San Diego Business Lawyer Blog

Like any metropolis, San Diego has a diverse business climate requiring constant interaction amongst retailers, service providers, customers, guests, invitees, tenants and landlords, suppliers, manufacturers, contractors, government agencies, insurers, law firms, and accountants. This level of interaction naturally breeds conflict especially when multiplied by the large number of business, consumer and professional transactions occurring every day in San Diego County. Conflict resolution occurs routinely and the vast majority of conflicts are resolved amongst the parties without the need for lawyers. In fact most conflict is resolved before anyone recognizes that a conflict has even arisen. People naturally look to solve problems as quickly and efficiently as possible so that they can move on to more important matters. Whether a simple cashier error or a complex misunderstanding regarding the terms of a contract, most conflicts are resolved within the first few hours. Of those that are not resolved quickly, most are worked out informally by the parties in a reasonable timeframe and without the need of a San Diego litigation attorney.

Unfortunately, the law of averages guarantees that some business conflicts will not be resolved without resort to the legal system. When conflicts reach this level, business owners rely on the court system to provide them access to a just resolution. The problem of course is that access to a just resolution isn't free and even in those circumstances where there seems little doubt about who is in the right, litigation outcomes are far from predictable. In fact, in most cases litigation is drawn out, expensive, emotionally draining and ultimately unsatisfying. This does not mean that access to justice is a myth. However, opting to resolve business disputes via litigation requires a cost benefit analysis similar to any other business decision. Even the most deserving cases may not be economical to pursue. Litigation costs and attorneys fees often exceed the value of the case to the litigants. In those cases, informal resolution becomes imperative. The alternative is to right off the loss rather than accept greater losses associated with long drawn out litigation.

Whatever the cost benefit analysis, resorting to litigation should be your last resort. Why? Because as stated above, litigation outcomes are unpredictable no matter how righteous a claim is. Assume for instance that a contractor is owed $225,000 for work completed on a construction project. There is little doubt from the contractor's perspective that it is owed for the work completed. Nonetheless, the developer, a private individual, has questioned the quality of the workmanship and is refusing to pay until major repairs are completed. Assume further that the developer is being unreasonable. The contractor knows that the developer is out of money and is making excuses to avoid payment. The case is simple enough. The developer should pay for the work done. If the developer cannot afford to pay, a lien can be taken against the property to protect the contractor's interest.

Continue reading "Litigation Should Be Your Company's Last Resort" »

Continued from Marketing Your Product or Service: Business Plan Part Four.

Funding: The Funding section sets forth the amount of funding necessary to start or expand your business. A strong business plan doesn't merely ask for a fixed amount of money. It sets forth the company's funding requirements in detail and includes different funding scenarios. It describes how the money will be spent, whether future funding will be necessary and how the current and/or expected future financial condition of the business will accommodate the debt. What does the five year horizon look like? Is the company seeking equity investment or a loan? What terms will best fit with the company's financial strategy? The funding section should also specifically state how an injection of capital will benefit the company's bottom line, and should delineate best and worst case scenarios. Tell the prospective investor or lender the company's long range financial strategies, how profits will be used and what the return on investment will be. In addition, describe precisely how the funds will be used including whether some or all of the funds will be needed to pay off debt or for capital expenditures. Be sure to tie your funding needs to the company's strategic goals. Lenders want to know that you will be able to repay your debt and investors want to know that there will be a positive return. Show them that the company has a plan to allocate resources efficiently and effectively.

Financials: The Financial section of the business plan is the dollars and cents section. It tells the reader about the company's current financial health and its projected financial health over the next five years. This is where you crunch the numbers and it is your opportunity to show the prospective lender or investor just how sound your business plan really is. The financial data backs up the funding requests. The financial sections should include historical financial data (typically three to five years back or for as long as the company has been in business if shorter than three years). Provide the company's accounting records including income statements, balance sheets and cash flow statements for each year, and identify any collateral. The prospective financial data should project the company's finances for the next five years including forecasted income statements, balance sheets and cash flow statements. It is helpful to provide monthly projections especially for the first year, and quarterly projections thereafter. It's important to discuss assumptions made to support projections. If you project increased revenue for year two based on increased advertising in the third quarter of year one, say so. Be sure your assumptions make sense and are consistent with your overall business plan. Don't expect that the reader will make these connections for you. It's also important that your funding requests are consistent with the financial projections. Finally, the Financial section should close with a brief analysis of the company's financial information including an analysis of historical and prospective trends. Use of excel spreadsheets and graphs are great tools.

Appendix: The business plan should conclude with an appendix that lists all of the supporting documentation such as: resumes and letters of reference; marketing materials; supporting data for market analyses: licenses, permits, trademarks or patents; leases, contracts, and other legal documentation; corporate, partnership or LLC documentation; and list of professional advisors such as your accountant, business attorney and banker.

