Category Archives: Contracts and Agreements

The Bad News Is…

One of the things that law school didn’t really prepare me for was the clients who you can’t help.

When I first started practicing law, I was eager to help clients and potential clients, and there was one who stands out in my memory as the first one I couldn’t help.  He had cosigned on a car for a relative, who had defaulted, and he came to see me, because the bank had come calling on him.  I saw nothing in the documents or the circumstance he described that would permit me to be of any meaningful assistance, but I was slightly worried that he might try to hurt me after I told him that I couldn’t help him.

He was very deliberate as he pushed back from the table, and left the room, never saying a word, and his jaw set like a rock.  After my initial relief at not having to dodge a punch or three wore off, I recall thinking “Well, that’s one person whom I’ll never see again.”

But I was wrong.

Before I moved on from that firm, the man came back to see me two more times.  The next time I met with him, he had a contract he wanted me to review before he would decide whether or not to sign it.  I was delighted that he consulted with me first.  I read through the document, noted a few points that I though he should be aware of, which prompted him to tell me that he was going to think about it before deciding to sign or not.  After wrapping up my notes, I looked up and said “Can I ask you something?”

He smiled and said “Let me guess.  You want to know why I came back.”

I nodded my head and said “Yes.  I could tell you were pretty upset when you left last time.”

He laughed and said “You’re not wrong, but I will tell you that I wasn’t upset with YOU.  In fact, I liked the way that you didn’t sugar coat it, even though you didn’t like telling me that there was nothing you could do.  You were honest with me, you didn’t waste my time, and you told me what I did wrong without making me feel stupid.  I knew I had found someone I could trust, and that makes you worth the money you charge.”

I saw him one more time, when I wrote a Will and powers of attorney for him.  Again, he expressed his thanks for the straightforward advice, and the no-nonsense approach.  I still think of him often, because I still encounter people whom I can’t help.  I won’t say that it’s easier telling clients this now than it was then, but I find that by trying to be respectful of their time, and by trying to not make them feel stupid because they made a mistake, I give them something of value, even if it was only allowing them to leave with the dignity they had when they walked in to my office.  Not everyone reacts well to such news, but I have managed to keep a few of them as clients because I approached their problems in this manner, which turns a negative into a much larger positive.

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Filed under Contracts and Agreements, Empathy, Logic Isn't Always The Life Of The Law, Pieces of the puzzle, Planning, The Practice, Wills

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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Filed under Business Law, Contracts and Agreements

Avoiding Unnecessary Liability In Probates

One of the biggest mistakes I often see in probate matters is when a Personal Representative of an estate sells real estate and conveys it by Statutory Warranty Deed.

There are four deeds used to transfer real estate in the state of Washington: The Statutory Warranty Deed, the Bargain and Sale Deed, the Quit Claim Deed, and the Transfer on Death Deed.  The first two require the Grantor, who is the person authorized to convey title to the real property, to make warranties to the person or persons receiving title.  The Statutory Warranty Deed is the gold standard, and warrants the following:

1.  The Grantor owns in fee simple (owns all the rights of ownership) and has the right to convey;
2.  The Property is free of all encumbrances (including encroachments);
3.  That the Grantee will have quiet and peaceful possession (meaning no one will have a claim against their ownership and use of the property;
4.  The Grantor will defend the title against all lawful claims;
5.  The Grantor conveys any after-acquired title.

A Bargain and Sale Deed is one in which the Grantor makes the first 3 of the above warranties.   Conversely, no warranties are made with a quit claim deed, in which a Grantor conveys any right or title they may have.  (Transfer on Death Deeds are specialized devices used to designate beneficiaries and avoid probate in certain circumstances, and therefore would not be used by a Personal Representative in the context of probating an estate.)

In many probates, a Personal Representative is acting with non-intervention powers, which means that they do not have to get the Court’s permission to sell real property that is owned by the estate.  However, in most cases, the Personal Representative also has no idea of the real property has been encroached upon my a neighbor, or if there is a cloud on title, either due to lien or and old claim which has never been removed.  Because the Personal Representative often has no knowledge of such things, I often counsel them to convey the real property by means of a type of Quit Claim Deed called a Personal Representative’s Deed.  This will spare the estate the expense of having a piece of property surveyed and having to order a title report from a title company, which is often a step taken by a Buyer, who wants title insurance on their purchase anyway.

I have encountered some Buyers who want deeds with guarantees, and some practitioners will often counsel their clients to use a Bargain and Sale Deed in the context of a probate, but in a tight real estate market in which the seller has an advantage, it is easier for a Personal Representative to avoid unnecessary and potentially costly risks, and use a Quit Claim Deed, especially since such sales rarely get the absolute top dollar that a living and breathing property owner might hold out for.

Depending upon the estate, it is usually a good idea to have an attorney review the purchase and sale agreement as well, especially if the Personal Representative does not have non-intervention powers, because then the sale will be conditioned up on Court approval, and a number of other statutory requirements and factors will also govern the sale of the property.

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Filed under Contracts and Agreements, Pieces of the puzzle, Probates and Estates, Real Estate, Transfer on Death Deeds

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