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Do you need a commercial real estate lawyer for your lease transaction?

Choosing your commercial real estate lawyer before the transaction is the key to success.

Choosing the right commercial real estate lawyer for your transaction involves a lot of factors. A wise client will ask about the lawyer’s commercial real estate transaction experience and the costs of the lawyer’s services. This should be done BEFORE the commercial real estate lease contract has been signed. The time to negotiate and ask questions about the commercial lease terms and agreement is before you sign!

Commercial Real Estate Transaction Experience

The commercial real estate lawyer should have lots of experience and focus on your particular business space, so he or she can advocate for you and protect your interests. The lawyer needs to be familiar with the type of property (the “asset”) class and the client base. A retail client will have different needs than someone purchasing raw land or leasing an office or industrial space.

Ask what kind of experience the attorney has in reviewing and drafting documentation, like commercial office leases or triple net leases. Find out what percentage of their practice is commercial real estate leasing. You don’t want someone who lists this as one bullet point among many- commercial real estate is complex and evolving, and a general practice law firm won’t have the experience necessary to negotiate in your best interest.

How many commercial real estate leases has the attorney negotiated? You want someone with enough experience to make sure you’re not leaving anything on the table at negotiation, and who can give you an unbiased view of the deal. The deal must be evaluated for risk appetite from a financial and legal perspective.

Commercial Real Estate Lawyer Costs

Contact your commercial real estate lawyer BEFORE you sign!!

Don’t try to save money by using a family or friend’s lawyer or Google to help you negotiate your lease. The intricacies of commercial real estate leasing and negotiations are not taught in law school. Only a commercial real estate lawyer, practice and experience, will be advocate for your interests. A web search will not substitute for a lack of knowledge. Commercial real estate is a complex and expensive transaction, and it’s worth it to invest in a knowledgeable lawyer.

Hopefully, the commercial lease transaction goes smoothly. The real estate lawyer will be working behind the scenes with Landlord’s representatives and brokers to secure your legal assets and your peace of mind. A real estate broker can’t provide legal advice, and the more complex the deal, the more legal items there will be. The broker is only paid if the transaction is completed, but the commercial real estate lawyer will advocate for your interests first.

Your Commercial Lease Transaction Is Unique

The commercial lease agreement is Landlord’s first offer, not an agreement uniquely tailored to your specific business. The commercial lease terms need to reflect the exact agreement between the Landlord and the Tenant. A good commercial real estate lawyer will take you through the lease document and explain the risk and reward of the negotiated lease agreement to you.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

Is a Triple Net Lease Agreement Right for You?

Understanding the difference between a triple net lease agreement and other types of lease agreements.

A triple net lease agreement (it could be written as net-net-net, or NNN, lease agreement) is a common commercial real estate lease structure. A “net” is term for “expense” and the “triple” part defines the three most common shared commercial real estate expenses: real estate taxes, insurance, and operating expenses.

In pretty much any lease situation, Tenant will pay its rent, the cost of the utilities it uses, and taxes on its personal property. The rest should be negotiated, depending on the type of lease agreement.

Absolute Triple Net Lease

Just because it’s called a triple net lease, doesn’t mean it actually is one. In an absolute triple net lease, the Tenant is responsible for all of the NNN expenses. This is more traditional in a ground lease situation, or if Tenant is exclusively occupying the entire premises. In a shopping center or large office building, it’s more likely that Tenant will pay a portion of the NNN expenses, along with all of the other tenants. Negotiation Tip: Watch out for repairs and replacement, especially structural ones and who is responsible for them.

Proportionate Share Triple Net Lease

In this lease triple net lease agreement structure, Tenant should pay its Proportionate Share of real estate taxes, Landlord’s insurance, and common area expenses (or operating expenses). If the lease isn’t negotiated properly, then Tenant is likely paying more than its fair share. The Landlord is responsible for the making sure the payments are made for the real estate taxes and its insurance on the property containing the building, using the funds collected from Tenant and other building occupants. Landlord should also maintain and repair the building and the property, so that it’s safe for everyone to use. Check out my post on Tenant’s Proportionate Share to learn more.

