Friday, October 23, 2009

Intro to Lease Causes: For the Landlord and the Tenant

In my last two posts, I discussed commercial lease clauses that should be included from the perspective of a landlord or that of a tenant. This week I want to discuss lease clauses that are of mutual benefit to both the landlord and tenant. I’ll also answer last week’s puzzler question.

First, to lease issues. When a landlord is going to be providing extensive leasehold improvements, in addition to a clear mutual understanding of the scope and cost responsibility for the improvements, there should be a clear change-order procedure. Almost every construction job brings with it the attendant “while you’re at it” changes, as well as changes that only become apparent once actual construction is underway.

Without clear understanding of how to document those changes and the costs, both parties are asking for post-execution confusion and disagreement. A clear procedure for documenting changes should be included as part of the lease documentation.

In any lease having a term of five or more years, it is likely that sometime during the term of the lease the tenant is going to want to make decorating changes.
So long as these changes are non-structural and not visible from outside the premises, the landlord should be willing to let the tenant make them without the landlord’s consent so long as the tenant understands that, at the end of the term, the landlord has the right to require the tenant to restore the premises to their original condition, ordinary wear and tear excluded.

Any other type of change or alteration should be subject to the landlord’s prior consent, but that consent should be subject to a “not to be unreasonably withheld, conditioned or delayed’ standard.

If the premises are served by an HVAC system located within the premises, the lease should be clear on the maintenance responsibility. It is fair and reasonable for a landlord to require the tenant to purchase a service contract with a contractor acceptable to the landlord and to be responsible for minor, ordinary operating repairs but the landlord should bear the responsibility for replacing a unit if it fails during the term and for making major repairs.

Insurance requirements are important to both the landlord and tenant. In addition to the obvious need for both parties to carry adequate liability insurance, landlords have an interest in requiring their tenants to carry property insurance equal to 100% of their property in the premises.

Otherwise, the landlord and tenant could discover that, after a fire in the premises (regardless of who was at fault), the tenant no longer has sufficient financial ability to re-fixture the property, purchase inventory and the like.

One subject area that is often misunderstood is the distinction between a tenant’s “waiver of claims” and a tenant’s obligation to provide a “waiver of subrogration.” A waiver of subrogation is not a waiver of claims.

A “waiver of claims” is a lease provision in which one party to the lease waives all claims it may have against the other party for losses or damages suffered by the tenant (e.g., interruption of business due to a fire). So long as the waiving party insures against the claims being waived (e.g., property damage or business interruption) in the event of a loss, it will have recourse to its own insurance. If a party affirmatively chooses not to purchase adequate insurance, the other party should not have to bear the consequences.

A “waiver of subrogation” on the other hand requires the tenant’s insurer to agree that if, the landlord causes loss or damage to the tenant or its property or business and the tenant’s insurer compensates the tenant for such loss or damage, the tenant’s insurer will not take advantage of its legal right to be subrogated to the claims of its insured and pursue recoupment against the landlord.

One subject that causes landlords and tenants alike much angst are indemnity provisions. Both parties often mistakenly think that, absent an indemnity in their favor, they risk waiving recourse against the proposed indemnitor.

All an indemnity provides is that the indemnitor will step in upon notice from the indemnitee to defend a claim or satisfy a loss. If the indemnitor fails to act (and a clever attorney can frequently find a reason why the indemnity is inapplicable), the indemnitee typically still has the same recourse against the proposed indemnitor except that to realize upon that recourse it may have to bring a lawsuit.

Admittedly, indemnity clauses frequently go beyond the two parties to the lease and include their respective principals, partners, shareholders, directors, etc., but in most lease situations those “tag-alongs” are generally not at risk anyway.

It is always a benefit to both parties to a lease to have unambiguous provisions. Lease transactions generally result in long-term relationships and it is in everyone’s interest that the parties get along and not have needless disputes because respective rights and obligations are not clearly articulated.

Finally, as promised, the answer to last week’s puzzler, namely from whence the term “saved by the bell”? During the plague in medieval Europe, there was a rush to bury people. The problem was that some people weren’t dead; they were only in comas. Sometimes those people awoke from the coma during the funeral – or worse, after burial.

