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Shell Game
by Ron Davis

Collecting several months of back rent from a tenant is seldom an easy task for a shopping center owner. But it’s especially difficult if the tenant is as evasive as the one leasing space at a certain St. Louis shopping center.

For a while after leasing that space, the owners of the shopping center received the rent without any problems from whom they thought was the occupant. When that “tenant” eventually fell behind in making the rental payments, however, the shopping center’s owners were in for a surprise.

They discovered that the tenant was merely a shell entity. It had never had any bank accounts nor any employees. It had no money and no revenue. It never filed any federal or state income tax returns. It had no financial statements. And, most important with regard to its tenancy, it never conducted any business other than that of collecting from a related corporation the exact amount of rent owed under the lease, then paying it to the shopping center landlord.

In fact, the related corporation was the actual occupant of the premises for the entire tenancy period. And the shopping center’s owners apparently never knew that the related corporation was the occupant until receiving a final rental payment and, shortly after that, the keys to the premises and a note stating, “We [the related corporation] have vacated the property.”

The shopping center’s owners subsequently sued both the shell entity and the related corporation (as the “alter ego” of the shell entity), seeking payment for breach of contract and for damages to the interior of the leased premises.

A Missouri court later ruled in favor of the shopping center’s owners and ordered the tenant and the occupant of the shopping center premises to pay $54,116.73 on the basis of their “fraudulent” activities in connection with the lease.

The occupant of the premises appealed, arguing there was no proof that it was in control of the property, nor that there was any wrongdoing, fraud, or improper conduct on its part.

A Missouri appellate court upheld the award of damages, however, explaining, “Inadequate capitalization and fraud are significant in the context of this lease because the lease was of commercial property to a lessee for the purpose of operating a particular business thereon. Instead, the lessee, which had the financial obligations under the lease, did not conduct the business. The occupant that conducted the business had no legal relationship with the shopping center.” (Real Estate Investors v. Am. Design Group, 46 S.W.3d 51 [Mo.App. E.D. 2001])

Decision: July 2001
Published: August 2001



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