Gross or Full Service Lease

This is pretty popular in an executive suite or co-working situation. All of the expenses (real estate taxes, Landlord’s insurance, operating expenses, even utilities) are rolled into the cost of the rent. Tenant pays one amount every month to Landlord, and Landlord pays all of the bills. Tenant will probably pay a premium rent for the convenience of this arrangement, but it’s a good situation for an all-included arrangement.

Percentage Lease

Tenant will pay the non-rent charges per the agreement (absolute NNN or Tenant’s Proportionate Share), and will report its sales to Landlord, usually on a monthly basis. Tenant will then pay a percentage of the money it collects on its sales to Landlord as additional rent, with an artificial or a natural breakpoint.

  • Artificial Breakpoint: A stated dollar amount (example: 5% of all sales).
  • Natural Breakpoint: divide base rent by the percentage (example: 5% of sales over $50,000). A natural breakpoint means that the Landlord should receive its percentage rent only if there enough sales to pay the minimum rent.

Percentage rent can be part of a triple net lease agreement or a full-service lease agreement. Landlords like this arrangement for retail or restaurant tenants, but it’s not as typical for a service-oriented Tenant. Negotiation tip: Define sales as merchandise that is bought and paid for at the location, and exclude online sales with in-store fulfillment and services.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

 

What’s at the end of the standard commercial lease agreement?

Those short sections are legally binding in the commercial lease agreement and should be read and understood!

The standard commercial lease agreement will contain important information at the beginning and the end of the lease document. The beginning of the lease (before all of the numbered sections), also known as the “whereas” clauses or “recitals”, are like an introduction. They should provide general information, like the purpose of the contract and who is signing it.

RECITALS

A good commercial real estate attorney will read all of those recitals, and confirm that the information they contain is correct. The signatory entity name might change, or the suite number might not be the right one. It’s not unheard of to have an entirely incorrect address, especially if Landlord owns multiple properties and uses the same lease form for each one.

These recitals matter, and they are easy to catch and change during lease negotiations. The fun begins at the end of the lease, where important items linger that are easy-to-skim-over stuff before the signatures and the exhibits. Even if these items are the last ones in the commercial real estate lease agreement, that doesn’t mean they aren’t important. All of that “other miscellaneous stuff” is just as legally binding as the first part of the lease, or it wouldn’t be there.

OTHER MISCELLANEOUS STUFF

These sections can address innocuous things like pronoun use, or provide state-specific disclaimers (such as radon gas in Florida or CASp inspections in California). Tenant could agree to abide by the Patriot Act or OFAC rules (good!) or become bound to not record a lease (bad news in Louisiana).

These sections could include a catch-all provision. For example, instead of stating a specific notice and cure period each time default is addressed in the lease document, the drafter might put all of the notice and cure provisions together at the end of the document and make it a stand-alone section, which is applicable throughout the lease. That’s not a problem- unless it contradicts a previous section in a lease! It’s important to treat the lease as a holistic document. If a section is disclaimed or limited by another section, it’s vital to check those referenced sections in other parts of the document.

WATCH FOR INCREASED OBLIGATIONS

“Other miscellaneous stuff” sections could also impose additional obligations or limit the rights of the parties to the agreement. For example, a clause at the end of the commercial real estate lease agreement could give away venue for disputes from a Tenant-friendly to a landlord-friendly state, or even surrender litigation options in favor of forced arbitration.

Another example is that Tenant could be required to provide financial statements, whenever Landlord requests them! Negotiation tip: limit how many times these have to be provided to Landlord, once per calendar year is usually sufficient. Bonus negotiation tip: be alert for what is missing in these sections. In the financial statements example, is there a requirement for Landlord to keep these statements confidential?

