Simply put, a default judgment is a judgment against a defendant who fails to answer a lawsuit. If a person or entity is sued and ignores the lawsuit entirely, the person or entity suing has the ability to get a judgment upon meeting certain criteria. The default judgment is a powerful tool in litigation allowing parties to obtain judgments for significant damages without a trial. Because of this, the requirements necessary for obtaining default are substantial. Judges insist on strict adherence to each requirement and routinely reject default packages submitted citing technical deficiencies. These strict requirements are designed to provide defendants due process. On one hand, California law provides wronged parties a mechanism to seek damages where the wrong doer ignores a lawsuit. On the other hand, California law ensures that basic procedures for fairness are in place. Unfortunately, the process is slow and cumbersome especially given how overwhelmed San Diego courts are today. For those who have been served with a lawsuit, the best advice from this lawyer is, “don’t ignore it”. See “Is Your Business Being Sued?” for a discussion of options. This article summarizes California’s default procedures and the options available for setting aside defaults.

Default procedures, like any aspect of lithe-lounge-1538128-300x200tigation, are complicated for lay persons. Whether seeking default or reacting to one entered against you, it is best to consult with and experienced San Diego litigator before taking any steps. This summary of procedures looks deceptively simple. It is not. In addition to strict adherence to procedural rules, the party requesting default may be required to “prove up” their case. This means presenting admissible evidence to the court establishing your legal claims and your damages. The following is a list of prerequisites to obtaining a default judgment:

  • Defendant must be served with the summons and complaint. In most cases, defendants must be personally served. However, where a defendant cannot be physically served, service may be accomplished by publication (by obtaining court approval to publish service in a newspaper).

There are numerous challenges facing San Diego business owners especially in today’s economic climate. Fighting for a share in an ever tightening market makes it difficult to keep up with monthly outlays not the least of which are lease payments and common area maintenance expenses (CAMS). Commercial lease lawyers in San Diego regularly receive calls from tenants struggling to stay afloat and wondering whether they have other options short of closing up shop. There is also a common misconception among commercial tenants throughout California regarding the legal consequences of defaulting on their lease and/or being evicted. They imagine that if they get evicted they will owe monthly lease payments from the date of eviction to the end of the term of the lease. This is because most commercial leases expressly identify all future rent (including CAMS) as recoverable by landlord as damages resultant from tenant default. If a tenant with a five year lease finds itself unable to keep up with its lease payments (say $5,000 per month), it may believe that it owes the landlord $180,000 in future rent payments along with any current past due monies owed. This is true from a purely technical standpoint. However, because California law requires parties to contracts to take reasonable steps to mitigate damages, in most cases the damages that would be awarded via litigation would be much smaller.

glass-elevator-1-1522751-225x300In the landlord/tenant context, landlords cannot let a property languish while the prior tenant continues to pay rent or worse re-lease the property and collect double rent. In essence, the previous tenant is only liable for the landlord’s actual losses (the rent while the premises are unlet and/or the difference in rent if the later tenant is not paying as much). The landlords duty is to take reasonable steps to re-lease the premises. In commercial lease lingo, Landlords are entitled to the rent that they would have earned to the end of the lease term less those damages a tenant can prove could have been reasonably avoided had the landlord made an effort to re-lease the premises. This writer has consulted more than once with tenants who have paid in excess of twelve months in lease payments for premises that are sitting empty because they did not know about their landlord’s duty to mitigate. As long as the tenant is paying rent, the landlord has no incentive to do anything. Tenants having trouble making their lease payments should consider other options before simply accepting their landlord’s representations. Landlords of course have a legitimate interest in being made whole once a tenant defaults. In most cases, they will work with tenants towards an early termination agreement that takes into account their ability to re-lease the premises. See “Early Termination of a Commercial Lease”.

