SBA Loan Settlement: What About Your Landlord and Seller Note?

In addition to SBA guaranteed debt, many failing businesses must deal with two other obligations that aren’t discussed too much: landlords and former owners who agreed to finance part of the acquisition cost.

In my experience, the more creditors that a borrower has, the more complicated their situation gets. I always liken trying to settle with multiple banks to herding cats. Their decision making is not always predictable, and the speed at which they make decisions is pretty much impossible to guess. With that said, most of my clients have at least two creditors that need to be dealt with. The two most common creditors are landlords and former business owners. Let’s address the most common questions I get about both of them:

Can my landlord sue me? If you were named as the lessee on the lease, or as a personal guarantor, it’s likely that you are personally liable for the lease payments. In this rough economy, some landlords don’t require personal guarantees in order to entice businesses to rent from them. Obviously, it’s very important to know whether or not you are personally liable.

Will landlords settle? Most will consider a settlement, especially if you lack the resources to pay the lease and the landlord is aware of this fact.

How can I get out of my lease if my business is going to close? The most common method I see is to find someone to buy or take over your business. Even if you don’t get much for the business, convincing the landlord to allow you out of the lease if you can find a replacement can save you hundreds of thousands of dollars that a lease might obligate you to pay.

What does it mean for me if the bank required the seller note to be subordinate to the bank debt? It basically means that the seller has to wait in line to take action against you if you default. In most subordination documentation, it prohibits the seller from taking action against the collateral without the banks approval, and that’s because the bank is first in line in a liquidation situation. The subordination may keep the seller at bay for a bit, but if your business fails, it’s only a matter of time before the seller comes knocking.

The seller refuses to settle. What the heck? Even though you as the business owner think the seller got enough money at closing to be satisfied, that’s not how the seller thinks about it. Unlike banks, for most sellers, this is the one and only time in their lifetime that they will be a creditor. So what happens when you default? They take it very, very personally. As a result, they think of it as “their money” and quite often they will be resistant to a settlement.


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