Category Archives: Business Law

Commercial Leases: The Devil Really IS In the Details

I’ve often heard other lawyers talk about how lawyers have a sickness.  I’m not sure that I would characterize what makes attorneys different as a sickness, but I will admit that we often seem weird to non-lawyers, and that this weirdness manifests itself in mundane ways.  My most obvious manifestation involves commercial leases.  How so?  Because I actually enjoy reading through them.  In fact, I’ve admitted publicly that being handed a commercial lease to review is like “Where’s Waldo?” for me.  I get out a pencil and my notepad, and I go to work.

Being a “country lawyer”, I don’t get to review the super-complicated, hundred-page plus leases that some attorneys get to build their careers around, but it isn’t unusual for me to be handed a commercial lease which is 30 to 50 pages long, and I have drafted some of similar length for clients.  The key is understanding that it really does take that many pages to include the “boilerplate” that you should expect in every commercial lease.  The problem is that I often discover that everyone takes the boilerplate for granted, and no one bothers to read through it carefully and determine if it makes sense for the individual tenant.  Hazardous materials clauses are a staple of commercial leases, and with good reason.  Environmental cleanup costs are very expensive, many owners policies limit the  but too often, landlords fail to think through the effect of whatever language is in their boilerplate, and the clients either don’t read carefully enough to know if they have a problem.  Many clauses broadly define “hazardous materials”, and if the lease does not narrow the definition, or make exceptions for materials commonly used by certain businesses, then a landlord may put a tenant in a position where the tenant is in violation of the lease from the moment they commence operations.  Perhaps the most obvious example came when I was asked to review a lease for a nail salon.  The hazardous materials clause was broadly written, and the tenant was shocked when I informed them that since they use acetone, they would technically be violating the lease.  In that case, the landlord was just as shocked as the tenant, and was willing to include an exception for acetone, and some other products that the salon used.  This is why patience in reviewing, along with careful note taking can help a tenant avoid nasty surprises like this which may be lurking in plain sight.

I also spend a fair amount of time with commercial leases looking at issues regarding Certificates of Estoppel.  Put simply, a Certificate of Estoppel is a certification by the tenant to a third party of certain facts regarding the lease.  The facts usually involve the length of the lease, whether or not either party is in default, the amount of the rent, or whether the tenant is currently insured as is required by the lease.  It is a subject that should not be an issue, but it frequently is, because landlords, or their banks will often ask tenants to certify things which aren’t true, or do not comport with the lease, which would have the effect of rewriting the lease moving forward, and maybe eliminating any remedy for violations or duties owed by the landlord which the tenant would otherwise be entitled to demand.  Another common error with Certificates of Estoppel occurs when the lease specifically limits what the tenant may be asked to certify, but the landlord (or a creditor of the landlord) asks the tenant to certify something outside of the specific scope defined in the lease.  This frequently occurs when a bank  or other lender has taken over possession of a property, and seeks to rewrite certain lease terms.  I no longer think that these occurrences are accidental.  I’ve spent too much time talking to representatives of banks or other lenders who clearly have a copy of the lease in front of them, and yet they ask, or more often demand, that the tenant certify something outside of the scope limited by the lease, or that otherwise is different than what the lease requires.

Finally, insurance clauses, in concert with indemnity and hold harmless provisions, require specific diligence in review. Many commercial transactions involve burden shifting, and the party with more bargaining power will shift as much liability or potential liability as they can to the party with less power.  This isn’t unusual, and I expect that, but every now and again, I get a lease where someone has gone overboard, and requires the tenant to accept certain liabilities which may or may not cause them to violate provisions of their insurance policies, or even void their insurance policies, which would leave the tenant legally liable and without any recourse against their own insurers for any recovery or contribution.   This is a problem when it involves a small business that doesn’t expect to make a lot of money,because they will often have NO bargaining power to change this, and don’t want to spend any money to even properly understand what it means for them.  But when I’m dealing with larger companies, I will sometimes arrange to sit down with the client and their insurance agent to discuss the specific wording of these clauses, and let the client hear directly from their own agent why the wording of these clauses will create problems with their coverage if it is not changed, and we will make detailed counter-proposals for alternate clauses which won’t leave them bare in the face of potential liability.

