San Diego Business Lawyer Blog

Continued from The Business Contract - Part Two.  

Integration Clauses:  The integration clause states that the written contract entered into by the parties is their entire agreement.  A typical clause reads: "This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter of this Agreement."  The integration clause ensures that neither side will be able to later claim that there were additional terms agreed to in a side agreement, orally or otherwise.  All contracts should include an integration clause.  

Modification Clauses:  The modification clause is a simple but important clause that requires contract changes be set forth in writing and signed by all parties to be enforceable.  

Severability Clauses:  It is sometimes possible that a particular clause in a contract is unenforceable under California law for a myriad of reasons.  To avoid having such clauses invalidate the entire contract, parties routinely include severability clauses which state that in such cases the remainder of the agreement is valid and enforceable to the fullest extent permitted by law.  

Authority to Execute Clauses:  When corporations, limited liability companies or other formal business entities enter into contracts it is important that the person that signs the contract actually has the authority to bind the corporation, limited liability company or other business entity.  The "authority to execute" clause warrants that those signing for the company have said authority.  This important language is often overlooked by businesses informally contracting with each other without attorney consultation.  

Attorney Consultation Clauses:  It is always wise when one side prepares and presents a contract to the other to include an "attorney consultation" clause asking the other side to acknowledge that it has had an opportunity to consult with independent legal counsel.  This reduces the likelihood that the party may later try and argue that the agreement was so one sided that it was not freely bargained for (adhesion contract) or that the contract was entered into under duress or fraudulent circumstances.  

Counterpart Clauses:  Counterpart clauses are clauses of convenience allowing all parties to sign separate copies of the contract.  It is often the case that parties wish to execute a contract in different locations and on different dates.  With a counterpart clause, the parties may do so while maintaining an otherwise enforceable contract.  

This is not an exhaustive list of common contract provisions, nor is the list intended as a substitute for critical analysis of the four corners of any contract entered into.  Contract drafting and negotiation is a complex process requiring careful review of each clause, and the rights and obligations of the parties.  Consultation with a San Diego contract attorney, despite the understandable hesitation to involve a lawyer, remains the safest way to protect your business.

Continued from Basic Business Contract Provisions - Part One.

Mediation/Arbitration Clauses: Mediation and arbitration are alternative methods of conflict resolution. ADR ("Alternative Dispute Resolution") has grown in popularity of late especially with judges. For the most part, ADR relieves pressure on overcrowded courts, reduces litigation costs and results in faster resolution. It's important that parties understand the consequences of mediation and arbitration clauses. Mediation, the tamer of the two, may require that the parties submit their case to a mediator (experienced attorney or retired judge) who will help the parties navigate through the realities of their respective positions. It often results in early resolution, but the mediator's findings are not binding on the parties. Mediation is not cheap. The parties generally share the cost and if the mediation fails, the parties still face all of the additional costs of full scale litigation. Those with limited resources may want to consider forgoing mediation clauses in their contracts. The scenario with non-binding arbitration is similar to that of mediation except that the procedures differ.

Binding arbitration on the other hand has significant consequences, not the least of which is that the parties waive their right to a jury trial and, except in limited circumstances, waive their right to appeal. Foregoing these fundamental rights leaves parties at the mercy of arbitrators who are typically more business oriented and conservative than juries. It's not surprising then that big business routinely includes arbitration clauses in their contracts. Nonetheless, resolving disputes without the significant costs associated with litigation is an appealing alternative to many businesses regardless of their size. Binding arbitration provides an affordable venue for dispute resolution that is otherwise unattainable for some due to the costly nature of full scale litigation.

Applicable Law Clauses: All contracts should clearly define the applicable law to be followed should a dispute arise. This is especially so where the parties (whether individuals or corporate entities) reside in different states. It is best for San Diego businesses that their contracts be governed by California law.

Jurisdiction and Venue Clauses: These clauses often go hand in hand with Applicable Law clauses. It is common for national corporations and other large businesses that operate in multiple states to include jurisdiction and venue clauses calling for actions to be filed in the company's home state. This can create significant problems for San Diego businesses. It is always best that disputes are litigated in a party's home territory, as it requires considerable resources to litigate a case in a foreign state. Of course, this may not always be practical. Generally, the party with the greater bargaining power will insist that disputes be heard in its home state. However, where possible, parties should seek jurisdiction and venue clauses that favor their place of residence.

Continued in Basic Contract Terms - Part Three.

It's probably not too far of a reach to say that most San Diego business owners would prefer closing their deals over a hand shake rather than involve their attorneys in another contract negotiation.  Attorney fees alone are enough to convince even the most seasoned business owners to try and work out an agreement informally.  Yet, all San Diego business owners understand the importance of memorializing their agreements.  The business climate is dynamic requiring contract drafters to anticipate remote eventualities in order to provide the greatest protection to their clients.  While most business relationships are conflict free, business owners understand that they need a well written contract that sets forth the terms of their agreements in clear and concise terms should a dispute arise.  