Worried that perhaps someone who appeared to be dead wasn’t, one solution was to tie one end of a string onto the "dead" person's hand and the other to a bell; if the person revived enough to pull the string and ring the bell, s/he would be unburied and would have been “saved by the bell. If a buried person pulled the string that rang the bell, s/he was a “dead ringer,” and, in some graveyards, a person was assigned to sit by the grave to listen for the bell – hence the term “graveyard shift.”

Tuesday, October 13, 2009

Intro to Lease Clauses: For the Tenant

Last week, I discussed commercial lease clauses that I think are important from a landlord’s point of view. I also posed the question, “Why are manhole covers round”? This week, I want to address leases clauses that I think are important from a tenant’s point of view. I’ll also answer last week’s question.

As a starting point, tenants should realize that in any negotiation with a prospective landlord, the tenant needs to apply the maxim “buyer beware.”

If the landlord is going to provide leasehold improvements prior to commencement of the lease, it is important that the tenant and landlord have a clear understanding of what those improvements will be and how they will be paid for. If the landlord is providing a fixed allowance for the construction of improvements, the tenant needs to independently determine if the allowance will be sufficient to complete the job as anticipated and, if not, whether any excess will be affordable.

This determination needs to be made prior to execution of the lease. I recently represented a tenant who relied on the landlord’s architect’s estimate of how far the landlord’s allowance would go. After lease execution, when the project was bid, the landlord’s estimate was off by more than $36/sf. Having already signed the lease, the tenant had little bargaining power to address this shortfall.

If the tenant’s rent is going to also include a portion of the building’s common area maintenance (CAM) and real estate taxes, the tenant should carefully review the items that will be passed along to tenants.

If the building is going to include a management fee and the manager will be an affiliate of the landlord, the lease should expressly specify that the fee will not exceed management fees charged by third-party managers of buildings similar in size, quality and location to the building in question.

In any such event, the landlord should not also be entitled to include an additional “administrative fee.” However, if that battle is lost and an administrative fee is included, it should be capped by an outside benchmark such as “administrative fees charged by landlords of buildings similar in size, quality and location to the building in question.”

A commonly included clause regarding CAM is a pet peeve of mine. It states that when the tenant is paying its pro rate share portion of CAM, the tenant loses certain rights if its negligence causes damage to either the premises or the building.

For example, a lease might provide that, following a casualty that prevents the tenant from using the premises, the tenant is entitled to rent abatement unless the tenant’s negligence caused the casualty. CAM charges always include the landlord’s casualty insurance premiums so, in essence, the tenant is paying for its share of the insurance and should get the benefit of the protection afforded by the insurance even if its negligence caused the casualty.

Think of this analogy: when a driver negligently causes an accident, it is the collision insurance that the purchased which pays for the repair of his own vehicle – and it is the driver’s liability insurance which pays for the damage to the other driver’s vehicle.

In negotiating the “permitted use” clause, tenants should seek general, comprehensive uses as opposed to limiting clauses such as “the operation of a law office.” A narrow clause can be used to justify denial of a proposed assignment or subletting.

If the lease includes a landlord’s lien, it should expressly exclude personal property of the tenant’s employees, as well as confidential client files. Any landlord’s lien should be expressly subordinate to bona fide lenders providing financing to the tenant secured by the tenant’s furniture, fixtures and equipment.

The tenant should not agree to any “self-help” provision (for anyone not familiar with legal terms, this is a provision which allows the landlord to evict the tenant without a court order) and should affirmatively obligate the landlord to use commercially reasonable best efforts to mitigate its damages. This requires the landlord to re-let the premises following a lease default.

Now for those of you who care, manhole covers are round because they are the only geometric shape that cannot fall in upon themselves.

Next week, I’ll discuss lease clauses that are mutually beneficial to the landlord and tenant and … for next week’s puzzler, ask you from whence the term “saved by the bell” (and no, it is not from that tweener Saturday morning show of the same name).

Wednesday, September 30, 2009

Intro to Lease Clauses: For the Landlord

Over the course of the next several weeks I’m going to discuss various lease clauses that should be included in commercial leases. But, as a lagniappe -– and as a way to find out if anyone is even paying attention -- like Click and Clack on Car Talk -- this week I’m going to include a puzzler that won’t be answered until next week. And for anyone who answers via a comment, you’ll have the psychic pleasure (or sadness) of learning whether you are right.

The question: Why are manhole covers round?

Now, on to the lease clauses. This week’s post will focus on those of importance to landlords.