There is one important exception with respect to mitigation. Under California Civil Code §1951.4, a commercial landlord may continue the lease in effect after the tenant breaches and abandons the premises and recover rent as it becomes due. In order for landlords to take advantage of Civil Code §1951.4, the lease must specifically provide for this remedy and the tenant must have the right to sublet and/or assign the lease. Essentially, the burden of mitigating damages shifts to the tenant who maintains the right under the terms of their lease to sublet and/or assign the lease to a third party. Landlords should and do regularly insist on the appropriate §1951.4 language in their leases. The lesson for tenants is simply not to abandon the premises. Doing so allows a landlord to take advantage of the Civil Code §1951.4 remedy. Landlords should consider whether serving a three day notice to pay rent or quit (thereby assuming the duty to mitigate) is a good idea at least until consulting with a commercial lease lawyer regarding the Civil Code §1951.4 option.  This is particularly so where the tenant is clearly solvent.

In the simplest terms, consideration is value. Under California contract law, mutual consideration (the exchange of value) is an essential element in the formation of a contract. Without it, a California court will (as will all courts across the country) most likely deem a contract unenforceable. For instance, consideration is lacking if two parties enter into a contract where one party is required to provide services and the other party is not required to pay or do anything. The bottom line is that the law disfavors one sided deals. It is presumed that one sided contracts are coerced in some form or another or fraudulently entered into. This makes perfect sense of course. What reasonably aware person would agree to provide something of value in exchange for nothing? However, consideration may come in a variety of forms including cash, property (real or personal) and services. Consideration may also come in the form of a promise to do something or to refrain from doing something that a party is otherwise legally entitled to do. The promise has its own value. If Party A promises to clear the snow from Party B’s driveway the following winter in exchange for Party B’s advance payment, there is a sufficient exchange of value (consideration). Similarly, if party A promises not to sue Party B if Party B pays restitution for some claimed harm, the promise not to sue may also be considered adequate consideration.

gold-1422084-225x300There are two general types of contracts – the bilateral contract and the unilateral contract. In both, however, there is an exchange of value in one form or another. Most people regularly enter into bilateral contracts. Paying for groceries or auto repairs, cell phone agreements and utility agreements are all forms of bilateral contracts. With unilateral contracts, only one party to the contract makes a promise. The most common example is the reward contract. One party offers a reward for the return of a lost dog. No person or business entity is obligated to look for, find or even return the lost dog under the contract, but the reward offeror is obligated to pay the reward if the dog is returned. The distinction has become less significant of late. Courts are increasingly focusing on other issues such as performance, party expectations and of course consideration rather than worrying about whether a contract is technically unilateral or bilateral. In any case, consideration remains a necessary element of any enforceable contract with a few narrow exceptions such as a promise to pay a prior debt that is no longer collectible because of a statute of limitations.

Consideration must be “adequate”. The exchange in value doesn’t necessarily have to be exact but there should be a reasonable exchange of value. The value of consideration is generally determined by the market values for goods and services. While parties are free to negotiate however they see fit, paying one dollar for a new car worth $10,000.00 (absent any other value exchanged) would clearly be inadequate. The one dollar is considered nominal consideration and therefore inadequate. The one dollar is essentially pretend consideration which courts see through. On the other hand, bad negotiation will not generally result in a contract being deemed unenforceable. Parties are free to make bad deals so long as the consideration is at least reasonable. The one dollar example above is an extreme case. Generally, courts analyze exchanges of value on a case by case basis. Other examples where consideration may be lacking include: performance when a party is already legally required to perform; gifts; past performances (in essence creating retroactive obligations); or illusory promises (where an obligation created is uncertain).

Most new businesses are required to enter into a commercial lease of one form or another. The owners of the business are typically presented with thirty to forty page leases set out in fine print on legal size paper. These standard leases are comprehensive and contain provisions that inexperienced business owners usually don’t fully understand. With proper scrutiny and research it is possible for the inexperienced owner to sufficiently navigate their commercial lease. However, this type of scrutiny (in essence due diligence) takes significant time and effort. Ideally, new business owners will instead consult with an experienced commercial lease lawyer before moving forward. Whether or not legal counsel is sought, it is important for all new lessees to be aware of certain pitfalls. This articles summarizes on the most common areas of concern:

