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Category: Business

Common Pitfalls of Commercial Leases

 

How Commercial Tenants Can Protect Themselves

When it comes to renting space for your business, location is key. Whether your business thrives or fails depends largely on where you choose to initially operate your business. What many business owners fail to realize, however, is that the terms of your commercial lease are just as important as the location. Before a business owner enters into a commercial lease, it is important to understand how commercial leases are different from their residential counterparts. It is also useful to take a look at some standard commercial lease terms and what they mean for your business.

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Commercial Leases Are Different from Residential Leases

If you are a long-time apartment-dweller or you’re simply familiar with residential leases, it is important to recognize that commercial leases are far different from residential lease agreements. Whereas most residential leases are for short terms – typically for one year – commercial leases tend to include much longer terms, with some commercial lease contracts spanning several years. With so much money tied up in a single lease agreement, you could find yourself in a financial bind if you need to end your relationship with your commercial landlord before the expiration of your lease.

Additionally, commercial leases also offer none of the consumer protection guarantees of residential leases. However, commercial leases generally offer a tenant much more leverage, flexibility, and negotiating power than a residential lease. Commercial landlords want to rent their space to a profitable business – they know they have a better chance of receiving their rent if your business succeeds. Hence, commercial landlords are generally more inclined to negotiate lease terms with their tenants and offer concessions to draw the right commercial tenant to their location.

Important Commercial Lease Terms

When it comes to commercial lease agreements, boilerplate legal documents are rarely a good solution. Your business is unique; your legal documents should be unique as well. There are, however, several standard provisions that generally appear in every commercial lease. Knowing what these terms mean will help you feel more confident when it is time to negotiate your own commercial lease agreement.

Use Provisions

You have probably seen a busy intersection with two or more gas stations sitting directly across the street from one other. This is an example of business “clustering”, which is something certain types of businesses do in an attempt to capture a larger portion of a specific market share. Clustering is not a good idea for all types of business, and it might spell disaster for yours. For example, a small mom-and-pop pizza shop is unlikely to last long if a major fast food pizza chain moves in right next door. Use provisions within commercial leases are designed to prevent these scenarios from happening. They define how the tenant intends to use the premises as well as limit the types of tenants permitted to occupy adjoining spaces.

Property and Facility Maintenance

When drafting a commercial lease for your business, it is critically important to define which party is responsible for maintaining the building and its interior. Although it may seem obvious that a landlord is in charge of repairing things like broken HVAC systems and leaking roofs, other items aren’t so clear-cut. What happens when a tenant conducts an extensive build-out? If a tenant bears the cost of new carpeting, shelving, and electrical wiring, is the landlord still obligated to fix these items if something fails? What if the tenant installs new signage? Who is responsible for repair costs pays for broken neon in one of the sign’s letters? These are all items that have the potential to create serious and costly conflicts if not addressed in the commercial lease agreement.

Personal Guaranties

Commercial landlords commonly require a commercial tenant to provide a personal guarantee in the lease. If you have organized your business as a corporation, this completely obviates the personal liability protection of your corporate business entity and exposes personal assets, like your home, to your landlord and your other creditors should you default on a commercial lease. If the business defaults on the lease, the owners can be personally liable for all the damages incurred to the commercial landlord for the entire term of the lease—including the commercial landlord’s attorneys’ fees, costs and defenses.   An owner should be careful in agreeing to provide a personal guarantee unless absolutely necessary or negotiate limitations to the potential damages the commercial landlord can obtain if a default occurs.

Landlord’s Breach and Default

Occasionally, a commercial landlord will end an agreement before the end of the lease term.  This can seriously disrupt a business and interrupt a business owner’s income stream as he or she scrambles to find new space and bears the cost of relocating and advertising a new location.  Tenants can protect themselves by including generous grace periods in their lease agreements and requiring landlords to mitigate any tenant damages incurred as a result of the landlord’s breach.

© 2014 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Book Review: Extraordinary Popular Delusions and The Madness of Crowds—Avoid Following the Herd

 

In the 2011 film Salmon Fishing in the Yemen, a life-changing decision by the character, Dr. Alfred Jones, is symbolized when he turns himself around and walks against the current of a crowd that is all traveling the same direction on a sidewalk. Often success in business comes from avoiding the follies of the group and independently developing a different plan. The first and still considered one of the best, books on this subject is Extraordinary Popular Delusions and The Madness of Crowds by Charles Mackay. Its principles and examples of group behavior are just as important today as they were when they were first published in 1841.

The author, Charles Mackay (1812-1889), was a Scottish journalist and author.   While a journalist, he researched and compiled the accounts that form the basis of the two volumes known as Extraordinary Popular Delusions and The Madness of Crowds. Unlike the popular sensational journalism of the time, Mackay provided several heavily-researched and detailed historical anecdotes of the pitfalls of group behavior. His examples of the problems that occur with group behavior have been used by modern social psychologists and economists to describe the dysfunctions of following “the crowd.” It is also often cited by analysts to explain the boom to bust behavior that perpetuates in stock markets.