A well written contract is enforceable (offer, acceptance, consideration, etc.), defines the rights and obligations of the parties (payment, services, warranties, indemnification, etc.), and accounts for contingencies (early termination, death of a party, natural disaster, disputes, etc.).  The principles of contract formation that determine enforceability, while certainly important, will be left to another article.  Specific contract terms unique to each contractual relationship are far too broad to cover in a single article.  The rights, obligations and contingencies outlined in an entertainment contract, a sales contract, a service contract, a franchise agreement, a buy-sell agreement or a commercial lease differ widely.  This article focuses on some common provisions found in most contracts.  It is not intended as a substitution for consultation with a contract attorney.  Rather, it is intended as a guide for businesses to better understand the contracts they enter into.  

Attorney Fee Clauses:  Most people believe that as a matter of course attorneys' fees are recoverable if they win a law suit.  Generally, however, this is not the case with contract disputes.  Under California law, the contract must include an attorneys' fee provision in order for a party to recover attorney fees in a breach of contract action.  A good attorney fee clause provides for attorneys' fees to be recovered by the prevailing party, provides that said fees are recoverable whether or not the case is tried to judgment, defines "prevailing party" and includes language for recovery of litigation costs (apart from legal fees).  Look for attorney fee clauses in all of your contracts.   In general, such clauses benefit all parties.  

Continued in The Business Contract - Part Two.

Continued from Part Two.

Paragraph 6 - Security Deposit: From the landlord perspective, it is a good idea to include lease language wherein the tenant waives its rights under Civil Code §1950.7 allowing the landlord to apply security deposits toward future rent.

Paragraph 7.4(b) - Removal and Surrender: Under the AIR lease, landlords may require tenants to remove alterations and utility installations by providing notice between 30 and 90 days before the end of the lease term. To avoid unanticipated costs, tenants should seek language requiring landlords to provide notice of landlord's requirement of removal before the alterations or utility installations are made. This way, tenants can calculate the costs of removal in deciding whether the improvements are economically feasible.

Paragraph 12 - Assignment and Subletting: The AIR lease does not address circumstances where an assignment results in net profit to the tenant. Landlords and tenants should work with their attorneys to include lease language that defines profits in such situations and how those profits are to be divided.

Paragraph 20 - Limitation of Liability: Paragraph 20 limits a tenant's rights to recover damages from the premises assets for the satisfaction of any liability of the landlord with respect to the lease. This language is common in commercial leasing. However, where possible, tenants should seek to eliminate the provision. If they cannot, one alternative is to better define the assets tenants may go after including rents, profits, and other income from the commercial property.

Paragraph 47 - Waiver of Jury Trial: Under Paragraph 47 of the AIR standard commercial lease, the parties waive their rights to a jury trial. Such clauses are unenforceable in California. Commercial landlords continue to include them in their leases probably in the hope that someday the law might change. Because tenants typically do not benefit from such a waiver and because the clause is unenforceable anyway, the clause should be omitted.

Paragraph 49 - Americans with Disabilities Act (ADA): The AIR lease places the burden on the tenant to ensure that the leased space is ADA compliant. Tenants should seek removal of this clause, or at the very least seek amendment of the language to require landlord to warranty that the property is presently ADA compliant or will be by the commencement date.

Brokers: The AIR standard commercial lease contains several clauses pertaining to brokers. Because these clauses do not relate to the landlord/tenant relationship, the parties should consider eliminating the language. If brokers are involved in the transaction, landlords might consider a separate agreement.

These are of course general issues that arise in negotiation. The discussion is not intended to include an exhaustive list of important issues for landlords and tenants to consider when entering into an AIR standard commercial lease. San Diego businesses should review each and every clause in the lease and consult with an attorney before entering into an agreement. Significantly, it is important that each side recognize their respective bargaining positions. A major department store that anchors a shopping center will have much greater success when it comes to negotiating more favorable tenant terms. Smaller businesses in a big pond need to be careful that they don't negotiate themselves out of a desirable lease. Consultation with an experienced commercial lease attorney is the best way to balance these concerns.

Continued from Part One.

Paragraph 4.2 - Common Area Operating Expenses: The AIR lease includes a comprehensive list of common area operating expenses which tenants are responsible for. The list includes property management fees. While property management fees are common in commercial leases, the AIR lease does not set any limits on the amount landlords can expense or define how such fees are assessed. Tenants should seek a limit on management fees and seek clarification of how administrative and management fees are calculated. See Understanding Your Lease - Common Area Expenses. Administrative and management fees should not be a source of additional income for landlords. The AIR list of common area operating expenses also includes reserves set aside for property maintenance. If the lessor is unwilling to remove this language, at least ask that the procedures for determining the reserves and the amounts reserved are set forth in the lease and/or an addendum to the lease.