967963_escalators_in_shopping_centre-224x300Common Area Maintenance (“CAM”) Expenses: In shopping centers and office buildings where numerous tenants share common space Landlords typically require their tenants to share the costs of maintaining these common areas. Shopping center leases are usually triple net (NNN) leases. Office leases are typically base leases. Either way, landlords are looking to pass on the costs of maintenance to tenants in one form or another. Common area expenses may include expenses associated with landscaping, sidewalks and parking lots, sprinklers, public address systems and music, bathrooms, signs, garbage collection, security and utilities for the common areas such as parking lots, hallways, food courts and any other areas where customers and clients gather or walk through. Most landlords also include an administrative and/or management fee. In addition to base rent, tenants will usually have a monthly CAM bill which represents a twelfth of the tenants pro rata share of the estimated CAM expenses for the year. At the end of the year, if the landlord underestimated the CAM expenses, the tenants are required to pay the difference to the landlord upon receipt of an invoice (the opposite is true if the landlord overestimated –tenants are refunded accordingly). It is vital that new tenants know precisely what these CAM expenses are, how they are calculated and the process for reconciliation of said expenses at the end of the year. Tenants should try and negotiate with the landlord towards ensuring that only legitimate expenses (expenses directly related to common area maintenance) are included. It is helpful to ask the landlord to provide CAM reconciliations for the last three years. This allows prospective tenants to better understand what these expenses are and how they grow over time. It’s also important to seek the right to audit annual reconciliations to ensure proper accounting. Finally, in some cases, tenants may be able to seek a cap on annual CAM expenses. The ability to negotiate for better terms of course depends on the parties’ relative bargaining positions.

Repair and Maintenance Obligations: It is not uncommon, particularly in retail leases, for landlords to require tenants to assume the obligations of all repairs and maintenance to the premises including repair and maintenance of plumbing systems, mechanical systems and equipment such as boilers and HVAC (Heating and Air Condition) systems. In a triple net lease, the entire obligation is shifted to tenants including sometimes full replacement of unrepairable equipment. The average business owner may first learn of this only after a major system breaks down and the landlord points them to the repair and maintenance provisions of the lease. An HVAC failure can have a devastating impact on a tenant’s business. The HVAC system must be repaired (or replaced) and the costs can be prohibitive. It’s important that tenants fully understand their repair and maintenance obligations before entering into a commercial lease. While it may not always be possible to negotiate better terms, it is important to at least try. If you fail, you at least have a better understanding of precisely what your obligations will be. For instance, it is not unreasonable to ask the landlord to warranty the premises mechanical systems and equipment for one or two years. It’s also not uncommon for landlords to agree to replace major equipment at its expense and to capitalize the expense over time so that the tenant pays only the annual capitalized portion of the total expense.

Dilution is a natural part of the corporate investment process, whether one invests in a startup or a public company that is growing. This article will provide a brief introduction to what dilution is, what causes it, and what effect it has on shareholders.

corporate-1213991-300x225What is dilution? Dilution refers to the reduction in a shareholder’s proportional ownership percentage in a company as a result of the issuance of additional shares. With the decrease in proportional ownership percentage, each shareholder’s voting rights also take a hit. The increase in the total number of outstanding shares leaves each shareholder with a smaller slice of the same pie. For example, let’s say that Company A that has 100,000 shares outstanding announces a secondary offering of 5,000 shares. The additional 5,000 shares will reduce the proportional ownership percentage of existing shareholders by 5 percent. The immediate effect of this dilution is a decrease in share price. If the share price before the secondary offering was $30, the company had a market capitalization of $3 million (100,000 x $30) before the announcement. After the dilution, however, the $3 million market valuation must now be divided by the new total number of outstanding shares, 105,000, which drives down the value of each share to $28.57. The long-term effect of dilution on each shareholder’s proportional ownership is hard to predict at the outset.

What causes dilution?

Remedies (types of relief sought by injured parties) can be either legal or equitable in nature. The recovery of money damages (monetary damages) is a legal remedy. An equitable remedy is designed to provide more flexible relief to aggrieved parties. The goal of equitable remedies is fairness. Injunctive relief where a court orders a party to do or refrain from doing something is a common example of an equitable remedy. In contract law, a common equitable remedy is rescission. The word “rescission” is derived from the word “rescind” which means to cancel. It seeks to restore the parties to a contract to the positions they held before they first entered into the contract. Rescission nullifies or “undoes” the contract which relieves all parties of their duties and obligations under the contract. Its effect can be analogized to restoring your computer to its factory settings. In California, there can be no partial rescission. The entire contract must be rescinded. A contract can be rescinded for a variety of reasons, including fraud, mutual mistake of fact or law, undue influence and duress. If the parties do not agree that a contract should be rescinded, the party seeking rescission will need to file a legal action to seek resolution.

