Business Law 101

My Recent Trip to Cuba

2011-11-21T16:40:00.006-05:00

I recently had the good fortune to spend two weeks in Cuba, having participated in a humanitarian visit to the country. I’ll leave the politics aside (although, if you have any interest in an insider’s perspective, I recommend Yoani Sanchez’ blog) and limit this blog to describing some of the things I saw.

Approximately 80% to 85% of the buildings in Havana are pre-revolution, have not been maintained and are in deplorable condition, both cosmetically and structurally. The infra-structure throughout the country is in dire straits. There is no water pressure in much of the country (which makes bathroom use an interesting experience), in many places, electrical power is turned off during the night, the top speed limit on the major highways is 50 mph and 35 mph on all other roads, all of which are full of potholes, so that, frequently going from point-to-point on a road is really a matter of zigging and zagging your way; many of the bridges shake when vehicles cross over them, which does not give one a sense of confidence in the transportation system. And, there is no money to address any of these issues. After the collapse of the Soviet Union, Cuba no longer had a source of foreign aid (as opposed to foreign investment, of which there seems to be a significant amount, most notably from Venezuela and China).

There is a housing crisis in Cuba which the Cubans openly acknowledge, and while a 100 by 300 meter tract of land in the countryside can be purchased for under $100, it takes, on average, five years to build a house because of the limited availability of building supplies. While I was there, on November 10^th, it became legal for the first time for individuals to buy and sell private homes – although house-swapping has been legal for some time and it has always been legal for private homes owned at the time of the revolution to be passed down from generation to generation.

If you have an opportunity to visit Cuba – especially while Fidel is still alive – take it! It is an unforgettable experience and the Cuban people could not be warmer and friendlier.

The country may be downtrodden but the people most certainly are not. They understand that the rift between Cuba and the US is a political one carried on at the highest governmental levels and I discerned no animosity of any sort on a people-to-people level. They venerate Ernest Hemingway and, like so much of the rest of the world, Cuban people enjoy much of our American “culture” from rock and roll, TV shows and movies, to baseball (the Cuban National Pastime) and, of course, Coca Cola, the ubiquity of which is rivaled only by mojitos.

I’ve Foreclosed on a Property, Some Tenants Live There Already, But I Think I Can Do Better…

2011-04-29T16:33:00.009-04:00

Let’s say you’ve purchased a Maryland residential property (defined as having four or fewer dwelling units) at foreclosure, and you want to either move in or rent it as investment property. However, tenants living in it at the time of foreclosure still reside there, under a lease having an unexpired term at what you consider a below-market rent. What, if anything, can you do?

Recent legislation in Maryland, passed in response to the turmoil of the real estate economy, has given tenants living in residential property that has been foreclosed upon enhanced protections. This legislation limits opportunities to terminate existing leases.

Assuming the property you purchased is residential and you intend to lease it, you will take title subject to the rights of existing tenants – which means that they have the right to continue renting the property until the end of the lease term. However, this right applies only to tenants that are “bona fide,” meaning that they are not the mortgagors who have defaulted (or the child, spouse, or parent of the mortgagors), the lease was the result of an arms-length transaction, and the rent is not substantially less than fair market value. (The measure of fair market value, while objectively quantifiable through, for example, an MAI appraisal may be costly, if the tenants dispute your valuation.)

Different rules are applicable if the lease is an “at will” lease (meaning that either side can terminate at any time) or is for a month-to-month tenancy. In those instances, you must give 90 days notice before terminating the tenancy.

Similarly, if you purchased the property with the intent of occupying it yourself as your residence, then, no matter how much time remains on a lease term, you can terminate it, provided the 90 day notice is given.

A word to the wise, however; Maryland’s notice requirements are specific, and must be strictly followed. More information about the notice requirements and the foreclosure process can be found at here.

Real Estate Redux

2011-04-12T09:11:00.002-04:00

The cover story in the current issue of Fortune is The Return of Real Estate. While the title is slightly misleading in that it focuses solely on residential real estate, it makes for interesting reading nonetheless (and to be fair, the subtitle of the article suggests the scope of its content).