It’s absolutely vital to read the entire standard commercial lease agreement from beginning to end. If you don’t, you might be surrendering important legal rights that might be in another section of the commercial real estate lease document.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

Landlord might contribute to Tenant’s construction costs in the commercial real estate lease!

It’s important to understand the conditions to recover the tenant allowance as stated in the commercial real estate lease.


What is a Tenant Allowance?

Tenant Allowance, or Tenant Improvement Allowance, means Landlord will contribute money to the cost of Tenant’s leasehold improvements, often referred to as “work.” Tenant is usually responsible for the work itself, and Landlord will reimburse a portion of Tenant’s costs, if certain conditions are met. The scope of the work and the conditions for reimbursement should be part of the commercial real estate lease.

There are usually conditions Tenant has to meet before receiving the Tenant Allowance reimbursement. Common conditions are:

  • Tenant has to pay its contractors first and get a lien release and receipts
  • Tenant has to submit all of its proof of payments
  • Tenant can’t be in default under the lease
  • Landlord approves the scope of work, the contractors, and the insurance

Negotiation tip: watch out for unreasonable conditions, like a time limit on when the Tenant Allowance can be recovered, or unreasonable criteria for Landlord approvals.

What a Tenant Allowance is Not

It’s important to read the commercial real estate lease to understand the restrictions on the Tenant Allowance. Sometimes, it is a stated amount, or it can be an amount per square foot of the lease space. Any amounts spent over and above the Tenant Allowance are Tenant’s responsibility- estimates from a general contractor are important!

A Tenant Allowance is not a cash advance or an interest-free loan, and if the actual costs of construction are lower than the Tenant Allowance, then the Tenant will probably only receive reimbursement for the lesser amount. The Landlord have factored in the cost of the Tenant Allowance during the term of the commercial real estate lease, so consider that when negotiating the rent amount. The Tenant Allowance could be an actual reimbursement or a rent credit.

Tenant Allowance Limits

Landlord will often limit what work can be reimbursed with the Tenant Allowance within the commercial real estate lease. Negotiation tip: If Landlord is also the contractor, watch out for a management fee or supervisory fee in addition to the construction fees. Sometimes only “hard costs” are included in the Tenant Allowance, so the following expenses could be excluded from reimbursement:

  • permits
  • cabling and wiring
  • mechanical or drawings
  • space plan
  • interior design
  • landlord supervision
  • construction management
  • waste disposal fees

Is the Tenant Allowance a Good Deal?

It depends! Tenant should ALWAYS get at least one bid, and preferably 3, on any sort of construction. Negotiation tip: do not rely on Landlord’s estimate or a verbal estimate. Actual costs tend to be higher than the original bid.

If Landlord is also the contractor, make sure that the commercial real estate lease is very specific about what work is being done, and the quality, as well. Tenant should get final approval of any work that Landlord has done, and other than minor punchlist items, Tenant shouldn’t have to accept possession until all of Landlord’s work is completed correctly.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

A commercial real estate attorney can save you money during your lease term!

The commercial real estate attorney must be consulted at the beginning of the transaction.

The Business of Staying in Business

A qualified commercial real estate attorney will help your business stay in business. Landlords often place disclaimers in their leases stating that both parties have been advised to retain counsel. There’s only one time in the entire lease transaction where Tenant can protect its rights and its business investment, and that’s before the lease agreement is signed.

The commercial real estate attorney will be your advocate, mitigating your legal risk, protecting your assets and making sure you understand what you are agreeing to and the consequences of that agreement.

Real Estate Brokers: Landlord and Tenant Representation

Real estate brokers are paid on commission, by Landlord. They get paid when the deal is done, and they have an interest in seeing it commence. The listing broker, while usually very nice, does not work for Tenant, and does not represent Tenant’s interests.