steps-1229559-300x96There are numerous grounds for rescission. The following are some of the most common grounds upon which a party may rescind a contract:

Mistake of Fact or Law: If both parties entered into the contract based on a mistake of fact, the contract may be rescinded. The fact must be material to the contract. A fact only collateral to the contract will not suffice. Sometimes, parties may be mutually mistaken about a material fact. For example, if the contract is for the sale of a book that contains the original signature of the author, it would be a mutual mistake of fact if the signature was forged and both the buyer and seller believed it to be real. A unilateral mistake of fact may serve as the basis for rescission where the effect of the mistake is such that enforcement of the contract would be unconscionable. Similarly, a mutual mistake of law is grounds for rescission. A mistake of law exists where all parties believe they know the law as it pertains to their contract but are wrong (i.e. both parties enter into a gambling contract believing gambling is legal in their state). A unilateral mistake of law is not a basis for rescission except where one party misunderstands the law and the other party knowing this fails to clarify the misunderstanding.

There are a number of reasons why a business owner might be motivated to end a commercial lease early.  The most common reason is that a business is not doing well enough to keep up with the lease payments.  Other reasons include changes in the local market, the need for larger or smaller space, or the simple desire to move on to other endeavors. Whatever the circumstances, a tenant desirous of terminating its commercial lease early faces an uphill battle.  Commercial landlords count on tenants to maintain their lease obligations.  They enter into long term leases to avoid the costs associated with continually looking for new qualified tenants and more importantly to avoid the loss of revenue associated with empty space.  For this reason, landlords typically demand strong lease language discouraging tenants from early termination.  See “Assignment Clauses and Related Terms in Commercial Leasing”.

sky-reflection-1453027 (1)Once a tenant decides, for whatever reason, that it wants to terminate a lease early, it should proceed cautiously.  The best approach of course is to seek the assistance of an experienced San Diego commercial lease lawyer.  Whether or not you consult with an attorney, it’s important to review your lease terms carefully so that you have a clear understanding of the options available to you and/or the consequences of early termination. What are the necessary steps for assignment of the lease to a new tenant?  Does the lease give the landlord unfettered discretion in deciding whether to accept an assignee (a new tenant)?  How does the lease define damages for early termination?  Is there a recapture clause (a clause that allows the landlord to terminate the lease merely because the tenant asks the landlord to approve an assignment).  Of course, tenants may also seek other ways to avoid early termination such as proposing flexible payment options to catch up on rent, proposing temporary reduced rent, asking to be moved to a smaller space on the same property or seeking assignment approval.  It is of course best if you can successfully avoid early termination via one of these proposals.  However, they are easier talked about than accomplished.

In most cases, a tenant terminating a lease early is liable for any unpaid rent and the unpaid rent due for the balance of the lease term less mitigation.  Mitigation is the amount a tenant can prove could have been reasonably avoided had the landlord made an effort to re-lease the space.  From a practical standpoint, tenants without the resources necessary to hire an attorney and litigate the case most often find themselves facing default judgments for the full amount of the damages requested without any mitigation.  This is why ignoring the problem isn’t an option.  At the same time litigation is extremely expensive.  However, landlords are sometimes willing to informally discuss early termination terms that factor in mitigation so long as tenants are communicating an intent to find a fair resolution.  A fair resolution unfortunately does not mean that the tenant is going to like the outcome.  Objectively, fairness would require a tenant to be responsible for the actual costs associated with the landlords quest for a new tenant (past due rents owed including common area maintenance expenses (“CAMS”), all rents and CAMS to the date of a final agreement, all costs associated with finding a new tenant, the costs of rent and CAMS while the space is empty and if the new tenant pays less rent, the difference the landlord would have earned had it received the higher rent.  These costs can be considerable.  Moreover, landlords don’t always know how long it will take and they err on the side of benefiting themselves when negotiating early termination terms.