First, of course, as a landlord, you need to decide what kind of lease to offer. There are three types customarily used in commercial leasing, namely,

  • a “full-service lease,” where the tenant pays basic annual rent but does not pay for any operating costs;
  • a “triple net lease,” where the tenant pays basic annual rent plus a pro rata share of the building’s operating costs and real estate taxes;
  • and a “base year lease,” where the landlord pays all operating costs and real estate taxes associated for a specific year - the “Base Year,” which is generally the first full calendar year following execution of the lease or the calendar year in which the lease is executed. The tenant pays a pro rata share of the increases in the building’s operating costs and real estate taxes for each year during the term following the Base Year.

    Retail leases can also include percentage rent (i.e., a percentage of a retail tenant’s sales from its premises) but that will be a subject of a future post.

    Second, landlords need to decide how Basic Annual Rent will be increased during each year of the lease term. Typically, increases can be based on a fixed percentage increase or tied to annual increases in a fixed benchmark, usually the Consumer Price Index (CPI).

    If choosing the CPI, the landlord needs to be careful which CPI to use because there are several, e.g., the “All Urban Consumers” Index (“CPI-U"), the “Urban Wage Earners and Clerical Workers” Index (“CPI-W”), and the “CPI-U, US City Average, All Items”; these indices are available to measure both national as well as regional trends. Regional indices tend to be more volatile than the national indices but may be more indicative of inflation in the area where the building is located.

    Another decision when using the CPI is whether a rent increase should be equal to 100% of the corresponding increase in the CPI or be a fraction of the CPI. Market factors will generally drive that decision.

    And, finally, when using the CPI, there should be a concomitant minimum increase regardless of the increase in the CPI. But what’s sauce for the goose is also sauce for the gander - if a minimum is imposed, landlords should expect tenants to ask for a maximum cap regardless of the corresponding increase to the CPI.

    Landlords should always include a provision that limits their possible liability for any type of claim made against a landlord to the landlord’s equity interest in the building. The personal assets of the principals of the landlord should not be placed at risk.

    Next week I’ll discuss lease clauses of importance to tenants -- and answer why manhole covers are round.
  • Wednesday, September 9, 2009

    Open Source Software & Its Legal Ramifications: What is Open Source Software?

    Barbara I. BerschlerI will be writing a series of posts that examine various issues related to open source software and legal ramifications for the average business owner -– not just those working in the IT field. Initially, I will address the main differences between proprietary software and open source software.

    More and more software is being written to respond to the explosion of computer driver services in business operations. So it is important to understand how that software is created, and what –- if any –- limitations to its use may accompany its acquisition by an individual/or business.

    Software is written by a programmer to operate a particular computer program. A business owner can either buy “off the shelf” software, like Microsoft Word or WordPerfect, or have some created for her special needs. What the business owner ends up with most likely is proprietary software. She pays for the use of the finished product -- and most likely is not given a version of the software to allow her to see “under the hood” of the program.

    To know the inner workings of the software requires having access to the source code, i.e., the programmer’s instructions which have been compiled into a format that the computer can understand.

    As part of the evolutionary process of writing software, a major path has emerged called open source software. So what does that term mean? It is software written by programmers to accomplish the same kinds of tasks as proprietary software. But using open source software means how the programmer obtained it, and how it can be further distributed may be subject to a set of requirements that are different from the proprietary version.

    Proprietary software is often obtained for a fee, is used or distributed under an extensive license, and, most likely, does not give the user access to the source code. In contrast, open source software is obtained for free and the programmer/or user can see exactly how the software was constructed because the source code is revealed. In addition, the user may freely modify and distribute the modified software.

    However, depending upon the originator of the software, there may be limitations placed on its further distribution. But unlike proprietary software, the object of such requirements is to advance the philosophical point of view of the author, rather than to seek an economic gain.

    Next time I will discuss why open source software was developed. If you have comments on this topic or suggestions as to issues you would like me to cover, please let me know.

    Thursday, September 3, 2009

    Choosing a Business Entity: Common Legal Entities


    In my last post, I talked about the benefits of forming a separate legal entity for your business. Once you’ve decided to set up a separate entity, you’ll need to figure out which type of entity makes the most sense. While not exhaustive, the following are some of the most common forms of business entities. Each type varies in terms of its ease in creation and maintenance and the tax consequences to the owners.