The broker is responsible for negotiating the business terms of the lease, but they are not lawyers and cannot give legal advice. They can help you find the location and negotiate business items, but they do not offer a legal perspective.

The attorney’s compensation isn’t tied to the transaction, which means a balanced perspective on the entire negotiation process, and representation in the best interest of the client.

Professional Operators

Landlords are in the business of being owning and managing property profitably, and will have professional service providers working for them and protecting their interests. Tenant also needs a professional to represent them in the transaction. It’s a signal of sophistication and professionalism, and an indication of a thoughtful tenant setting up for success. The Landlord will not be offended if Tenant engages a commercial real estate attorney.

The commercial real estate lease is usually one of the most complex and expensive transactions in a business life cycle. It’s a long-term, binding legal commitment, and it’s not easy or cheap to change after signature. Consumer protection laws don’t apply, like they do in residential real estate transactions. Landlords don’t use standard contracts, but have custom forms that are drafted to favor them. Landlord expect a savvy tenant to negotiate.

What a Commercial Real Estate Attorney Does

A dedicated commercial real estate attorney will provide a legal review and negotiate with your end goal in mind. Tenant want a predictable price for a safe and secure place to operate, and Landlord wants steady cash flow and a fully leased location. Don’t use an attorney that has “leasing” or “real estate” as one bullet point among many; chose someone with experience in your market, your industry, and with your type of lease.

You need a representative and an advocate who can provide strategic, business-oriented legal advice to move the leasing transaction to completion without sacrificing financial or legal protections. A good real estate broker can make a recommendation. An experienced commercial real estate attorney will protect your interests and help reach your ultimate goal: get the rights and responsibilities of each party outlined, and to negotiate a fair and equitable commercial real estate lease agreement.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

Minority-owned businesses have historically lacked access to capital, and in an effort to level the playing field, governmental bodies and private companies have special designations for minority-owned businesses which can give them an edge.

Each business entity type has to submit different forms, so it’s important to choose the correct entity for legal protection and tax consequences, and to observe the formalities.

Private Sector

National Minority Supplier Development Council (NMSDC) is one of the largest nationally recognized providers of the Minority Business Enterprise (MBE) certification.

Qualifications

  • United States citizen
  • At least 51% minority-owned operated and controlled.
  • Be a for-profit enterprise and physically located in the U.S. or a territory
  • Minority member(s) must be involved in management and daily operations of business

Owner Documentation Requirements

  • Complete certification application
  • US citizenship
  • Proof of ethnicity/tribal enrollment for minority owner(s), partners, shareholders
  • Business license/permits (if applicable)
  • Capabilities statement (history, core competency and capabilities of business)
  • Resumes for all owner(s), partner(s), shareholder(s)
  • Company’s work or contract history, last 3 years
  • Insurance/bond evidence (if applicable)
  • 2 years of business tax returns (or 3 years of owners’ tax returns if in business is less than 1 year)
  • recent financial statements (or projections if in business less than 1 year)
  • Outstanding debt
  • Bank/Business Signature Card
  • DBA or assumed name (if applicable)

Company Documents (based on the type of business entity)

  • Corporations submit:                                                                                                  
  • articles of incorporation
  • corporate bylaws
  • certificate of corporation
  • minutes of first board meeting
  • stock certificates, stock ledger and proof of stock purchase
  • proof of capital interest

LLCs submit:      

  • articles of organization
  • operating or company agreement
  • membership certificate(s)meeting minutes (first and most recent meetings)
  • proof of capital interest

Partnerships submit:

  • partnership agreement
  • buy-out rights
  • profit sharing agreement
  • proof of capital investment

Sole Proprietorships submit:

  • certificate of ownership or assumed name filed with the Secretary of State
  • business lease agreement or title/security deed, mortgage statement and/or property tax statement
  • equipment rental or purchase agreements (if applicable)
  • list of all equipment,tools and inventory owned or used in daily operation, plus management service agreements

Government Sector

The Small Business Administration (SBA) has the 8(a) Business Development Program for MBEs that want to be certified for government contracting.