According to the article, the key factors driving this resurgence are the cost of owning vs. renting and the level (or lack thereof) of new construction. Apparently the pendulum is finally beginning its swing back from glut to dearth.

In support of that proposition, the article says that in mid-2006, there were 53,000 new homes for sale or under construction in Phoenix; currently, that number is only 8,100. In discussing this statistic with one of my colleagues she asked why she should care about what’s going on in Arizona when we’re here in DC. In responding, I was reminded of John Donne, English poet and lawyer (real estate maybe?) who famously declaimed, “Ask not for whom the bell tolls. It tolls for thee.”

Washington DC, Northern Virginia and lower Montgomery County, along with places like Indianapolis, Minneapolis, San Diego, the San Francisco suburbs and Texas, are what the article calls “nondistressed markets.” In these locales, housing prices, while impacted, were not battered. These markets will show a healthy resurgence as the economy and, in particular, job growth, improve. The housing market in Phoenix, along with other Sunbelt cities like Las Vegas and Southern Florida, suffered devastating collapses that crushed their local economies.

With job markets showing nascent signs of life, low inventories of new homes mean there is an opportunity for construction to slowly begin anew – notwithstanding the continuing spate of foreclosures nationally, provided that local markets are able to absorb these properties. Why? Because foreclosed properties drive down the price of housing generally, this makes them extremely attractive to investors, who purchase them for use as rentals. As the Fortune article points out, “Remember, the millions who lost their homes to foreclosure still need somewhere to live.” Real estate construction, whether it be housing or commercial, has a pervasive impact on local economies; first, construction of a typical new home can, during the course of construction, employ anywhere from 80 to 100 tradesmen such as electricians, plumbers, carpenters, painters, roofers and the like, not to mention the increased business for local mortgage brokers, appraisers and insurance agents, as well as local dealers and suppliers. More than that, however, the revival of the home building industry unquestionably impacts the national economy as well, because new construction means new business for the manufacturers of appliances, plumbing fixtures, floor coverings, paints and wallpaper, furniture, roofing and siding materials, etc., not to mention lenders and insurers.

One can even argue that in today’s multinational economy, the effect is global, since it is hard to imagine any new home without several flat screen TVs, WiFi, sound systems and the other amenities of modern life, many of which are made abroad.

If you are actively involved in real estate (or even just interested), I think the Fortune article is a good, informative read and if you’re not a subscriber, it’s definitely worth the newsstand price.

Chinks in a Subtenant’s Armor

2011-03-29T14:44:00.003-04:00

Recently, I received a call from a prospective client (the “PC”) regarding a sublease the PC had entered into as a subtenant less than a month earlier. It turned out that the tenant (the sublandlord in this case) failed to comply with provisions of its lease (i.e., the “main lease”) and its landlord put the sublandlord on notice that this failure constituted an “Event of Default.” The notice stated that, unless the sublease was terminated immediately, the landlord would start proceedings to terminate the main lease. Imagine the PC’s shock upon learning that it was about to be dispossessed from its premises shortly after having taken possession.

Simply stated, a subtenant’s leasehold rights derive entirely from those of its sublandlord. That means that if the sublandlord’s lease with its landlord is terminated, the subtenant’s rights will simultaneously be terminated. Not a predicament a subtenant wants to find itself in. (In this case, the landlord was unwilling to compromise, so the PC’s proverbial goose was cooked.)

Were there steps that the PC could have taken to avoid this situation? Yes. First, the PC could have asked to review the non-monetary terms of the main lease. By this simple process, the PC would have discovered that the landlord required that certain conditions precedent to any subletting had to be met by the tenant. Second, the PC could have requested the landlord’s written consent to the sublease, thereby removing all doubt as to the landlord’s consent.

