When your business moves into a new place, it’s normal to be required to sign a lease. Sometimes the lease can seem skewed to protect the rights of the landlord – and that’s because they’re basically risking their property by agreeing to lease it to you. On the other hand, you aren’t risking much by agreeing to use the property of your choice. But what happens when the lease gets a little weird and overly detailed about what you are and are not allowed to do? What about when your new lease agreement takes it upon itself to require that you NOT file for bankruptcy in the event that your business fails? Is there legal precedence for such a demand in a commercial lease? Is it a common practice? Can landlords actually expect to make such a contractual agreement with a new commercial tenant?
If you’re lease agreement includes prohibitions against filing for bankruptcy in the future, you should approach with caution – or not at all. It’s not illegal for a landlord to include this as a part of their lease agreement with commercial tenants, but it is not common. It does seem to be a common inclusion in contracts with payday loan lenders, hard money lenders and some small business lenders though.
Think of it like this: if it were possible to sign away your right to file bankruptcy against a creditor…EVERY creditor would include a similar clause. There are very few types of debts that cannot be eliminated by bankruptcy. You cannot simply sign away your right to access bankruptcy protection from overwhelming debt. In fact, if that were true, bankruptcy would probably cease to exist because every lender, creditor, etc. would simply include a clause in the initial contract stating that you can’t file for bankruptcy against the debt.
In fact, the only types of debt that cannot be eliminated through the bankruptcy process are: debts incurred by fraudulent acts, criminal restitution, and government penalties. (In some cases, even student loans can be eliminated by bankruptcy – depending upon the circumstance at hand).
If you have a contract with references to bankruptcy that you aren’t sure to sign, please get in touch with one of the southern California bankruptcy attorneys at Westgate Law. We can assist you in determining what is legal and what is just legalese thrown down on paper, but holding no weight in court.