Qualifications

The business must be a small business with demonstrated potential for success.The owner(s) must possess good character and be (majority) US citizens.The business is controlled/managed by socially and economically disadvantaged individual(s).

(Separate eligibility requirements exist for a business that is owned by American Indians, Native Alaskans, Native Hawaiians or Certified Development Companies.)

What is social disadvantage?

The SBA defines socially disadvantaged individuals as “those who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identification as members of groups without regard to their individual qualities.”

Groups that automatically meet the requirements for a socially disadvantaged background are:

  • Black Americans
  • Hispanic Americans
  • Native Americans
  • Asian Pacific Americans
  • Subcontinent Asian Americans

The majority of the ownership of the business must have US citizenship.  If the business owners do not fall into one of the above-named groups, then actual evidence of social disadvantage is required.

What is economic disadvantage?

Social disadvantage is a separate qualification from economic disadvantage.  To prove economic disadvantage, provide:

  • A narrative statement of economic disadvantage (yes, this is an essay requirement)
  • personal financial information (tax returns and other proof requires by the SBA)

Editor’s Note: It is up to you as the business owner to determine if getting certified an Minority Owned Business (or a Woman Owned Business for that matter.) If you’re planning to go after large contracts or deals, or plan to work as a Federal Contractor, there are definite upsides to consider.

This post originally appeared on Hire Effect™: https://hireeffect.com/index.php/2019/02/11/minority-business/


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

One of the advantages of leasing is to have someone else fix the problems, right? Tenant pays rent, Landlord fixes things. That’s what an idea commercial real estate lease contain from a Tenant viewpoint, right?

Welcome back to the real world.

First, some definitions:

Repairs and maintenance: A repair is to fix something broken (air conditioning that isn’t working) and maintenance is to keep something in working condition (changing the air filter in the air conditioning). These are expected, routine expenses that can be accounted for in CAM (common area maintenance, check out my CAM post for more information).

Replacement: A thing can’t be fixed, so a new one has to be acquired and put into use, and the old, broken one disposed of. Replacements are usually expected, but unpredictable in nature (you can’t always be sure when the hot water tank will need replaced). The really expensive items that need replaced are sometimes capital expenditures.

Capital expenditure: A financial term and it has to do with taxes and depreciation. A capital maintenance item could be a repair or replacement. It might be covered through CAM, or there could be a special assessment. A capital improvement is changing out what is already there for something else to make the situation better. It’s big, it’s expensive, and it is something where Landlord generally reaps longer-term benefits.

HVAC: Heating, ventilation and air-conditioning. When included as part of plumbing, electrical, sprinkler, life-safety, etc., these are known all together as systems.

What To Negotiate:

– Tenant should repair/replace/maintain what it brings onto the property. Tenant should contribute its proportionate share of common area maintenance through CAM payments.

– Tenant is still responsible for maintaining the stuff inside its space. This means things like filter checks and replacements, maintenance contracts, pest control, etc. Tenant probably doesn’t get the tax benefits of a replacement (like depreciation), so is a good place to read closely and negotiate.

– A system could exclusively service Tenant, such as a dedicated plumbing or HVAC system. If Tenant is the only one that is using it, make sure it is in good condition, because Tenant should be responsible for maintaining it.

– Find out how old the HVAC system is! Find out if it is still under warranty! Find out if it has been regularly services and maintained! Ask questions and get documentation! Otherwise, Tenant might end up with an unexpected expense, or worse, in default if the repair isn’t made and Landlord does it instead.

– Landlord should generally maintain, repair and replace systems that service the common areas or that are not exclusive to one tenant, the structural portion of the building, the foundation and the roof, as well as the common areas of the building. These are shared, and are part of CAM. Watch out for replacement expenses sneaked in there. Negotiation tip: A CAM cap can limit the increases in some of the expenses!