For more information on starting up a new business see Starting Your Own Business. If you are considering purchasing an existing business, check out Purchasing an Existing Business Offers Benefits Often Overlooked and Considerations When Purchasing a San Diego Business.

Continued from Describing the Company: Business Plan Part Three.

Marketing:  Once you have a complete understanding of what your target market is, it is critical to have a plan to capture a competitive share of that market.  The Marketing section of your business plan should tell the prospective investor exactly how you intend to accomplish this important goal.  Your marketing strategy should be unique, creative and effective.  It's important to tell the reader in this section: how the company intends to penetrate existing markets; how the company intends to distribute its products; what the company's plans for growth are; and what the company's marketing strategy is or will be.  Explain the business' strategies in detail.  Does it intend to expand via acquisition of other businesses or franchising?  Does it intend to expand the customer base via advertising and promotion?  How will the company use various marketing tools to grow the business?  There is no "one size fits all" marketing strategy.  However, zeroing in on these fundamental components assists in the development of a strategy that has the best chance of success.  

The Marketing sections should also set forth your sales strategy if your business relies on or will rely on a sales force.  What type of sales force will you use?  How will you recruit and train them?  Will they be independent contractors or employees?  How will they be compensated?  What type of system will you have in place to identify and prioritize customers?  Will they be contacted by phone or in person?  What is or will be the average number of calls necessary to make one sale?  Show the reader that the sales force will be productive.  

Service or Product Line:  The Service/Product Line section describes what the company is selling, and explains why potential and current customers will benefit from your particular product or service.  What distinct advantages will your business offer?  Will you provide customers solutions they cannot find elsewhere?  Do you own, have pending or intend to obtain copyrights, patents, trademarks, trade secrets or licenses that will provide an advantage?  If so, in what way will they be advantageous to the company?  Is there any research and development (R&D) underway?  What about competitors?  Describe your R&D goals and compare them with other R&D efforts in the industry.  Explain why your solutions are important to the client base, and anything else that will set your business apart from its competitors.  Provide a detailed description of the company's services and/or products and pricing schedules.  Include promotional and marketing materials. Is the product or service seasonal?  If so, how will the company deal with seasonal trends?  What is the availability and cost of necessary supplies and raw materials?  Who are the company's suppliers?  This is your opportunity to pitch the product or service to the prospective investor or lender, to explain why people will be willing to purchase your product or service at profitable price points and to explain how you will be able to meet those price points.  

Continued in Funding and Finances: Business Plan Part Five.

Continued from The Market Analysis: Business Plan Part Two.

Company Description:  As the title suggest, this section describes the business.  In the Company Description, the San Diego business owner summarizes the nature of the business, how the business is organized, the needs of the marketplace and the reasons why your business will succeed.  The information in the Company Description may be repetitive of other sections.  Be careful not to copy exact language from the Market Analysis or the Organization and Management sections.  Instead, use the information in these sections to help paint a broad picture of the company and how each of these factors interrelate with each other within that broad picture.
 
Organization & Management: The next section in a typical business plan is Organization & Management.  It sets forth in detail the company's organizational structure, ownership and management structure and identifies the owners, management team and/or board of directors and their qualifications.  This section tells the reader whether the company is a California corporation, limited liability company, partnership or sole proprietorship.  It then identifies the owners, their percentage interest in the company, the role each will play in the company's operations and describes their respective experience levels in the industry and exactly how that experience will benefit the company.  It is often helpful to provide the reader with an organizational chart that covers all aspects of the company's operation and tells them who does what.

The Organization & Management section also describes the qualifications of key management personal and corporate officers, and the salaries and benefits offered to keep them.  It shows the reader that the company is in good hands, and intends to maintain that level of quality over time.  It's important to set forth the details of the owners and management team's qualifications, including their names, percentage and type of ownership (if owners), position and description of their primary job duties and responsibilities, unique experience and skills, employment history and track record with other companies and recognition in the industry.  What are their achievements?  In short, prospective investors want a resume for each person that will have influence over the success of your business.  

Continued in Marketing Your Product or Service: Business Plan Part Four.

Continued from Writing an Effective Business Plan: Part One.