Of course, even if a landlord consents to a sublease, a subtenant’s situation is still at risk to an early termination of the main lease. To minimize that risk, a subtenant can ask the landlord for a non-disturbance agreement (an “NDA”), which will require the landlord to recognize the sublease even if the main lease is terminated before the expiration of its term. However, this is a case where size counts. If the subleased space constitutes only a small portion of the tenant’s space, the landlord will, in all likelihood, be unwilling to execute an NDA; if, on the other hand, the subleased space is of significant size, the chances of obtaining an NDA increase, although it would not be unreasonable for the landlord to impose conditions precedent to its effectiveness (such as requiring that the subtenant first cure any existing main lease default by the sublandlord, or requiring the PC assume all of the sublandlord’s main lease obligations, including those pertaining to rent and the length of the remainder of the lease term). If a landlord is unwilling to give a subtenant an NDA, the subtenant can ask the landlord to send it copies of default notices and request that it be given an opportunity to cure its sublandlord’s defaults.

Admittedly, in the subject case, the PC has remedies available to it against its sublandlord (e.g., breach of the covenant of quiet enjoyment (if there is one in the sublease) and/or breach of contract), but these remedies are inadequate to compensate it for the loss of its possession of the subleased space and the PC is most likely going to have to find and relocate to space elsewhere.

CONGRESS RECENTLY EXTENDED IRC §179 TO INCLUDE DEDUCTIONS FOR REAL PROPERTY BUT ONLY FOR 2010 AND 2011

2010-12-02T14:22:00.002-05:00

Usually when you think of §179 of the Internal Revenue Code, you think of deductions available to businesses for depreciable, tangible “personal” property such as equipment, vehicles and computers. However, Congress has given a gift in the Small Business Jobs Act, signed September 27, 2010, by extending the deductions to include up to $250,000 of Qualified Real Property.

What kind of real property will qualify for this favorable tax treatment?

· First: Qualified Leasehold Improvements—typically capital improvements made to an interior portion of a commercial non-residential building.

· Second: Qualified Retail Property Improvements—typically capital improvements to buildings which are open to the general public for the sale of tangible personal property.

· Third: Qualified Restaurant Property—typically, capital expenditures for the improvement, purchase or construction of any building (new or used), if more than 50% of the building’s square footage is devoted to the preparation of, and seating for, the on-premises consumption of prepared meals.

In order to receive the benefit of this deduction for Qualified Real Property, you must place the building or capital improvement in service by the end of your 2011 tax year, so it may take some quick footwork to be able to elect §179 treatment.

Whether you can take advantage of this deduction depends on your individual circumstances and (big disclaimer coming here) you cannot consider the foregoing to be tax advice of any sort. As with anything connected with the Internal Revenue Code, there are tricky issues, so you should consult with your tax planner to guide you as to how best to take advantage of this opportunity. That said, this link will take you to a good first step in understanding the process.

Small Business Resources

2010-11-30T16:24:00.002-05:00

As President of the Women Business Owners of Montgomery County, I have the opportunity to learn about various resources and programs aimed at women-owned and small businesses here in Montgomery County. Earlier this month, I attended the launch of the new Rockville Women’s Business Center. RWBC began as an initiative of the non-profit Rockville Economic Development, Inc. (REDI). The Center is located within the REDI offices at 95 Monroe Street in downtown Rockville, and offers tailored training, counseling and technical assistance to help entrepreneurs start and build successful business enterprises that are positioned for long-term growth. The Center is open to all and promises to be a great resource for both start-ups and companies looking to grow and expand.

I also recently attended a briefing by Robert Carpenter of the U.S. Small Business Administration on the new Small Business Jobs Act, and how this legislation affects our small business community.

One change that caught my attention is a provision that will allow some small businesses to refinance their owner-occupied commercial real estate mortgages into the SBA 504 loan program. Regulations implementing this provision should be issued during the first quarter of 2011. The law also sets higher loan limits for the 7(a) and 504 programs ($2 million to $5 million) and expands the number of small businesses eligible for SBA loans by increasing the alternate size standard to those with less than $15 million in net worth and $5 million in average net income.

The briefing, hosted by the Montgomery County Department of Economic Development (“DED”), also included information on the Small Business Revolving Loan Program, administered by DED, which provides “micro” loans of between $5,000 and $100,000 to small businesses which are looking to expand in Montgomery County and may not qualify for traditional private banking financing.