These kinds of pitfalls are why if you are looking at signing a commercial lease, it makes sense to hire an lawyer with my particular brand of weirdness to spend a few hours reviewing the lease, and then going through it with you.  Yes, it requires an outlay of capital, but it doesn’t cost as much as voiding your insurance coverage or rewriting a lease to the benefit of your landlord’s creditors.

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Filed under Business Law, Contracts and Agreements, Uncategorized

The Importance of Agreements Between Business Owners

So you and a friend have taken that leap and decided to set up a business together.

Great! And Congratulations!

But the lawyer in me has to ask “Do you have your exit plan in place?”

I see the look of shock on your face.  It could only be more genuine if I slapped you.

“Weren’t you listening?  We just started the business.  I’m working with my best friend and we’re going to make piles of cash!”

I heard you.  And I’m genuinely happy for you.  I HOPE you succeed.  No attorney wants his clients to fail.

BUT…

I can’t tell you how many times I have witnessed a business start with all the hope and potential you’d expect in a new venture, only to see the owners get in knockdown dragouts which end up destroying the business when conflicts come.  The fact is that you will probably need an agreement between the owners at some point anyway, either for tax purposes, or for the ability to obtain loans from banks, or for some other  legitimate business purpose.  However, the way I talk to clients about it is to tell them that this is their opportunity to “pre-negotiate” a divorce, and the best time to do that, the time when everyone is most likely to be fair with each other, rather than consumed with emotions that often cause people to make  bad decisions, is when everyone is happy and excited.

I know, some you might think that this would be the last thing that business owners would want to be thinking about at a time like this, but putting aside issues of fairness, it is also when people are going to be the most objective when considering issues such as what happens if an owner becomes disabled, or dies.  Do you want to be a partner with the surviving spouse?  Do you want to be a partner with the children or other heirs?  If you don’t, how do you want the estate fairly compensated for this? How will you value that ownership interest?  Do you want restrictions on the transfer of ownership?  What happens if an owner transfers their ownership interest WITHOUT consulting the other owners or complying with transfer restrictions?  What if an owner simply decides that they want out?

Being able to agree ahead of time to the answers  to these and a host of other questions is important, because if you don’t agree, then you get to get attorneys and courts involved, and the issues will be resolved, but it will take a lot of time, money, irritation, money, effort, and money, and by the time you’re done, the business may not survive, and you might have some significant legal costs as well.

The good news is that you have a choice, and you can make decisions right now that will make that day considerably easier to deal with.  It may even make it possible to keep the friendship, let alone the business, and there isn’t really a price that can be put on this.

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Successor Liability…The Hazard Many Never See Coming

I was at an event recently where another attendee found out that I am a business attorney, and he asked me what I thought was the number one thing that people who try to buy a business without hiring an attorney should worry about.

I had to consider it for a moment, because I didn’t think the Inquisitor would be amused by my saying “Everything.”  After mentally flipping through the various traps and pitfalls, I finally said “Successor Liability”.  The Inquisitor’s face wrinkled up, and he said “What’s that?”

I told him “The short answer is that Successor Liability is when you think that you’re just buying a business, and then you discover that you’ve also bought your predecessor’s obligations and debts.”  Apparently that answer wasn’t sexy enough, because he soon found an excuse to drift to the other side of the room.  My feelings weren’t hurt, but I found his reaction to be illustrative of the way many people enter into the purchase of someone else’s business: sometimes the biggest problems receive the least attention.