    Corporation:
    The corporation has, until recently, been the most traditional form of business entity. A corporation is owned by one or more stockholders who are issued shares of stock in return for their investment. Although in small businesses and family-run corporations, the stockholders may have a role in running the business, their role as stockholders is strictly economic. Absent extreme circumstances, such as fraud, a stockholder of a corporation is not personally liable for the acts or obligations of the corporation.

    The corporation is managed by a Board of Directors, which is elected annually by the stockholders. The Board appoints the corporation’s officers, including a President, Treasurer and Secretary, who are responsible for the day-to-day business affairs of the corporation.

    A corporation is taxed as a separate entity, meaning that it files its own tax return and pays taxes without regard to the tax status of the individual shareholders. However, if the corporation distributes a portion of its after-tax income to its shareholders in the form of dividends, each shareholder will pay a separate tax on the dividend received. This “double taxation” can be avoided if the corporation makes an election under subchapter S of the Internal Revenue Code. It is critical to consult with a tax professional for the rules and requirements relating to corporate taxation.

    Corporations must comply with many formalities (which, to the detriment of many shareholders, are often overlooked), including annual meetings of the stockholders, election of directors, keeping of minutes and a stock transfer ledger, all of which are typically set forth in the corporation’s bylaws. Some of the corporate formalities may be dispensed with if the corporation is set up as a “close corporation” pursuant to the provisions of Title 4 of the Maryland Corporations and Associations Act.

    Limited Liability Company:
    In recent years, an increasingly-popular alternative to the corporation is the limited liability company (“LLC”). An LLC is an unincorporated business organization with at least one “member.” Members may be individuals, corporations, partnerships, or other LLCs. LLCs have gained favor, especially among small businesses, because they offer the limited liability of a corporation but with fewer record keeping requirements and other formalities and, like a corporation, can be managed by non-member employees.

    An LLC offers the same liability protection for its members as a corporation does for its stockholders. This means that, absent fraud, self-dealing and the like, a member is not responsible for the debts, liabilities and obligations of the LLC.

    An LLC can consist of only one member. However, where there are multiple members, it is critical for the members to enter into an “Operating Agreement” which sets forth the relative rights and obligations of the members regarding contributions, distributions, allocations of profits and management of the business.

    LLCs are also favored because they offer the streamlined “pass-through” tax benefits of a partnership. This means that the entity is not taxed separately but rather passes through its income, deductions, credits, as well as other items, to its members. Your tax advisor can provide you with more information on the tax implications of operating as an LLC.

    Limited Partnership:
    A limited partnership is a partnership which includes one or more general partners, who are responsible for the management of the business, and limited partners, who have an economic interest in the partnership, but take no part in the management of the business. Limited partnerships are most commonly used in real estate ventures (although, in recent years, LLC’s are becoming favored alternative entities). Limited partnerships must comply strictly with the provisions of the Maryland Limited Partnership Act, Md. Code Sec. 10-101, et seq.

    General partners are personally liable for the obligations of the partnership. Limited partners, like corporate shareholders, are not liable for partnership obligations beyond their financial contributions. Unlike shareholders, however, except in unique circumstances, limited partners may not participate in the management of the partnership’s business –- another reason why LLC’s are becoming favored alternatives. There is no legal prohibition on the role of members in the management of the LLC’s business –- even if those members are merely passive investors.

    Limited partnerships are treated the same as partnerships for tax purposes.

    Again, this list is not exhaustive. There are other entities, such as professional corporations, limited liability partnerships and others, that may be more suitable for your business activities. A business attorney, working together with your tax advisor, can help you decide which form is most appropriate for your business.

    forming partnerships, business formations, starting llc, starting llc in maryland, incorporating a business, why incorporate, why incorporate a business, why incorporate your business, legal entity, legal entity types

    Thursday, August 20, 2009

    Choosing a Business Entity

    Whether you are just starting a business enterprise or you’ve been running your existing business as a sole proprietor or as a partnership, you should consider whether it makes sense to form a separate legal entity for the business. This is important for accounting purposes, as well as insulating your personal assets from the liabilities, debts and obligations of the business.

    If you are operating your business as a sole proprietor, then from a legal and tax perspective, you, as the owner, are inseparable from the business. Since a sole proprietorship and its owner are considered one and the same, taxes on a sole proprietorship are determined at the personal income tax rate of the owner. In fact, a sole proprietor simply reports all business income or losses on an individual income tax return.