The Small Business Revolving Loan Program recently received a $2 million infusion to provide loans to small businesses whose expansion includes the creation of new jobs or the relocation of existing jobs into the County. Eligible businesses must have gross revenues of less than $5 million annually and fewer than 75 employees. To learn more, go to http://www.montgomerycountymd.gov/dedtmpl.asp?url=/content/ded/financing/small-business-revolving-loan-program.asp.

SHOULD A SMALL BUSINESS OWN ITS FACILITIES?

2010-10-20T11:52:00.001-04:00

To own or not to own? That is the question. If you run a business, should you buy your own facility? When small business clients ask me that question, I generally advise them to rent, not purchase, their facilities. My rationale is two-fold:

• First, if your business is making widgets and you do it successfully, then keep your eye on the ball and focus on doing what you know best so that you can make your business grow. Real estate is often fraught with unanticipated consequences that divert your energies, emotions and capital; every dollar sunk into real estate will reduce your monthly income and produce additional fees/taxes and expenses. My belief is that you should invest your capital in your business, not what, in essence, is a speculative investment.

• Second, if you believe in yourself as a widget-maker, you most likely expect to expand your widget-making business over time. But along with growth comes the likelihood that you will outgrow your space. Then what? If you need to relocate, you may find yourself having to sell into an unfriendly economic real estate market, which may well scotch your growth opportunities.

Why Is Social Media Important to Franchisors and Franchisees?

2010-09-30T15:44:00.003-04:00

Since more and more Americans use their connections to Facebook, Twitter and YouTube to guide them in their consumer decisions, they expect the companies they patronize to be accessible on the web. That fact gives franchisors and their franchisees a common interest in having their business develop a dynamic presence on the Internet via the various social media outlets.

Many franchisors have gotten the message and have made budgeting decisions accordingly with respect to their marketing programs. Existing franchisees may ask, “Are the social media programs being adopted by their franchisors more than just trying to get on the bandwagon or simply attracting prospective franchisees and/or investors”? This is because whatever expense the franchisor makes for social media marketing is probably going to be paid for by the franchisees through the advertising or fees they are charged.

It behooves both franchisors and franchisees to develop the best and nimblest social media marketing program that they can so that it will be of interest to, and attract, potential customers/clients. Many businesses have figured out what it takes. Their programs are so well developed that while a customer is sitting in a restaurant wondering why he does not have more corn tortillas, the franchisor’s corporate HQ picks up the Twitter complaint and can inform the local restaurant owner of his customer’s concern.

This kind of 24/7 social media coverage can be expensive. Given the size of certain chains, they may not be able to respond within minutes to a customer’s complaint. However, that should be a goal towards which each franchisor aims and it is certainly a marketing sophistication level that any prospective franchisee should expect.

If a franchisor cannot provide such “hands on” response time for their social media marketing campaigns, what would be a reasonable standard to expect?

Useful Links

2010-09-20T14:01:00.005-04:00

Sometimes a blog is just a blog, sometimes it has some insights (hopefully of value) that the blogger wants to share and sometimes –- as in this case –- the blogger has seen some other blogs that might warrant a visit. Toward that end, here are links to directories of local real estate blogs that run the real estate blog gamut:

Maryland Real Estate Blogs

Virginia Real Estate Blogs

Washington, D.C. Real Estate Blogs

and two more narrowly-focused blogs:

The Real Estate Bloggers

NAI Global

Enjoy.

Real Estate Appraised Valuations vs. Fair Market Value

2010-05-24T13:35:00.002-04:00

I’m a subscriber to Zillow.com, which, according to its website, is a home valuation site that provides an estimate of a home’s market value. According to Zillow, the “Zestimate” of my home increased 1.1% in January while according to the Zestimate I received last week, the value decreased by 0.5%. Since I have no present intention of selling my home, I find these fluctuations to be more interesting for their entertainment value than anything else.