Paragraph 4.2(a)(ix) passes on the costs of capital improvements to the tenants. This is also common in commercial leases. The AIR lease calls for the costs to be amortized over 12 years reducing the tenants' monthly burden. However, this burden may still be significant depending on the size of the commercial property and the particular premises leased. This can be especially problematic for smaller businesses leasing space in a smaller commercial property. If the business leases 25% of the space from a 50,000 square foot strip mall and the lessor decides to completely remodel the property at a cost of $500,000.00 , the business' monthly obligation increases an additional $868.00 not including any additional property tax passed on to tenants. This can be disastrous for new or growing small business. This clause essentially passes on the costs of discretionary capital improvements to tenants. Capital improvements ultimately benefit both the landlord and its tenants. As such, passing on a portion of the cost is reasonable. However, tenants need to be acutely aware of this potential expense. Ideally, tenants will negotiate for the elimination of this clause. Alternatively, tenants should seek a cap on the capital improvement costs that may be passed on to the tenant during the term of the lease. From the landlord perspective, agreeing to a cap might be a reasonable compromise, but the landlord should clarify that the cap only applies to discretionary capital improvements. Compliance with applicable laws is dealt with comprehensibly by the AIR standard lease and California law.

It appears that the AIR list of operating expenses is not intended to be exclusive. To ensure that there are no uncertainties, prospective tenants should ask their attorneys to negotiate for the inclusion of language that sets forth specific exclusions. To avoid confusion, Landlords will want to ensure that its lists of inclusions and exclusions are consistent for all tenants.

Finally, the AIR standard commercial lease does not include a provision granting tenants the right to audit landlord's books with respect to common area operating expenses. To incentivize proper accounting methods and efficiency, tenants should seek the right to audit landlord's books at least once a year. Landlords benefit from an audit clause that includes language that sets forth the timing and specific methods for conducting the audit.

Continued in Part Three.

In the San Diego commercial real estate market, these days it is relatively common for landlords to ask prospective tenants to enter into a standard AIR (American Industrial Real Estate) commercial lease.  The AIR standard lease was drafted by the AIR Commercial Real Estate Association with the intention of balancing the interests of commercial landlords and tenants in an effort to expedite the negotiation process.  While the standard lease provides a framework for landlords and tenants to work from in negotiating lease terms, it's important that they avoid arbitrary acceptance.  Every lessor/lessee relationship is different and it is important that individual landlords and tenants examine the AIR lease with an eye towards their particular circumstance.  Consultation with an experienced commercial lease attorney is the best way to ensure that a business' interests are protected.  This article examines some general issues with specific attention directed to the Standard Industrial/Commercial Multi-Tenant Lease - Net:
 
In general:  The parties to a commercial lease should always be acutely aware of important terms and definitions such as Premises, Common Areas, Common Area Operating Expenses, Commencement Date, Parking, Use, Warranties, Rent, Maintenance, Utilities, Trade Fixtures, Alterations, Insurance, Property Taxes and Renovations.  This list is not exhaustive, but it is a good representation of lease language that requires specific attention by both the lessor and lessee.  The ultimate terms will depend on the tenant's business and the layout of and landlord's vision for the property.  The standard AIR lease language is typical for commercial net leases.  Landlord's who repeatedly use the AIR lease have practical experience relying on its terms, and aren't necessarily concerned with changing the status quo.  However, finding and keeping good tenants provides a significant benefit to landlords, and working with new tenants to achieve lease terms that are practical and economically feasible for new tenants is a good long term business practice.  New tenants have much to learn about the "triple net" lease and common area operating expenses.  It's important that they understand clearly what their rights and obligations will be under the new lease regardless of whether they are able to negotiate more favorable terms. 

Paragraph 3.3 - Delay In Possession:  The lessor is required to use its best commercially reasonable efforts to deliver possession of the premises by the "commencement date", and lessees have little recourse against the landlord for delayed delivery.  Under Paragraph 3.3, lessors are not liable in any way for delayed delivery.  At best lessees may terminate the lease if possession isn't delivered by the 60th day.   If delivery is delayed beyond six months, the lease automatically terminates under Paragraph 3.3.  Termination of the lease is an untenable option for most new tenants who have made commitments to lenders, contractors, suppliers, franchisors and/or customers.  As such, lessees are at the mercy of the lessors' "commercially reasonable efforts" without legal recourse for the damages delayed delivery cause.  This does not mean that landlords are out looking to take advantage of new tenants.  However, tenants should ask their attorneys to try and negotiate better terms with respect to delayed possession to increase the landlord's incentive to be diligent and efficient, including a provision for damages for delayed possession. 

Continued in Part Two.