    Similarly, because they are the same entity, a sole proprietor is personally responsible for any liabilities, obligations and debts of the business.

    If you have a partner, then you have formed a general partnership, which is defined under the Maryland Code as “an association of two or more persons to carry on as co-owners a business for profit.”

    Each partner is personally liable to third parties for all the liabilities, obligations and debts of the partnership, as well as the other partners. In this context, the only difference between a sole proprietorship and a partnership is that a partner could find him/herself liable for liabilities, obligations or debts created by another partner in the business. The partnership is not taxed as a separate entity. Instead, taxable income, losses, deductions, and credits are passed through on a pro-rated basis to each of the partners. Each partner is taxed directly on his/her share of the partnership’s net income, whether that income is distributed or not.

    Why Form a Separate Entity?

    Most of us carry casualty insurance, which protects our business from the loss of assets in the event of a casualty (e.g., a fire) and liability insurance (which, by the way, should always include contractual liability coverage), which protects your business from liabilities asserted by third parties for acts such as negligence (e.g., a fire caused by your -- or your employee’s -- negligence in your leased space which damages or destroys the landlord’s premises). But there could be situations where the insurance proceeds either don’t cover the claim being asserted or where the limits of coverage are insufficient to cover the entire amount of the claim being asserted. Also, business and economic cycles could create financial pressures on your business operations, making it necessary to negotiate with lenders, landlords and other creditors.

    Unless your business is a separate legal entity, your home and other personal assets could be at risk. Establishing a separate legal entity, maintaining its separate existence and using the entity’s name on your marketing materials, invoices, etc. will help protect your personal assets.

    There are also tax and accounting benefits associated with establishing a separate legal entity. Each type of entity has different tax and legal implications so it is critical that you consult with your attorney and a tax advisor before forming a separate legal business entity.

    Next week I will discuss the various types of common legal entities.

    forming partnerships, partnership, partnership business, sole proprietor, sole proprietorship business, why incorporate, why incorporate a business, why incorporate your business

    Thursday, August 13, 2009

    Thinking of Filing a Lawsuit to Collect Long Over-Due Fees? Some Considerations Before Suing ...

    There is no dearth of advice from business pundits on what business owners should be doing during this economic downturn to shore up the bottom line. A recent Business Week article seemed to tout going for a bike ride. Another suggested canning long-term goals. In such desperate times thoughts may naturally turn to those clients, customers and patrons that owe money to your business. If we could just collect some of this bad debt, the thinking goes, everything would be fine.

    At the risk of oversimplifying a fairly complex analysis, here are some considerations savvy business owners must take into account when analyzing the various legal options:

    1. Start at the end. That is, consider the likelihood of collecting if you win. This may depend on a combination of factors such as the potential defendant’s ability to pay, the length of time required to obtain a final judgment, and whether an insurance policy is available. If you do not know the defendant’s ability to pay, inquiring about assets through mutual acquaintances or obtaining an asset check may be considered. Next, determine how the assets of the delinquent are owned. For instance, is the potential defendant’s only asset a personal residence owned with a spouse as tenants by the entireties? Or, does the potential defendant have many assets, but few or none in the LLC that your business signed the contract with? Is bankruptcy a factor? Such factors greatly impact your business’s ability to collect any judgment obtained in court, and thus, warrant careful thought at the outset.

    2. Equally important is the cost of pursuing the action. In truth, most lawsuits end in settlement where the parties, after having exhausted their resources or their wherewithal to fight, or both, finally determine that it is in their mutual best interests to resolve the lawsuit before a judge or jury has an opportunity to fully examine the case. Given this reality, it is best to weigh the cost to the business to pursue the litigation in earnest against what you may reasonably expect the defendant to offer to rid itself of the matter. Obviously, the availability of an insurance policy, or a written contract that states that the winner of a dispute between the parties is entitled to recover their attorneys’ fees, or anything that may mitigate your costs is very positive. As my partner Daniel P. Dozier discusses more fully in his ADR Law blog, it makes sense to explore mediation and other, less expensive options for collecting the debt. In any event, as the cliché goes, do not fail to count the costs. If it costs $20K to obtain a $25K judgment—have you won? Maybe, but the point is, you need to have a base line to measure against.