Market Analysis: A market analysis should be conducted before starting any new business venture whether or not one feels compelled to draft a business plan. Having a marketable product or service is fundamental to any San Diego business' success, and the market analysis is probably the most important part of the business plan. A sound market analysis requires the identification of the target market, analysis of the market's geographical and financial limitations, analysis of the barriers to entry into the market, development of plans to capture a share of the market and a competitive analysis that includes assessing the strengths and weaknesses of your business and those of your competitors. The market analysis is your opportunity to impart your knowledge of the industry to the reader. However, it shouldn't be based on your general knowledge and anecdotal evidence alone although this can be helpful. Where possible, your market analysis should be supported by actual market research and the underlying data. This can be accomplished with the help of a marketing research company or at the public library by analyzing existing market surveys, research and data. Begin your market analysis with an overview of the market and follow with a more detailed analysis.

As you describe the target market, remember that "target" is the key. Focused business plans that describe a succinct segment of the population as a customer base are more appealing to others and more importantly have a greater chance of success. Trying to target the entire population (being everything to everyone) dilutes potential. Identify the characteristics of the targeted market. What are its demographics? What are the actual needs of the potential customers? How are those needs being currently met? Are there cyclical or seasonal variations? What is the current size of the market and what is its potential for growth? What are the market trends and is there or will there be a secondary market to exploit? What media has influence over the market? Once clear on the market definition, describe how the business will capture its share of the market either via price points, discounts, volume or other means. If market tests have been conducted, what were the results?

The competitive analysis portion of this section should identify all competitors and describe their share of the existing market including what specific products and services they offer. If there is a window of opportunity to capture a share of that market, how long will it be open before other competitors take advantage? Identify competitors' specific strengths and weaknesses and describe how your business stacks up. Include factors such as customer service, ability to meet customer needs, reputation and goodwill, capital resources, key personnel and longevity. Finally, be sure to identify barriers to entry into the market and address how the business will overcome these barriers. Typical barriers include high initial investment, necessary delays in starting up, rapidly changing technology making it difficult to keep up with competitors, brand loyalty, difficulty in obtaining quality key personnel and intellectual property rights such as patents, trademarks and copyrights held by competitors.

The market analysis should also include a summary of any regulatory restrictions including necessary licenses and permits.

Continued in Describing the Company: Business Plan Part Three.

Writing an effective business plan requires more than just summarizing good ideas.  An effective business plan details your strategy for success.  It starts with the formation of the company and ends with an exit strategy.  A well drafted business plan prepares you for the task ahead, informs prospective investors and lenders and is probably the most important step any young San Diego entrepreneur takes on the road to success.  New business ventures are of course risky and time consuming, and there can be little doubt that planning is fundamental.  Yet, young business owners often overlook the significance of the written plan and neglect to consult with experienced professionals.  While a detailed analysis is beyond the scope of this article, an examination of key business plan elements is instructive.

Ultimately, the development of a business plan should be accomplished only after significant due diligence and where possible with the assistance of others specializing in marketing analysis.  The information in a business plan tends to interrelate requiring thoughtful attention to each section.  The goal is to highlight common themes without being repetitive.  Consider consulting with trusted advisors such as a San Diego business attorney, accountant, banker and insurance agent.  These folks will help frame some of the financial and legal boundaries important to the company.  The typical business plan includes the following sections: Executive Summary; Market Analysis; Company Description; Organization & Management; Marketing; Service or Product Line; Funding; Financials; and Appendix.
 
The Executive Summary:  The executive summary is a concise summary of your business plan's highlights.  It typically consists of the name and location of the business, the date it was begun, the names of the founders and their respective functions, the number of employees, a description of its products or services and the company's facilities, information regarding existing investors and lenders, a mission statement (sometimes as short as a two word slogan, but always enough to leave the reader with a clear picture of the company's vision), a summary of company growth (for existing businesses) and a summary of the company's future plans.  This information is set forth in more detail later in the business plan.  The executive summary should be short and concise and the information may be set out in bulleted fashion except for the mission statement which should head the section.  For new businesses, it's a good idea to include information about the target market including identifying potential problems, and summarize how you intend to take a share of the target market.  The executive summary is the first thing the reader sees.  It is your first bite at convincing prospective investors and/or lenders of the business' viability.  

Table of Contents:  Include a Table of Contents after the Executive Summary to allow the reader to easily locate specific sections.

Continued in The Market Analysis: Business Plan Part Two. 

Continued from Negotiating Power - The Often Neglected Contract Position.

In most cases, the party with the greater bargaining power presents a draft contract to the other and asks them to sign it as is.  The draft will set forth the major contract terms already discussed by the parties such as price, delivery method, term of a lease, etc.  The remaining terms tend to favor the party who prepared the contract.  If you are an entrepreneur looking to capitalize on a new shopping center for your small café, you will have a harder time convincing the landlord to agree to changes in a commercial lease than a national chain that will anchor the center.  

