Question

Henry, a promoter, signs a five-year lease agreement for office space for Ajax Corp., which has not yet been formed. After formation, Ajax moves into the office space, pays rent and occupies it for six months, but then finds a cheaper location and moves out. Which party is liable on the lease?

1) Henry
2) Ajax
3) No one, since it was a tenancy at will
4) Both Henry and Ajax

Answer 1

In legal terms, both Henry and Ajax Corp. might be liable for the lease. Initially, Henry is liable as the promoter and later Ajax Corp. may also be liable as they adopted the lease by moving in and paying rent. However, both could be liable unless a novation occurred or an agreement released Henry from liability.

Step-by-step explanation:

The question pertains to liability on a lease agreement for an entity that has not been formed at the time the lease was signed. In this scenario, Henry, as the promoter, would generally be liable for the lease because he entered into the agreement before the corporation (Ajax Corp.) was formed. Upon formation, however, if Ajax Corp. adopts the lease by moving in, paying rent, and using the office space, then Ajax Corp. becomes liable on the lease. Therefore, since Ajax Corp. did adopt the lease and then later decided to move out, both Henry and Ajax could potentially be liable depending on the jurisdiction and specific facts, such as whether Ajax formally assumed the lease and whether Henry was released from his obligations.

In many jurisdictions, promoters remain liable for pre-incorporation contracts unless there is an agreement to the contrary or until novation occurs, which is a substitution of a new contract or obligation that relieves the promoter from the previous liabilities. It is important to review the lease agreement and any other relevant documents to clearly determine the liability shift from the promoter to the corporation.