When a law firm partnership dissolves, among the serious issues requiring analysis and consideration is the firm’s office lease. This is particularly the case with law firms in Manhattan where lease obligations often represent a considerable proportion of a law firm’s finances, but, no matter where the partnership does business, it is likely that its office lease is a substantial expense. Issues of prime concern include whether the lease on dissolution creates personal liability to partners, whether the firm as an entity on dissolution has accelerated liability, how can the leased space be used by the partners upon dissolution, and whether, in the context of an accounting, the lease is an asset or liability of the firm.
Last month, the Appellate Division, Third Department, affirmed the grant of summary judgment concerning the dissolution of an upstate law firm that addressed the firm’s lease.1 The decision raises issues common in many law firm partnership dissolutions and is worth exploring.
‘Wiggins v. Kopko’
In Wiggins v. Kopko, the Third Department affirmed the grant of summary judgment, seeking, among other things, the termination of the law firm’s office lease, to a partner in a dissolved law firm where the partner was also the firm’s landlord. The law firm partnership had a written agreement between its two partners, Wiggins and Kopko, in which Wiggins would bear 60 percent and Kopko would bear 40 percent of the law firm’s current debt. In addition, the firm since 2006 leased offices in space that Wiggins owned. In 2009, Kopko informed Wiggins that he wanted to dissolve the partnership and that he would not contribute “a single dime” to the ongoing expenses of the partnership. Wiggins moved for summary judgment to terminate the lease and to grant him sole possession. The trial court granted Wiggins’ motion.
In the appeal, the two partners made arguments, common among former law firm partners (downstate and upstate), concerning lease liability. Kopko argued, among other things, that, by terminating the lease, the lower court deprived the partnership of a substantial asset and gave Wiggins (as landlord) a substantial advantage over other creditors of the law firm as it was argued that the partnership after dissolution could have sublet the space, which would have generated income to pay creditors. Wiggins countered that, by terminating the lease, the firm was saved from accruing additional debt.
The Third Department affirmed the grant of summary judgment and stated: “Kopko failed to controvert plaintiff’s claim that the lease had already been terminated by operation of law or that such termination inured to the benefit of the partnership by preventing the accrual of further debt.”
What is interesting about the decision is that it presents two law firm partners taking diametrically opposed positions concerning the partnership’s lease. One, Kopko, argued that the lease was a partnership asset which could be used to pay off firm creditors. The other, Wiggins, claimed that the lease was a liability and that the firm was benefitted from its termination. The grant of summary judgment, as affirmed, was largely based upon the record that there was no evidence that the lease had not already been terminated or that such termination did not in fact prevent further debt.
Accordingly, the case presents common concerns among law firm partners regarding the nature of their lease obligation when facing the dissolution of their firm.
Among the primary concerns of law firm partners facing a dissolution is whether they have personal liability for the outstanding amount of the lease. Such lease liability is most often determined by the nature of the firm’s legal entity and the firm’s lease agreement.
Partners of law firms operating as general partnerships are personally liable for the debts of their partnership to the extent that the partnership’s funds are insufficient to satisfy the partnership’s debts.2 In dissolution this is often the case; accordingly, partners of a general partnership may likely face personal liability. In a limited liability partnership, the partners are not liable for the partnership’s commercial liability3 provided they have not agreed to be personally bound in the firm’s office lease agreement.
Accordingly, it is very important to analyze the firm’s office lease. The office lease may provide that the liability is solely that of a single partner, often perceived by the landlord to have the “deepest pockets.” The lease may also provide for joint and several liability, meaning that each partner is liable for the entire debt. A common provision is that the partners are only personally liable up to the amount of their percentage interest in the firm. In addition, personal lease liability provisions may be limited to “good guy” guarantees. Generally speaking, leases with a good guy clause do provide for personal liability but eliminate the personal liability of a partner if a lease is terminated prior to the lease’s contractual termination date. For example, if the firm defaults on the lease but is current on past due rent payments and surrenders the office in good condition, the landlord will not seek to hold the partners personally liable. In the case of a dissolution, it would mean that individual partners would not be personally liable so long as the firm was current on its rent payments prior to dissolution.