Of course, if there is a casualty or someone is negligent, then all of the above could completely not apply! If it’s a true triple net (net-net-net or NNN) lease, then Tenant is responsible for the cost of repairs and maintenance anyway.

– Tenant needs understand the agreement before being bound by it. A commercial real estate lease ideally address who is responsible for what. It’s important to negotiate and comprehend the financial and legal results of the lease to avoid unexpected expenses and increases in payments.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

A simple lease is not a short one.

Most people equate simple with short. If it’s a long document, that means it’s a complex transaction and there is a lot to discuss and rights, responsibilities and liabilities to define. A good commercial real estate lease will contain a lot more information besides the rent cost and the lease term.

Investing in a qualified attorney with relevant commercial real estate experience to review and negotiate the lease will strengthen and improve the Tenant/Landlord relationship. Both Tenant and Landlord can be satisfied that there is an understanding of the responsibilities assigned and the obligations imposed on each party. If there is a dispute, it will be easy to understand how to resolve it. Tenant and Landlord will understand their rights and responsibilities, and can make better business decisions, with full knowledge of the risk.

A short lease means that many provisions probably haven’t been negotiated- the parties might not even be aware that the provisions should be addressed. The party controlling the lease has decided to let the default statutory provision (aka, “the law”) control. This is often state-specific. Some commercial real estate leases can be invalidated, or at least legally challenged, if certain items aren’t addressed, disclosed, or otherwise appear in the lease agreement.

When the law and not the commercial real estate lease controls, then someone has to review the lease and then do the state-specific research regarding the circumstances, interpret the law, and make a legal recommendation on a course of action. If there is a lawsuit or dispute, that means someone is spending even more time and resources in pursuing a remedy. This someone is often an attorney, and attorneys charge for this service.

If only one party has a commercial real estate attorney representing them in the lease negotiation, then it’s a pretty lopsided negotiation. A sophisticated, business-savvy party understands the importance of having experience and knowledge on their side to reduce risk and protect their legal rights. Landlord will most likely have legal representation to negotiate and secure the best deal, Tenant should have the same.

Landlord’s attorney will represent Landlord, not to provide a fair and equitable lease negotiation. Landlord’s attorney will not point out favorable provisions to Landlord and explain the potential consequences and risk to Tenant. Many leases now have disclaimers, stating that each party acknowledges it should have legal counsel. If Tenant was advised to get legal counsel during negotiations, and doesn’t, then the lease won’t protect Tenant, and neither will the law.

If Tenant don’t take the time to get the lease reviewed and negotiated, or the lease is too short and doesn’t cover all the things it should, then Landlord and/or Tenant will have to hire an attorney to read the commercial real estate lease anyway, do the research to find out what the relevant law is, then render legal advice. Then, a decision has to be made and a course of action decided upon, with traditional dispute resolution techniques.

A short lease isn’t necessarily a good one. It’s better to invest at the beginning in the knowledge and experience a qualified real estate attorney what they’ll bring, to secure and protect your legal interests.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

Why Does a Small Business Need a Business Entity?

The right business entity can empower a small business operation.  The entity will grow and evolve with the business.  It will protect the owner of the business, and the owner’s personal assets, but it has to be done correctly to get the full legal and tax advantages.

Personal vs. Business Assets

The business entity, properly formed and kept current, will help protect the business owner’s personal assets. All businesses have liabilities, whether its payments to suppliers or employees that are due, or something more drastic, like a lawsuit if an employee or customer gets hurt by the company’s product.

If a person is operating a small business, but hasn’t filed for a business entity, then by default, the person created created a sole proprietorship (one owner) or a general partnership (multiple owners).  The operator is personally liable for the debts and actions of the company. If the company gets sued, or owes money, then the owner’s personal assets (bank accounts, car, house, etc.) are now at risk.

So How Does a Business Owner Protect Personal Assets?