According to Zillow.com, it differentiates its Zestimates from appraisals because Zestimates are computed using a proprietary formula. Real estate appraisals on the other hand are performed by qualified professionals, often – although not always – by an appraiser who is a Member of the Appraisal Institute (“MAI”), which means the appraiser has fulfilled specific educational and experience requirements and passed an examination. (See, http://www.appraisalinstitute.org.)

Are real estate appraised valuations the equivalent of the fair market value (“FMV”) of real estate?

Maybe, but not necessarily.

In one variation or another, FMV is defined as the price at which a bona fide knowledgeable, willing seller under no pressure to sell will sell a real estate asset and the price a bona fide knowledgeable, willing buyer under no pressure to buy will pay for that asset.

The appraised value of real estate is basically the opinion of the appraiser and can take one of several forms, including:

The “cost value” approach, which is the aggregate of the land value and the depreciated value of any existing improvements.

The “sales comparison” approach, which is predicated on the recent sales value of similarly situated comparable properties.

If the property is commercial, retail or industrial, the “income capitalization” approach may be the basis for an appraisal, which capitalizes the income stream to be generated by a particular property and bases the value of the property on the “cap rate.”

So, for example, a cost value may, at any particular point in time, be significantly higher than a prudent buyer would pay for a property. Similarly, the cost value may be significantly lower than the price a prudent buyer would pay, thus leading to an enviable “bidding war” among competing buyers, one of whom will end up paying more than the asking price for the property.

So, why is my Zestimate up one quarter and down the next? Apparently, because of fluctuations in the recent sales prices of “comparable” homes in my neighborhood. Of course, I think my home is incomparable – but that would lead me into a discussion of “intrinsic” value, which is a different proverbial kettle of fish.

As a pretty clear demonstration that value is in the eye of the beholder, a recent Zillow.com value for my home was 15% greater than the MAI appraised value conducted in connection with a mortgage refinance at the same time. Apparently, the value of my home is worth 15% less for loan security purposes than it is for sales purposes. Presumably, the MAI appraiser conducting the appraisal for my prospective lender knew the purpose of the appraisal and chose to be conservative. Thus the often-heard sobriquet, “Made As Instructed”!

Who Owns Copyright in Source Code in Technology Start Up Company?

2010-04-13T15:30:00.001-04:00

Start-up ventures, especially in the area of technology, often begin based on nothing more than good faith assumptions of the founders. Frequently they operate informally without understanding the need to document the relationships among the venture, its principals and its employees. More often than not avoidable disputes ensue, creating needless expense, arguments and sometimes the split-up of the founders or the loss of key employees leading to the dissolution of the venture.

JustMed, Inc. v. Michael Byce, a case decided by the U.S. 9th Circuit Court of Appeals earlier this month, involved a dispute between the founders of the venture about the ownership of the copyright in computer source code. This case is a classic illustration of what not to do; these facts are often present in startup companies (not only the IT field), namely the absence of written agreements and formal employment procedures.

Former brothers-in-law, Joel Just and Michael Byce, patented a device to help those whose larynxes have been removed. Together they formed JustMed for the manufacture and development of the necessary hardware and software. Byce was a shareholder and served on the Board of Directors. He took over the development of the software from a company employee, and basically rewrote the source code. JustMed had no employment agreement with Byce; he created the source code at home; worked his own hours; and his pay was in company stock.

Byce was anxious that he would not receive his fair share should there be a buy-out or merger of the company. So, to protect what he considered his intellectual property, he deleted the source code from the company’s computers.

The expected lawsuit followed. From JustMed’s point of view, it owned the copyright in the software on the theory that Byce was its employee and, therefore, the source code was a “work made for hire.” Byce countered, arguing that he was an independent contractor and, therefore, owned the copyright in the work.

In deciding whether an employer/employee relationship existed, the Court examined several factors to determine to what extent JustMed controlled the manner and means of the creation of the source code. Typically in employee vs. independent contractor disputes, factors such as whether an employment agreement exists; whether taxes are withheld and social security paid; to what extent the employer controls the creation of the work product; and what level of skill is required in the work, are examined to see which side proves stronger.