    3. Finally — and this is the only point some litigants wish to consider — do you have a good case? I do not place whether the business has a viable case as the preeminent factor because if the potential defendant has no assets from which to collect, or the business does not have the means to pursue the action to a satisfactory conclusion, the merits of the case may be immaterial (aside from the bluff value). But having determined it is worth it to the business to file the lawsuit or to pursue mediation before or after filing suit, the merits of your case must be fully analyzed. Doing so has several benefits:

    a.) It will likely give you the upper hand in settlement negotiations because you will have already determined the strengths and weaknesses of the case;

    b.)It will force the decision makers in your business to take a sober look before committing company assets to the litigation; and

    c.)You will be prepared to deal with technical considerations such as the timeliness of the lawsuit, the availability of proof to support your contentions, the defendant’s ability to effectively assert a defense (such as counterclaims), and the like.

    Although this blog shares some of the analyses we go through with our clients, this blog is not intended to substitute for obtaining legal counsel. Each case must be evaluated independently with the help of a professional.

    Keywords: lawsuit, lawsuit advice, considerations before suing, considerations before pursuing a lawsuit, suing, sue, civil lawsuit, civil litigation, litigation, reasons to sue, debt collection, debt

    Wednesday, August 5, 2009

    Copyright Office's Increased Fees

    As of August 1, 2009, the Copyright Office is instituting new fees for registering works that are protectable under the Copyright Law of the United States. And, as with many of the federal government agencies, the Copyright Office encourages people to register on-line.

    In the case of a fully electronic registration of a basic claim, the fee remains $35.00. However, because the Copyright Office is required to recover the full cost for many of the services it provides, it has now instituted a new schedule of fees.

    Because copyright protection applies to more than literary writings, there are other application forms to consider. If you are registering a visual art work, performing art work, sound recording or serial, such as magazine issues, newspapers, newsletters, then you must select the proper form whether you submit your registration application electronically or via a paper format. The fees for those kinds of submissions have been increased from $45.00 to between $50.00 and $65.00.

    While the Copyright Office’s registration forms are short, their apparent simplicity can be deceptive. From the applicant’s point of view, it is critical to understand what kind of work you are seeking to protect and what ownership interest you have in the work. Moreover, the electronic registration process can require submissions to be made partially on-line and partially via delivery of an actual hard copy to the Copyright Office.

    Keywords: intellectual property, copyrights, copyright, copyright registration, trademark, trademarks, trademark registration, copyright office, copyright office basics, copyright office fees

    Tuesday, July 28, 2009

    Alternatives to Lease Guaranties

    You’re a landlord who is about to sign a lease with a tenant that is a corporation or limited liability company with no long-term operating history or few assets, and you want to be able to reach the principal of the tenant in the event of a default. The easiest way is to ask for a Lease Guaranty.

    But if you’re the principal being asked to give the Lease Guaranty you don’t want to subject your personal assets to the risks associated with the possible failure of your business so you are reluctant to give the Landlord the Lease Guaranty. A failed business venture – especially in these times – should not necessarily result in a significant reduction of your lifestyle or possible loss of your house or other significant assets.

    How do you resolve these conflicting interests in a manner that provides security for the landlord and is a reasonable but not life-changing risk to the tenant?

    There are several alternatives to the Lease Guaranty. The simplest is for the tenant to provide more than the customary one month security deposit and one month advance rent. Looking at the local rental market, the landlord should “guestimate” how long it would take to relet the premises following a termination of the lease for default. If, for example, the landlord thinks it will take six months, then the landlord should ask for a security deposit equal to six – or maybe even seven – months’ basic rent. If the tenant defaults and the landlord relets the premises in less than the six (or seven) month time frame it will earn an unexpected windfall; if it takes longer, then the landlord can chalk that up to the typical risk of doing business.

    Another alternative to a Lease Guaranty is a letter of credit in an amount equal to a prescribed number of months of rent. But, given that there are fees associated with the issuance of a letter of credit and that most issuers will require a significant amount of collateral to back up the letter of credit, this may not be as attractive to the tenant as posting the cash with the landlord.

    Whether cash or a letter of credit is used, the landlord could also agree that after an agreed default-free period, a portion of the security will be released. For example, if the term of the lease is five years, then after two years the landlord could agree to reduce the security deposit by an amount equal to one month’s rent; after three years, the security deposit could be further reduced by an amount equal to two months’ rent leaving the landlord with a security deposit equal to two months of rent. In a ten-year lease the reduction might be one month after two years, one month after three years, one month after four years and two months after five years.

