Client are in their sixties, husband and wife. They operate a retail business that provides a service. There is no corporation or LLC. In other words, clients are sole proprietors of the business. The commercial lease for the premises is $5,000/month with 3 more years to go. Before the virus arrived in Los Angeles, their business was humming along smoothly. Revenues were good and they had no problem paying the $5K commercial rent for the premises. Their gross receipts hovered $15K to $20K a month and life was good. 

Of course in March, before New York locked down, the virus travelled from Europe to NY, and from NY it was spread and fanned out to the rest of the country. Domestic flights from NY to the rest of the country kept going on and on, so the virus kept on spreading, all the way to us here in the West coast. This is the conclusion of official studies that try to understand how we became the number one hot spot for the virus in the world with 1.2M infected, with 75K deaths and still going. The virus strain that we have here in our country is the same strain that is ravaging Europe. Well whatever. The fight is against the virus in whatever mutated form it is. It’s not against a particular race. The virus does not distinguish race or geography. It attacks human beings. 

Now is the time for kindness and our humanity to shine forth, to help each other not get sick, by wearing face masks, gloves and self isolating and helping our society’s most vulnerable, seniors, get the good treatment and protection they need. After all we pride ourselves as being a Christian country right? And what is the “golden rule” in Christianity? Jesus described the “golden rule” as the second great commandment for human beings to follow. The “golden rule” of Leviticus 19:18, quoted by Jesus of Nazareth (Mathew 7:12; Luke 6:31 is: “Do unto others as you would have them do unto you.” So this is how we should be treating each other, especially now during the time of the pandemic, we should be following the golden rule.

Let’s go back to clients. Since the virus came over to LA and the shutdown began, they had to close shop. In the last two months, their gross income was zero. Yes, no sales at all. Well, it’s shut down after all, but even if it were open, people are afraid to go in and have the service performed on them because of the fear of getting infected.

They were still able to squeeze out the $5K rent payment for March. But there’s no money left to pay for April. And there’s still 3 years of lease to go. That means clients are legally liable for $180K of lease payments even if they voluntarily surrender the leased premises today. And why is this? Because the contract requires that clients pay 3 more years of rent. Landlord expects another $180K of rent irrespective of the fact that the lease premises are surrendered back to landlord. Trust me. That’s the way it works. 

In addition to $180K of lease liability, clients also owe $200K of credit cards. These cards were used over the last 5 years, for various businesses of clients, including the retail business. Therefore, clients are looking at $380K of debt. Faced with a business that has no revenues and a pandemic with an unknown end date when life gets back to normal, clients have decided to throw in the towel and start fresh without any debt. They even decided to return the 2019 Camry lease that had two more years to go. They’ll just make do with their fully paid 2010 Tacoma. 

They want a fresh start with no debt. When things get back to normal, they will get back into business without any debt. They decide to file for Chapter 7 to wipe out the $380K of liability, which includes $180K of unpaid commercial lease and $200K of credit cards.

In this case, clients do not own a house. So that issue did not come into play. Just like Walt Disney who filed for Chapter 7 twice, before his Disney theme parks and entertainment business became successful, clients decided to start life again with no debts, the proverbial fresh start. Milton Hershey, the owner of Hershey chocolates, the biggest chocolate business in the world, also decided to file for Chapter 7 for a fresh start before his business became worldwide success story.

Who’s to say that my clients won’t become the next Disney or Hershey? Anything is possible with business people once they start thinking clearly again and have no debt to worry about.

Next client is not a senior. She is young, even younger than my own son or daughter. She signed a commercial lease in December, less than 5 months ago, for $10K a month, and still owes two years on it. She has not paid January to April, and obviously cannot pay May. She will owe $50K of lease payment this month. Well, two more years at $10K a month of rent means that she will $240K. But she has the same problem with senior clients. Business has shriveled up to nothing. In December, she grossed $100K, which is really good. That’s why without the pandemic, she would have no problem paying the $10K a month of rent.

However, this young client’s case is a lot more complicated. She personally guaranteed the lease even as the lease is signed by the LLC. And she has a house in her name. This house does not actually belong to her, but it’s in her name. This is an interesting situation that has many different issues with the primary focus on protecting the rental property in her name that she does not own. The real owners are her parents who don’t live here.

 

FORCE MAJEURE contract clause to excuse contract performance on lease

The LLC can file for Chapter 7 to get out of the lease. But she’s on the hook on the personal guarantee. So, this needs a surgical removal of the guarantee. The first line of defense once she is sued to collect on the personal guarantee is the defend herself using the FORCE MAJEURE clause which allows performance on the contract to be excused if an entirely unforeseen supervening event has happened which renders performance on the contract unreasonable. The unforeseen supervening event may include an epidemic such as the one we have now. Government action such as the lockdown may also qualify as an event to excuse performance. The events are normally described in the contract. 

DISCLAIMER: NONE OF THE FOREGOING IS CONSIDERED LEGAL ADVICE. EACH CASE IS DIFFERENT.

“DO UNTO OTHERS AS YOU WOULD HAVE THEM DO UNTO YOU.” MATHEW 7:12

Lawrence B. Yang is a graduate of Georgetown University with a Master’s Degree in Law and specializes in Bankruptcy, Business, Real Estate and Civil Litigation.  He speaks English, Mandarin and Fujian and has successfully represented thousands of clients in California, including companies overseas.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.