Anyone who spends much time navigating contracts can appreciate the saying “the devil’s in the details.” In a recent decision from the Court of Queen’s Bench of Alberta, a landlord tried to collect outstanding rent from a group who rented office space. One of the parties to the lease had settled with the landlord (“the plaintiff”). The plaintiff argued that the other parties were still liable, while the other tenants claimed the settlement was absolute.
A question of outstanding rent
The defendants were partners in a law firm that rented office space from the plaintiff. The three partners were “BK”, “CB” and “KA”. Each of the lawyers operated their own professional corporation which joined to form a partnership. The court pointed out that the group was not a limited liability partnership, but a normal one “wherein each partner is jointly liable in their personal capacity for debts and obligations incurred by the partnership.”
The plaintiff was seeking $81,150.62 plus interest from both BK and KA. They had already settled with CB in the amount of $30,000.
Monthly rent charged after some of the parties left the partnerships
An initial argument made by the defendants was that they were not liable for outstanding rent because it came due long after they left the partnership with CB. They stated that since rent was due monthly, and they were no longer partners when the rent was due, they were therefore not liable to it.
However, the court found that the partners became liable to pay the rent under the lease when the lease was signed, stating “just because the lease provided for payments of rent on a monthly basis does not mean that is when liability was incurred.” The lease stated that the partners promised to pay “annual rent” for a specified number of years. As a result, under ss 20(2) of the Partnership Act, BK and KA did not cease to become liable even though they had ceased to be partners.
Does a settlement with one partner constitute a settlement with the others?
During oral arguments, the court had asked both parties’ lawyers to provide common law direction on whether a settlement with one joint debtor stands as a settlement with all joint debtors.
The plaintiffs brought one case to support their position that the remaining partners were still liable, citing a 1919 decision from Alberta’s Court of Appeal. It stated, “There is no reason in justice nor in law why the release of one co-principal should release a co-principal from his obligation to exonerate and contribute to the extent to which he would have been ultimately liable had the one co-principal not been released.
However, the court distinguished this case from more recent law because in that case there had been no joint liability to begin with. Instead, the court agreed with more recent decisions, the latter of which states “As a general principle, where one co-surety is released from the debt, the other co-sureties are thereby also released.”
In this case, the court concluded that the release of CB applied to all of the partners. However, the court pointed out that there is a way to avoid others from falling into the position that the plaintiff found itself in. The exception to the rule is that the plaintiff in this case could have provided CB with a covenant not to sue rather than a release. However, they released CB, and therefore released BK and KA as well.
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