    If the security deposit is paid in cash and it is a significant amount (e.g., equal to four months basic rent), the tenant should insist – and the landlord should agree – that the security deposit be held in a separate interest bearing escrow account. For small amounts, it is not typical that the security deposit will be segregated or bear interest but, in such cases, the landlord should be obligated to transfer the security deposit to any subsequent owner of the property and should not be released from liability until that occurs.

    These are some examples of how we work with parties to address legitimate but sometimes competing interests. We are skilled in working with clients – in this example, landlords and tenants – to solve legal problems and balance the needs of all parties to a transaction.

    Keywords: small business, loan, financing, small business loan, lease, commercial lease, commercial real estate, lease guarantee, guarantee

    Wednesday, July 15, 2009

    Free Money? SBA Offers Help for Small Businesses

    You may have read the recent Washington Post article (July 11, 2009) about the White House proposal to use bailout funds to increase the amount of “working-capital” loans the Small Business Administration (SBA) provides small businesses under its popular 7(a) loan program.

    However, a program is already in place at the SBA which aims to offer relief to small businesses in the total amount of $35,000.00. If a firm is eligible to receive the loan from a commercial bank, then the SBA will fully guarantee the loan and waive its typical fees. These “ARC loans” are interest-free to the borrower for the life of the loan. Repayment of the principal can be deferred for 12 months after the last disbursement of proceeds. Repayment of the total balance of the loan can extend for up to five years.

    To be eligible, the borrower must have been in business for at least two years and be able to show that it was profitable at least one of the two years. If the firm was open for less than two years, it needs to have been profitable all of the time it was open.

    You may ask, “Why would a business need a loan if it was “profitable?” Well, the answer is that the SBA is offering to help businesses with a bit of “relief funding” to help them get over the hump due to slowing sales that may make it harder to meet existing loan payments, vendor payments or even payroll.

    So, if you think this may be of interest to you or a small business owner you may know, contact Barbara Berschler at Press, Potter & Dozier, LLC, (301) 913-5200. She will give you more particulars and put you in contact with a local bank that is interested in participating in this special loan program.

    Keywords: small business, loan, financing, small business loan, sba, sba 7(a) loan, sba 7(a), 7(a) loan

    Thursday, July 2, 2009

    Is now a good time to start a business? Yes!

    Is now a good time to start a business? Yes, it is!

    At Press, Potter & Dozier, LLC, we've seen an uptick in recent months of entrepreneurs seeking help in starting new businesses. This might be a surprise to some, given the dour economic news in the newspapers, especially the perception that the "credit crunch" for new and existing businesses getting access to credit is still an insurmountable obstacle.

    Our clients tell us, and our experience bears this out, that now is a great time to successfully start a business. Our bank clients have told us that they are looking for new lending opportunities. The key is having a good product or service that meets a currently-unfulfilled need. For example, this past week's Washington Post Magazine (June 28, 2009), highlights two local women who started a business helping organizations use social networks like LinkedIn, Facebook and Twitter to keep in touch with their members.

    A key in starting any business is to control upfront costs. And legal costs in particular can be dramatic for a new start-up. Businesses must be registered and licensed, trade names need protection, employment agreements must be drafted, independent contractor agreements must be created/or reviewed and leases negotiated. While an entrepreneur may be a great "idea" person, it can be especially daunting to wade through all the requirements that must be met before a new business can open its door.

    Starting Your Business in Montgomery County, MarylandPP&D's manual, Starting A Business In Montgomery County, Maryland (written by my colleague Susan Potter and me) identifies all the steps that must be taken in forming a business. In easy-to-read language, we describe those items that can be done independently compared to other tasks where it would be more appropriate to seek outside help. The Manual has links to sites that have forms for many steps of the start-up process, such as registering businesses, selecting a name, securing licenses, and others. We also provide directions for obtaining insurance, opening a bank account, hiring employees, and choosing a location. It is a must-read for all new business owners in Montgomery County, Maryland.

    You can preview an excerpt (in PDF form) of Starting A Business In Montgomery County, Maryland. Ordering information is here. In some future posts, Susan or I (or our colleagues Fred Press or Cecilia Jones) will highlight particular parts of the Manual and the start-up process that we feel deserve more attention. And we'd appreciate hearing your comments about the Manual as well!

    Keywords: startup, starting a business, starting your own business, starting a business in maryland