Understanding your bargaining position prepares you for the negotiation process whether or not you are working with an attorney.  If you really want to open your café in the new shopping center, you will want to tread carefully during negotiations.  First, understand your rights and obligations as set forth in the proposed contract.  If you are negotiating without the benefit of legal counsel, consider asking a San Diego contract attorney to at least explain these rights and obligations.  Next, consider those terms you would like to change and prioritize.  What are the most important changes?  Remember, less bargaining power is not zero bargaining power.  By focusing your negotiations on only the most important issues, you preserve leverage.  Direct your discussions to the success of the transaction.  If we change Term X, it will improve both our volumes.  If you keep Term Y in the lease, I will lose significant business.  Stressing the success of the transaction shows that you are focused and professional, and the other side has little choice but to accept it as a valid concern.  Avoid the temptation to play "hard ball" with a party holding all the cards.  Finally, where possible increase you bargaining power by giving yourself alternatives.  No deal should be so important that you are willing to agree to terms destructive to the end goal.  If you are convinced there are no reasonable alternatives, make sure the other side doesn't know the extent of your desire.  

There are of course a myriad of negotiation schemes (too many to address in this short article).  Whatever the scheme, understand and accept your bargaining position and ensure that your attorney does as well.

Because San Diego businesses routinely enter in to contracts with vendors, clients, customers and other partners, it is important that they are familiar with basic contract principles and the need for negotiating favorable contract terms.  This is true whether or not they retain the services of a San Diego contract attorney.  The art of negotiating contracts requires a careful balancing of nuance and tactic.  Contract lawyers must weigh the needs of their clients against the desire for and/or business necessity of the contractual relationship.  The business contract binds the parties to its terms.  It defines the rights and obligations of the parties moving forward and can have far reaching effect, especially where disputes arise.  

In the vast majority of contract negotiations, one side is considerably more concerned about ensuring the success of the agreement.  In such circumstances, the "more concerned" party must decide how much they are willing to give up.  This defines the "more concerned" party's negotiating power.  The more the party is willing to walk away from the agreement, the more power that party has.  Negotiating power is probably the single most important factor in contract negotiation.  It is simultaneously one of the most often overlooked factors.  

The issue of course is not black and white.  The mere fact that one side has more negotiating power than the other does not necessarily mean that no negotiation is possible - although clearly this is the case sometimes.  The key is to recognize your negotiation power and leverage it to its fullest with skill, tact, bluff and perhaps a tad bit of humbleness.  Humbleness may seem counter-intuitive to some, especially attorneys, but it can and should make up at least a small part of your negotiation tactics.  No matter how hard seasoned attorneys and negotiators work to dehumanize the negotiation process, it is still conducted by people.  A soft touch often disarms even the most purposeful intent.

Continued in The Importance of Negotiating Power - Part Two.

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.

Continued from Due Diligence When Purchasing a Business - Part One.

It's also important to be certain about the extent of the company's additional obligations.  Is there a lease?  What is the rent?  Are there common area maintenance expenses?  What is the term of the lease and are there options to renew?  Must the landlord consent to an assignment?  Be sure to review all existing leases including any addendums and amendments.  Confirm with the landlord that the rent is up to date.  Equipment leases should get the same scrutiny.  Ask the seller whether there are pending or threatened lawsuits or governmental proceedings against the company.  You'll want the seller to retain such liabilities where possible.  A business attorney can assist with negotiations and ensure that the purchase agreement reflects the seller's retention of liabilities.  

An important operational component of any business is the existing staff.  Talk to key personnel such as officers, managers and supervisors to get a sense of their commitment and to get a feel for the employees' level of productivity.  Is there a risk of mass exodus with the departure of the current ownership?  Do the employees seem content in their positions?  Or does there appear to be a widespread discontent with working conditions and pay?  If there is an employee manual, review it carefully.  Does the company appear to follow its own policies?  Does it comply with Federal and State employment laws?  

If purchasing the business entity as opposed to the business' assets (see Considerations When Purchasing a San Diego Business, Part One), be sure to review the company's books in detail including articles, bylaws, resolutions, minutes, and/or operating agreements.  Confirm that the books are up to date, that the business is in good standing with the State, and that the seller has the actual authority to sell.  Whether or not you are purchasing the business entity or the business assets, ensure that all licensing is current and that business taxes are up to date.  

Before closing any deal, ask the seller to personally guarantee that all of the information provided is complete and accurate.  Your San Diego Business Attorney should insist on a "Representations and Warranties" clause to accomplish this goal.  Once all the information is in, compare what you have learned about the particular business with the industry overall.  What is its market share?  Can it remain profitable under the current conditions?  
A "due diligent" investigation ensures that the buyer has the clearest possible estimation of the company's worth.  It may seem a bit daunting but it is a worthwhile investment. See Purchasing an Existing Business Offers Benefits Often Overlooked.