  1. Incorporate the business entity correctly and keep it active
  2. Observe corporate formalities
  3. Keep personal and business assets separate
  4. Operate honestly and with integrity

Correct Incorporation

Instead of letting the state pick, identify the correct entity for the business, usually an LLC (limited liability company) or a corporation.  The legal protections are similar, but there are different tax consequences to consider.  Once the business entity is formed, the business is liable for its debts and actions, and the owners are not personally liable, if the owners observe the corporate formalities

Observe Corporate Formalities

Different business entities have different obligations.  Forms (and sometimes payments) have to be filed, meetings may have to be held, and the business must have governing documents.  It might seem a little silly to have a governing document for a single-member company, but if the owner wants to sell the company, sign a contract, or doesn’t want to be personally liable in a lawsuit, it’s important to have proof that the business assets are separate from the owner’s personal assets.

Separate Business and Personal Assets

Having separate accounts for business and personal assets is one way to demonstrate corporate formalities are being observed.  If the business is sued or has to pay a debt, the business entity formation means the owner’s personal assets are not at risk, unless the corporate veil is pierced.

Piercing the Corporate Veil

No matter what, the business still has to operate ethically and in accordance with the laws.  If not, the entity is disregarded for legal purposes. That means all of the business entity protections are unavailable, and the owner’s personal assets are exposed. This tends to happen when business owners either:

  • don’t observe the formalities of separating business and personal assets;
  • they defraud or mislead their customers or creditors;
  • taxes aren’t paid on time; or
  • business owner signs a personal guarantee (very common for commercial real estate leases and franchises)

This post originally appeared on Hire Effect™ : https://hireeffect.com/index.php/2019/02/01/protect-your-business/


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

The Default

Sometimes Landlord or Tenant, either inadvertently or deliberately, don’t abide by the terms of the commercial real estate lease, resulting in a breach. A breach, if not cured (fixed), can create an event of default. If there is a default, then the damaged party can seek remedy. Landlord remedies could be everything from hefty financial penalties to lockout to termination of the lease and suing for the monetary balance. If Tenant has any default rights, they are often limited to actual damages or specific performance.

The Notice

It’s not fair to have consequences without knowing what the action is, right? That’s why notice is important. The defaulting party should be informed of default by the damaged party, so the offending party can take action to fix it- this is notice.

The commercial real estate lease should clearly state Landlord and Tenant’s address for notice. Negotiation tip: don’t make the premises Tenant’s sole notice address. If Tenant is locked out or doesn’t otherwise receive mail at the space, then notice may be legally delivered, but not actually received!

Notice can be delivered in different ways:

– By hand

– By email

– By mail (US Mail, certified, or registered)

– By courier service

Notice should always be required to be in writing; it’s hard to prove a phone call occurred in court. Certified mail or courier service are often the most reliable ways to document that delivery occurred, and it’s important to understand the entire notice provision to confirm when the clock starts ticking on any cure period in the event a notice of default is received.

The Cure

Once the damaged party has provided notice, there should be some time for the offending party to fix the damage, known as the cure period. That’s not always the case! In an improperly negotiated commercial real estate lease, Landlord can theoretically tell Tenant that Tenant is doing something wrong (even if it’s easy to fix), then default Tenant and immediately pursue its remedy. That’s default without a cure period!

Each party to the commercial real estate lease has an incentive to make sure that defaults are remedied as quickly as possible- Tenant wants a safe place for its employees and customers to enter into business transactions, and Landlord wants to make sure that Tenant is paying its rent. Both parties enter the lease expecting the other to abide by the agreement, but if there is a breach, it does take a little time to fix the problem.

With a notice and cure period, Tenant has to be told something is wrong AND has an opportunity to remedy the default. Negotiation tip: Non-monetary defaults usually need more time to cure than a monetary one. State the exact amount of days for cure that each default has in the commercial real estate lease.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.