Sometimes,  I encounter someone who thinks that they have found a clever way around a potential problem, such as when someone decides that rather than purchasing the seller’s business entity, they will instead just purchase the assets, because “then the debts of the business are still the Seller’s problem.”  Sometimes, this will end well for the buyer, which may be purely coincidental, because these Buyers rarely check to see if the business has any sort of tax liens, tax warrants filed against the business (and consequently the assets) in the local Superior Court, or if there are any UCC filings that apply to the assets they want to purchase.  But invariably, the situation that creates the most heartburn is when a Purchaser is unaware of unpaid taxes owed by the Seller, and the Purchaser learns about it for the first time when the taxing authorities inform them of the lien against the property, or inform them of a pending Sheriff’s sale.  When this happens, things are frequently already at the point where an attorney can’t stop what is going to happen, leaving the Purchaser to have to resort to the courts to try to get a remedy that may not come until years later, when the process is complete, and they have had to spend thousands of dollars to get a judgment that they may or may not be able to collect on.

Buying a business is supposed to be a time of anticipation and optimism.  Risks that you never even anticipated can wreck those emotions, and make an occasion that you make have worked years for into a curse that will take you on a journey through the court system that will take years, and thousands, or hundreds of thousands of dollars before you are through.  This will make the cost of a consultation with a knowledgeable attorney to help you with the purchase seem miniscule by comparison…or as a client of mine has stated on more than one occasion, “It’s just cheap insurance.”

 

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Filed under Business Law, Contracts and Agreements, Pieces of the puzzle, The Practice

The Devil Is In The Details

If you provide goods and services to corporations and limited liability companies, then you have probably had to negotiate and sign agreements.  But do you really know what it is that you are signing?  There are some terms inserted into agreements that may escape your notice, or that you think you understand, but don’t.  Deciding to not get help in reviewing such terms and provisions in favor of “going it alone” can be very costly.

Indemnification and Hold Harmless provisions may seem innocuous, or like boilerplate provisions, but sometimes the other party isn’t interested in playing fair, and simply wants to shift all the risk in a transaction to you, even risks that they would otherwise be liable for.

An indemnification and hold harmless agreement is one in which one party agrees to indemnify (and usually defend) claims brought against the other party, and hold them harmless for said claims.  And there are activities which make sense for one party to indemnify the other from certain kinds of claims, usually those in which the party indemnifying the other is the party actually at fault for the injury or default which caused the claim to begin with.  However, some indemnification provisions go too far, requiring one party to indemnify the other for any and all claims, without any recognizable limitation, and even when the indemnified party isn’t just the party at fault, but guilty of negligence.

When presented with an agreement that requires you to indemnify someone else and hold them harmless, you should consider:

—Is there any clear limitation on what I am expected to offer indemnification for?
—Does the agreement require me to waive rights on behalf of a third-party, such as a customer or client of mine?
—Is there a limitation on the amount of the claim that I am required to indemnify the other party for?
—Am I insured if I accept these terms?

It’s the last question that can be one of the biggest pitfalls.  While your business insurance will often pay for defense of a claim against you, and pay on the claim itself if it is legitimate, your policy may not pay for you to defend someone else from a lawsuit, or on a claim against a third-party, which may mean that your business could end up paying that bill. 

This is why it is important to make sure you understand your insurance coverage and policy limits, and to call your insurance agents or brokers if you are considering an agreement and don’t know if you are covered for the risks you are being asked to assume. If you don’t understand parts of the agreement itself, make an appointment and consult with a business attorney before signing…because the last thing you want to hear is “I wish you would have talked to me before you signed this.”

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Should My Business Have An Employee Handbook?

“Should my business have an employee handbook?”

This is a question that I often find a difference of opinion on among business attorneys.  Some don’t like them, because they feel that a handbook creates more problems than they prevent.  Others will automatically respond “Absolutely.”  I think the answer is a bit more nuanced.