Here, despite that JustMed operated informally as to Byce’s compensation, namely, by the issuance of stock; did not exert control over the manner and means of the creation of the source code; and was lax in its tax and withholding procedures, the Court nevertheless concluded that Byce was an employee, making the source code a work made for hire, which meant that JustMed owned the copyright in it.

In other circumstances, such informal employment practices could be seen to favor an independent contractor interpretation. Here, because of the start-up nature of the technology enterprise, the Court relied on other factors (such as that a software developer is expected to be inventive and work independently, that the project was central to JustMed’s business and that Byce performed other tasks for JustMed) to buttress its conclusion that he functioned as an employee.

Regardless of whether one considers the outcome fair in this case, had some of the variables changed slightly, it is unclear whether another court would give similar leeway to a technology company faced with a challenge to its copyright ownership in its software. But why take the risk? Had JustMed documented its relationship with Byce and specified who owned the copyright, it could have avoided the expense, disruption and animus that both sides experienced.

Commercial Photographer Dilemmas in Protecting Copyright in Photographs

2010-04-08T11:41:00.002-04:00

A case recently decided by the US Eleventh Circuit Court of Appeals offers commercial photographers a primer on what to do and what not to do in order to protect their copyright interests in their photographs. While the case involved some well known players—Kawasaki Motors and Roaring Toyz—and the unveiling of the ZX-14 sports motorcycle at the Daytona Bike Week in 2006, it took four years for the 11th Circuit to rule on the copyright claims of a photographer, and not all of the issues have yet been resolved.

The basic facts were that Kawaskai wanted to focus on the customization potential of its new motorcycle. It hired Toyz to customize some ZX-14 motorcycles to display at Daytona. As part of its customization efforts, Toyz hired an independent contractor, Ryan Hathaway, to apply custom paint and graphics to the vehicles. Toyz also hired Todd Latimer, a motorcycle photographer known for his unique and artistic style, to photograph the two customized ZX-14s.

The dispute arose over whether Kawasaki and Toyz used Latimer’s photographs in ways beyond those he claimed to have authorized. In response to Latimer’s claim of copyright infringement, the defendants raised significant arguments that he had to rebut. By examining some of these defensive arguments, you can learn from Latimer’s miscues.

Latimer’s first mistake was not having a written agreement that clearly stated what uses of his works he was permitting. Not taking the time to consider and memorialize, even if by an e-mail, what uses are permitted, subjected Latimer to the task of proving a negative, namely, that he did not authorize the use about which he then complained.

Ironically, Latimer had to overcome the argument that because his photographs were shot without Hathaway’s permission, he infringed on Hathaway’s copyright in the graphic art appearing on the motorcycles. Therefore, Latimer’s second mistake was not recognizing that what he was photographing contained separate copyright --protected material, thereby exposing himself to the claim that his photographs were not protected by copyright because they infringed Hathaway’s work. Only because the Court concluded that Hathaway had granted an implied license to have his work on the customized ZX-14s photographed was Latimer able to remain in the game. However, in accordance with the well-settled legal principle that “What is good for the goose is good for the gander,” Kawasaki and Toyz argued that their uses of the photographs came within an implied license from Latimer.

At this point it is useful to discuss how a court will determine the existence of an implied license. Basically, an implied license can be inferred from the conduct of the parties. The objective facts of a photographer creating a work at the request of another, delivering that work and intending that the person will copy and distribute the work, (i.e., knowing how the client intends to use the work), show the existence of an implied license. Once an implied license is established, it will be interpreted broadly unless there is proof that at the time of the work’s delivery, the photographer placed limitations on its use.

Latimer’s third mistake was not recognizing that his actions could be viewed as his grant of an implied license to use his photographs. In this case, the Court concluded that Latimer’s conduct resulted in an implied license. The unanswered question was whether any of Kawasaki’s uses exceeded the scope of the license.

Latimer’s fourth mistake was not having any clear proof when he delivered his work product (the photographs), that he intended to limit the scope of their use. This absence of proof of his intent resulted in the case being returned to the trial court to examine the facts on that issue.