A general theme found in Mackay’s book is that humans have the tendency to develop a herd mentality. The individuals in the herd then act and react to one stimulus after another in similar and predictable ways.  Mackay theorized when the herd develops “a madness” it can lead to a downward spiral of behaviors that often have very negative consequences. In addition, once this madness occurs it is usually takes individuals, with great difficulty, to break with the norm in order to stop the behavior.

Mackay narrates several historical events to illustrate the negative (and sometimes bizarre) effects that can arise out of a group mentality. These events include the Mississippi Company bubble, the Witch Mania (It wasn’t just in Salem, Massachusetts.), and the South Sea Company bubble as examples of when a group of seemingly rational individuals developed irrational thoughts and behaviors that led to very negative consequences.

The often-cited example in Extraordinary Popular Delusions and The Madness of Crowds is the Tulip Mania, which arose in Europe in the 1600s. The tulip, a simple flower, with its origins in Constantinople, was at first a novelty item for the very wealthy in Europe. Tulip bulbs then evolved from novelty item to status symbol for the upper and middle classes where they became the concentration of serious financial speculation. As the mania amplified, tulip bulbs began being purchased by investors and merchants who utilized most (if not all) of their assets. Producers sold the bulbs for property, gold, and monetary amounts that still seem exorbitant by today’s standards. This pattern of “madness” devolved into wild speculation and hoarding which tainted the region’s economic markets. As often occurs, the speculation then piloted a downward spiral that depressed markets and negatively affected producers for years.

The power in the message of Extraordinary Popular Delusions and The Madness of Crowds is in its timelessness. These same fits of “madness” can be seen today by simply opening the newspaper.   The modern-day observer need only look as far as Cabbage Patch Doll fever in the 1980’s, the Beanie Baby craze of the 1990’s, or the real estate market crash of the last decade as modern-day “tulips.” Other recent examples which appear a few times a year are the crowds of people who camp out for days in order to purchase the newest technological gadget, which can be purchased a couple of weeks (sometimes only days) later by simply walking into the store. Then there are examples of the tensions which dissolve into fights seemingly every Black Friday over a $25 toy at the big-box store, the stock market tech bubble, the successful fraudulent financial schemes orchestrated by Bernie Madoff and similar individuals. The list goes on…

The primary goal as an individual and businessperson is to notice when this herd mentality occurs and to avoid being swept up in the “madness” that can often have disastrous results.  As in Salmon Fishing in the Yemen, going against the current of a crowd will serve your personal and business interests well. Success will often come from avoiding the follies of the group and independently developing a different plan.

© 2014 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

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This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

 

Articles of Incorporation: Getting Your New Business Off the Ground

Articles of Incorporation

 

 

If you’ve chosen to organize your business as a corporation in Arizona, there are a number of steps you must take to launch your new enterprise. The Articles of Incorporation is one of the first – and most important – legal documents you must prepare and file with the Arizona Corporation Commission.

 

 

 

 

 

All states require new corporations to file Articles of Incorporation with the appropriate state authority. Although the requirements vary slightly from state to state, Articles of Incorporation generally serve the same purpose in all jurisdictions:

  • Create the corporation
  • Set forth the corporation’s basic purpose
  • Establish a corporate name (and prevent similar names)
  • Identify shareholders, members, and a Statutory Agent
  • Authorize stock and/or provide authority

Like most states, Arizona gives prospective business owners access to a downloadable Articles of Incorporation form found on the Arizona Corporation Commission’s website. New business owners should be mindful, however, that the choice of entity is a huge decision that involves much more than filling out a form or two. Significant tax implications and business planning issues are just two of the decisions that require the help of an experienced business attorney. In fact, the Commission’s website explicitly advises potential business owners to consult with an attorney before completing any of the forms available on its website.

Articles of Incorporation: Required Information

The Arizona Articles of Incorporation form is a three-page document that requires business owners to submit rudimentary information about their corporate entity. This form requires the following information about your business:

Entity Name

Giving your corporation a name may seem like a straightforward exercise, but it’s very important to secure the exact name for your new business. Your business name must be unique – otherwise, the state will reject your Articles of Incorporation. You can check the availability of your desired business name on the Arizona Corporation Commission’s Electronic Document Filing website.

Character of Business

Include a brief, general statement describing your business’s purpose.

Shares

List the class and total amount of each class of stock your corporation is authorized to issue.    With a limited liability company, instead of issuing shares you will provide the names of the members of the company.

Arizona Known Place of Business

This is the corporation’s principal place of business – in other words, where the business conducts its daily operations, sales, and/or functions. Also, the form requires you to list whether the known place of business is the same as the address of the Statutory Agent.