Assignment clauses are an important part of commercial leasing. They provide successful tenants an opportunity to sell their businesses and provide failing businesses the possibility of finding replacement tenants in order to avoid breaching their leases. Generally, landlords retain significant control over the process. This article focuses on lease terms that facilitate the assignment process and/or early lease termination for new and growing business owners interested in testing the waters. While landlords are resistant to the concept of “testing the waters”, they will sometimes work with new business owners in order to secure their tenancy.

time-flies-away-801503-mIdeally, commercial tenants, especially new and growing businesses, will seek more favorable assignment and early termination terms when negotiation the lease. Depending on the circumstances (some tenants will have more bargaining power than others), landlords may agree to be more flexible. While favorable assignment and early termination language is hard to come by for tenants generally, the following concessions are worth pursuing:

  • A cancellation clause that allows tenants to cancel their lease if specific income projections are not met within a certain time period such as on the six-month or one-year anniversary of the lease commencement date.

Generally, parties are liable for their own negligent conduct.  An indemnity provision in a contract reallocates this liability from one party to another.  Viewed practically, an indemnity clause shifts insurance obligations from one party (“indemnitee”) to another party (“indemnitor”). Under an indemnity clause, the indemnitor agrees to pay the indemnitee for losses resulting from a claim brought by a third party. Absent explicit language assuming the obligation to defend, the party providing indemnity has no obligation to provide or assist in defending claims. Almost every contract includes an indemnification clause. It is important to read the clause carefully when entering into a contract of any nature, as the precise language of the clause can make a dramatic difference in each party’s financial obligations.

meet-up-1538121A typical indemnity clause looks something like the following:

To the extent caused by A’s negligence or willful conduct, A agrees to indemnify B of and from all reasonable claims, losses, causes of action, damage, lawsuits, and judgments, including attorneys’ fees and costs, provided that such claims, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property. Party A shall indemnify B only for the percentage of responsibility for the damage or injuries attributable to Party A. Nothing herein shall be interpreted as obligating A to indemnify B against its sole negligence or willful misconduct.

Percentage rent allows a retail landlord to benefit from a tenant’s success.  In addition to the base rent, tenants will pay an additional rent based on some percentage of the tenant’s gross sales typically triggered by what is termed a “breakpoint”.  New tenants asked to pay percentage rent are typically troubled by the idea mostly because they see it as a way of being penalized for success.  Clearly, landlords benefit significantly from percentage rent reaping additional profits in times of economic boom while losing nothing during downturns. However, there is a synergistic effect that can benefit tenants.  Most landlords aggressively seek to maximize profits and creating the right tenant mix and shopping center atmosphere aids in increasing the revenue stream for all tenants thereby increasing the landlords rent.  In such cases, the landlord at least arguably is creating something of value for tenants.  The value of a landlord’s labors in this scenario is of course difficult to measure, but with an earnest effort it can unquestionably have a dramatic impact on shopping center sales. 
 

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Percentage rent is typically set at five percent (5%) of gross revenue but usually doesn’t trigger until some “breakpoint”.  The breakpoint can be arbitrarily set by the parties as a stipulated breakpoint (for instance at $1,000,000).  In this case, a tenant would be obligated to pay 5% of all gross sales in excess of $1,000,000.  If gross sales were $1,500,000, the tenant would owe as additional rent of $25,000 (5% of $500,000).  Many retail leases set the breakpoint at what is termed the “natural breakpoint”.  For the natural breakpoint, you divide the base rent by the set percentage (the typical 5%).  The natural breakpoint results in a percentage rent applicable to sales over and above the point in which the base rent would equal 5% of gross revenue.  In other words, the tenant is paying 5% of gross sales or the base rent whichever is higher.  If the breakpoint is not reached, the base rent is higher than 5% of gross sales.  If the base rent in the above example was $120,000 ($10,000 a month), the breakpoint would be $2,400,000 resulting in no additional rent due.  The landlord is then guaranteed a minimum rent no matter how bad sales are, but benefits when sales are good. Tenants benefit if the stipulated breakpoint is above the natural breakpoint but not if it is below the natural breakpoint.  In the above example, if the stipulated breakpoint is $4,000,000, the additional rent would be zero.  If the stipulated breakpoint is $500,000, the tenant would pay the base rent ($120,000) plus a percentage rent of $50,000 (5% of $1,000,000).

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