The lesson from all of this is that commercial photographers can avoid Mr. Latimer’s problems by taking relatively simple steps to protect the use of their work.

The Virtues of Joint Venturing

2010-03-26T15:42:00.003-04:00

Small businesses face multiple hurdles new and old, from identifying lucrative contact opportunities to determining how best to use limited resources to penetrate new markets. In this post, I will extol the virtues of joint venturing or teaming with equals or larger companies to gain a competitive advantage and multiply earning potential.

As a lawyer, I see companies, particularly closely held businesses, grapple with subcontracting agreements and similar contractual arrangements in which they have little leverage to shape the final terms. The scenario usually involves me reviewing a subcontract with terms such as: “the subcontractor shall not be paid unless and until the owner approves of all work performed …” and “in the event that the owner does not pay the prime for any reason, the prime shall have no obligation to pay the subcontractor.” Another favorite: “as a condition precedent to final payment, the subcontractor shall execute and deliver to the prime a release of all claims against the prime and the owner arising under or by virtue of this agreement.” I promptly revise the most offensive terms, the other party or their counsel objects citing their reasons, and in the end the parties have a finished product that reflects their unequal bargaining positions.

Joint venturing, which is simply forming a strategic alliance with one or more other businesses, could be a powerful weapon for these businesses and a more advantageous alternative to the traditional subcontracting arrangement. In the case of a small business teaming with another small business, the advantages are evident:
(1) each company maintains their autonomy (making teaming a superior alternative to mergers);
(2) the companies collaborate to compete for business they could not otherwise hope to win on their own; and
(3) most importantly, they equitably split the rewards of their labor.

Incidentally, government contracting officials and others with a vested interest in small businesses winning their fair share of contracting opportunities often report that small businesses would be much better positioned to win and successfully perform contracts if they simply joined forces with one another. What’s more, the value and potential of both companies suddenly expand manifold.

The big guys are adept at this. In a recent issue of Business Week, for example, an article about Thermax, Ltd., an Indian power equipment maker, noted the company’s market value rose to its highest in seven weeks after it merely announced a joint venture with Houston-based Babcock & Wilcox Power Generation Group, Inc. The deal is expected to add $30 billion to Thermax’s sales by March 2015. Its CEO was quoted as saying: “We no longer need to be a part of any consortium to bid for projects. We will be able to compete with bigger rivals now.”

Joint ventures are in, and if you're not utilizing this powerful tool, chances are your competition is, or will soon be. The trick is knowing when it makes sense to collaborate with your peers on a project. First, consider whether a prospective joint venture partner has an accommodating culture with compatible broader business strategies. Second, don’t overlook the importance of having a carefully drafted legal document (the joint venture agreement) that describes what each party brings to the joint venture in detail. Finally, and more important than the process itself, is the execution of the joint venture—start with a full-fledged joint business plan, including (very important) an exit strategy.

Business Financing & the Bursting of the Commercial Real Estate Bubble

2010-02-24T14:35:00.006-05:00

A few weeks ago, I wrote about the economy in general and the commercial real estate market in particular.

Last week, The Washington Post had an article suggesting that the other shoe is about to drop when it comes to commercial real estate. The article makes for sober reading, suggesting that the commercial market is a bubble that is about to burst (although, unlike home foreclosures, it is likely that few, if any, commercial and retail tenants will find themselves out on the street because of a foreclosure).

A spate of commercial foreclosures is something we have seen before. During the S&L crisis of the early 90s, I recall one banker telling a client of mine that his project was going to be foreclosed upon and it would just be added to the pile of other properties that the bank had already acquired in that manner. The banker did not seem particularly troubled.