When written after careful consideration, an employee handbook can be a tremendous tool.  A well-written handbook will address a number of issues such as sick leave, vacations, attendance policies, and break times.  A handbook can also be used to set expectations for employee conduct and dealings with the public and each other.  You can use a handbook to establish travel and reimbursement policies,  training and continuing education policies, and policies regarding use of company vehicles.   You can also include confidentiality, non-disclosure, and non-compete agreements in an employee handbook.  (You can include social media policies, but there are some complex issues and considerations that you need to be aware of in order to avoid conflicts with federal regulatory agencies.  The law is developing in this area, and you should discuss it with your attorney before deciding what to include and what to leave out.)

But it isn’t enough to have a carefully crafted handbook.  You also need to be consistent.

Be consistent in how you present it to employees.  Timing is important.  It is best to present the handbook and any agreements to an employee when they are hired.  If you present them later, then there are more steps you need to take to make the terms enforceable.

Be consistent in how you enforce policies.  Employee handbooks are great, because they let everyone know what the rules are.  But if you do not enforce those rules uniformly, then you are asking for a lawsuit, especially if you fire an employee for an offense that different employee was NOT fired for.

Be consistent in reviewing and revising policies.   An employee handbook is as only as good as the policies that are in it.  Things change in business, and if your handbook doesn’t keep up with your changed circumstances.  Establishing a policy of reviewing your handbook every year or every other year is a good idea.

A well written employee handbook can prevent a lot of problems and help your business to run efficiently.  But to get one requires a willingness to give careful consideration to what you put into it, and a willingness to keep it updated.  A good business attorney can help you to focus on the core items and write one that suits your business, your style, and your employees.

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Filed under Business Law, Pieces of the puzzle, Planning

Why Having A Business Attorney Isn’t Enough

Running a business these days can be more complicated than many people think.  I frequently meet with people who are starting a business who come to me to set up a corporation or a limited liability company and discuss what they will need to do to get the administrative things out of the way so they can actually do the work they are starting the business to do.  And far too often, when the conversation departs the realm of the general information and gets down to the choices they need to make, the client will ask me “Which should I chose, the corporation or the LLC?”, and I will respond with a question of my own: “What does your CPA or accountant think you should do?”, and then I see it.  The blank stare, followed by a look of confusion.  Then the inevitable question.  “Why would I ask the accountant?  Isn’t it a legal question?”

The fact of the matter is that choice of entity is a legal question, legal considerations are not the only considerations.  If your concern is for liability protection, there really is no difference between a corporation and an LLC (if you observe the formalities).  From my perspective as a business attorney, the nature of the business itself, and how the business will be owned will weigh more into the decision than the question of liability.  But there can be some serious tax considerations that may, and should, override other considerations.  This is why I want to know who the client’s CPA is, and what their CPA thinks about the choice of entity, and provisions that may be necessary in a shareholder’s agreement or an operating agreement.   This approach may seem unnecessarily costly to some clients, but tax planning at the beginning of a business venture is far less costly than trying to mitigate a tax problem later, or as I am fond of saying “Fixed haircuts cost extra.”

But your team as a business owner shouldn’t just stop with your attorney and your CPA.  You should also have an experienced insurance professional.  When I meet with resistance at this suggestion, I explain it like this: “You hire the CPA to keep more of what you earn.  You hire me to keep your personal stuff separate from your business stuff.  But you need to hire a good insurance person to keep your business.”

There are a number of things that a business does that requires insurance.   If you lease space, your lease invariably requires you to carry general liability protection.  If your business owns vehicles, you need to insure them.  If you deal with the public, you need insurance.  Dealing with one person or group on this can help you to make sure that you aren’t under insured, over insured, or paying for overlapping coverage when you didn’t plan to do so.

Some people are successful in business because they get lucky.  More people are successful because they plan for success.  A good business team, all working together can help you put together a plan that fits your business, and is tailored to your goals.

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Filed under Business Law, Pieces of the puzzle, Planning