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Your Tenant Is in Default, But the Entity Does Not Exist
More often than you might think, landlords enter into leases with tenant-entities only to find later, when the tenant defaults under the lease, that the tenant-entity was never lawfully formed or did not exist at the time of entering into the lease. The tenant might be anxious to finalize the lease and is in the process of forming a single-purpose entity, but has not completed that process for one reason or another. The parties might be hasty and not as diligent as they should be with regard to the formalities of the transaction and the signatory executes the lease on behalf of an entity that does not yet exist. Does this mean that the landlord has no remedy? Not necessarily. In fact, under promoter liability law, such a situation may provide a better potential for recovery than if the entity did exist!
Promoter Liability Law
Under promoter liability law, if the signatory is determined to be a promoter for the tenant-entity, the landlord who finds that such entity does not exist may have personal recourse against the signatory. “As a general rule, when a promoter makes a contract for the benefit of, or in the name of, a prospective corporation, he is personally liable on the contract in the absence of an agreement with the contracting party that the promoter is not liable.” (18 Am. Jur. 2nd Corporations ' 137.) Further, under California case law, if the tenant-entity was formed subsequent to the promoter's execution of the lease, the landlord may be able to recover from the entity as well as the individual promoter. (Brisacher v. Baier (1924), 67 Cal. App .96,1401, holding that “Those dealing with promoters should be left with the double security of the promoter and the company when one is formed, unless it clearly appears that liability of the promoter was not intended or was intended to be released when the liability of the corporation began.”)
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