Just this week, we learned that bank lending dropped 7.5% during 2009, supposedly the largest annual decline since the 1940s. Is there a corollary between the dearth of lending activity and the upcoming bubble burst? In my opinion, there is; it’s not hard to imagine how the former will cause the latter. Most businesses need to be able to borrow money in order to operate and smooth out cash flow ups and downs. Debt is not necessarily an evil to be avoided and, in fact, if used wisely, is a good cash management tool. When a business needs new expensive equipment, why should it pay the full price up front when debt will allow it to amortize the cost over the effective life of the equipment? And in today’s economic climate, where customers age their receivables as long as possible, a business may need to dip into its operating line of credit to meet those obligations which cannot be aged – payroll, for example.

When banks stop lending, businesses find it hard to operate – let alone grow. And for a business that is marginally profitable, or for a business that is currently in an economic trough, the unavailability of credit can make it impossible for the business to continue. A business can, of course, ask its landlord for rent relief, but a too-understanding landlord may suddenly find itself unable to generate enough rent revenues to meet its debt service obligations or find that, even with rent relief, its business tenant cannot long survive; this, obviously, impairs the landlord’s rent revenues and its ability to meet debt service obligations. So, it is not hard to draw a straight line from the lack of business financing to the bursting of the commercial real estate bubble.

Back in 1990, I started a law firm with two colleagues. During our first year our revenues were, as one might expect for a start-up, acceptable, but not spectacular; nevertheless, we all did quite well economically because we offset the low revenue stream with a close eye on operating costs; what we didn’t make in revenues we enjoyed in savings.

While I don’t want to suggest that the road to survival is layoffs, there are many areas of discretionary spending that can be reduced if not eliminated. How many businesses have a budget that is continuously reviewed and updated? My guess is that there are very few that do. Contrary to popular sentiment, I think it’s currently prudent to sweat the small stuff.

Best Wishes for a Happy and Prosperous 2010

2010-01-29T11:33:00.003-05:00

It’s been some time since I’ve blogged, what with the Thanksgiving, Christmas and New Year holidays, but I suspect I’m not alone in breathing a sigh of relief that 2009 is past. (Of course, I hope that this time next year, we’re not looking back on 2009 as the “Good Old Days.”)

When people ask how Press, Potter & Dozier fared in 2009, my stock response is “We made a larger profit than GM and Chrysler combined.” Of course, that’s not necessarily saying much.

If you had asked me last October if I thought the commercial real estate market was showing signs of life, based on the sudden spike in first generation lease activity that kept me busy, I would have said “Yes.” But things slowed considerably in November and December and January has been somewhat of a roller coaster.

I’ve seen small spurts of activity, mostly with the renewals of existing leases, but nothing of long-term significance to suggest to me that the end of the downturn is in sight. As long as businesses tread water or, worse, contract, there does not seem to be any reason for the commercial real estate market to show any vibrancy.

And until consumers – which, in reality, are all of us – start to regain confidence and begin spending, there will be little reason for businesses to expand by increasing production or adding employees. In that sense, I suppose Pogo (the classic Walt Kelly comic strip character) was right when he said “We have met the enemy and he is us.”

I invite you all to return here regularly to see what my colleagues and I think is of interest to the real estate, general business and ADR and environmental law communities and, of course, I really, really, really mean it this time when I wish each of you a Happy and Prosperous 2010.

Intro to Lease Causes: For the Landlord and the Tenant

2009-10-23T15:47:00.000-04:00

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.”

Intro to Lease Clauses: For the Tenant

2009-10-13T11:51:00.006-04:00

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).

Intro to Lease Clauses: For the Landlord

2009-09-30T15:42:00.000-04:00

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.

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

2009-09-09T16:24:00.001-04:00

I 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.

Choosing a Business Entity: Common Legal Entities

2009-09-03T15:59:00.000-04:00

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

Choosing a Business Entity

2009-08-20T15:01:00.000-04:00

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

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

2009-08-13T10:23:00.000-04:00

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

Copyright Office's Increased Fees

2009-08-05T10:37:00.001-04:00

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

Alternatives to Lease Guaranties

2009-07-28T09:34:00.000-04:00

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

Free Money? SBA Offers Help for Small Businesses

2009-07-15T15:53:00.001-04:00

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

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

2009-07-02T16:14:00.000-04:00

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.

PP&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