The lease may also provide for acceleration of all rent in the event of a dissolution of the firm. This would mean that the landlord would not have to wait until the contractual termination of the lease to sue for the remaining rent but could sue for the remaining amount of the total future lease obligations upon dissolution. Such a provision is particularly important in firms that operate as partnerships at will in that the mere change of status of a partner (by, for example, death or withdrawal) can cause a dissolution and, in turn, invoke acceleration.
Post-Dissolution Use of Space
Issues also arise concerning whether partners can use the leased office space after the dissolution of a partnership. This problem typically occurs when there is a dissolution of a partnership at will as the result of the withdrawal of a partner or simply the will of a partner who seeks to dissolve the firm.4 In such situations, disputes often arise concerning the usage of the space. After dissolution, all of the partners have an equal right to use the office space of the dissolved firm, and a partner cannot be rightfully excluded from the office space. This is the case because the partners of the dissolved firm are considered to be “tenants in partnership” regarding the lease.5 They can, therefore, use the space until the business of the firm is wound up. This process of winding up, which entails paying the liabilities of the firm and finishing its business, can, in the case of a law firm, take years to complete. During the sometimes lengthy winding up period, the former partners are required to pay reasonable use and occupancy for the space used by them.6
Is Lease an Asset or Liability?
As in the Wiggins v. Kopko case discussed above, partners in a dissolved firm often disagree concerning the nature of the remaining lease and whether it is an asset or a liability.7 Whether the lease is an asset or a liability also can be affected by the lease agreement itself. Leases that do not permit subletting or assignment may be perceived as having less value than those that do. In addition, whether the landlord’s consent is required for such transfers may be argued to diminish the lease’s value. Similarly, if subtenant income is required to be turned over to the landlord, the value of subletting and the lease itself may be diminished.
Also quite relevant to the determination of whether the lease is an asset or a liability in the accounting of a dissolved firm is whether the lease rent is above or below market. While tenants often believe they know the market, in order to demonstrate whether a lease is below or above market, an analysis of comparable recent leases is required to be undertaken. In the event the lease of a partnership in dissolution can be demonstrated to be below market, it may be successfully argued that it is an asset of the dissolved firm. This is the case because it permitted the dissolved firm to operate its business, prior to dissolution, in a less expensive manner than the market and thereby provided an asset to the partnership. If the lease is above market, it operated as a drag on the firm’s profit and therefore a liability to the firm’s business.
A firm’s office lease is a substantial obligation which can, in a law firm partnership dissolution, seem ominous. To evaluate the impact of the dissolution on a firm’s lease and hopefully navigate around it, it is important to consider the nature of the firm, the terms of the office lease, and the conditions of the market.
Arthur J. Ciampi is the coauthor of the treatise ‘Law Firm Partnership Agreements’ and is the managing member of Ciampi LLC. Maria Ciampi, of counsel to the firm, assisted in the preparation of this article.
1. Wiggins v. Kopko, 2011 Slip. Op. 09565 (3d Dept. Dec. 29, 2011).
2. N.Y. Partnership Law §26(a)(2) (McKinney’s 2012).
3. N.Y. Partnership Law §26(b) (McKinney’s 2012).
4. N.Y. Partnership Law §60 (McKinney’s 2012).
5. Londin v Carro, Spanbock, Londin, Fass & Geller, 124 Misc.2d 1013 (Sup. Ct. N.Y. County 1984).
7. Wiggins, 2011 Slip. Op. 09565 (“Leased property constitutes a partnership asset (see generally Partnership Law §71[a]), which should ordinarily be considered in the winding-up of the partnership (see generally Partnership Law §61; see 111–115 Broadway Ltd. Partnership v. Minter & Gay, 255 A.D.2d 192, 192 ; compare Silvernail v. Silvernail, 22 A.D.3d 970, 970–971 ; see also Matter of Goldberg v. Harwood, 88 N.Y.2d 911, 913 “). But see Cohen v. Akabas & Cohen, 2008 WL 7675821 (Special Referee’s Decision, June 2008), aff’d, 71 A.D.3d 419, 420 (finding office lease was not an asset)).