Directors’ Names and Addresses

As the heading suggests, listing the name and business address of every corporate director is required. For a limited liability company, you will provide the contact information for the members.

Statutory Agent

A Statutory Agent is an individual, attorney, or business authorized to accept official communications on a corporation’s behalf. In most cases, communications are limited to mail; specifically, Statutory Agents receive lawsuits, subpoenas, and other court documents on behalf of the corporations they serve.

Certificate of Disclosure

For a corporation, any corporate officer, director, trustee, or incorporator with at least a 10 percent share in the corporation or a 10 percent ownership interest must complete a Certificate of Disclosure form. This form asks questions about an individual’s record of any criminal convictions or financial misconduct.

Incorporator’s Name, Address, and Signature

For a corporation, you must list the name and address of every incorporator. In many cases, there will be just one incorporator. Additionally, each incorporator must sign the Articles of Incorporation form.

© 2014 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Key Steps When Starting A Business

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The Importance of Timeliness When Starting a Business

For the majority of entrepreneurs and new business owners, time is a precious commodity. Finding time – and managing an existing schedule – is a challenge. When launching a new business, however, it is critically important to follow a proper timeline. Failure to execute the new business start-up steps in the correct order can cost a fledgling enterprise much-needed funds. More importantly, waiting until the last minute to handle important tasks can seriously jeopardize a business’s likelihood of success.

By working with an experienced business attorney, a new business owner can stop worrying about the legal details and focus on running their business. The following are some of the initial steps that should not be left until the last minute:

Creating a Unique Business Name

There are several considerations that contribute to choosing a business name. For a variety of reasons, business owners must choose a name that is not too similar to an existing Arizona business name. The name should not infringe on an existing federal trademark. Ideally, it should also be available as an Internet domain.

Separating Personal and Business Accounts

Many first-time business owners make the mistake of relying on personal credit to launch a new business. Understandably, they do not always have access to business credit as a means of funding a new business. By pledging personal assets, however, they expose themselves to business creditors. A business attorney can help a new business owner find a solution that does not put the business owner’s personal credit and assets at risk.

Planning for Intellectual Property

Copyright and trademark law is complex. Business owners must ensure they do not violate other businesses’ work, while at the same time guaranteeing they protect their own efforts. This is where the help and knowledge of an experienced business attorney is invaluable.

Drafting Business Contracts

Many business owners are tempted to create their own contracts or rely on agreements they pull from the Internet. Although this may initially seem like a money-saving step, it can be a critical and costly mistake in the long run. Arizona courts construe ambiguous contracts against the drafting party. Harford v. National Life & Casualty Ins. Co. (1956), 81 Ariz. 43, 45, 299 P.2d 635, 637; see also, Sears Roebuck and Co. v. Avery (2004), 593 S.E.2d 424 (North Carolina applying Arizona law). Business owners who create confusing, misleading, or simply incomplete contracts just to save a little money could end up losing a significant amount of funds should a dispute later develop.

© 2014 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Five Things To Consider When Starting a New Business

 

If you’ve recently launched a new business or you’ve been contemplating starting your own company for some time, chances are you’ve put a considerable amount of thought into how you plan to achieve your dreams of business ownership. Most entrepreneurs are driven, energetic people who devote considerable time and effort to strategy and planning.

Despite the best intentions, however, the majority of new business owners fall victim to the same mistakes when starting out. Although this is by no means an exhaustive new business checklist, it is a solid overview of some of the most common things people neglect when starting down the road to being their own boss.

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1. Business Structure Is Crucial

The way you structure your business is arguably the most important decision you will ever make as a business owner. The corporate structure of your business has far-reaching tax and personal liability implications that can make or break a fledgling business. Unless you plan on operating as a sole proprietor, the options generally come down to organizing as a limited liability company or as a corporation. Both entities involve complex legal analyses that require the in-depth knowledge of a business attorney who understands the pros and cons of each structure and how each could support your business. In summary, corporate structuring is not a decision to be made on a whim.

2. A Credit Line or Alternate Cash Flow

Cash flow is the lifeblood of business. Even a small start-up operating from a basement office has overhead costs. Late-paying customers or a series of unexpected expenses, may cause a drought in your cash flow. Having a backup funding source, such as a business line of credit, is crucial to keeping business finances afloat while waiting for income to begin flowing back in.

3. Profitability Takes Time

Most business experts recommend saving at least one year’s salary before launching a new business. Other advisers suggest saving for a minimum of two years before going out on your own. You shouldn’t rely on turning a profit right away. With money in reserve, you can focus on building your new business for the long term rather than worrying about how you will pay your everyday living expenses.

4. Employer Regulations

Hiring an employee is a monumental step that goes well beyond shaking a candidate’s hand over a resume. Employers must comply with the variety of federal and state regulations that govern everything from workers’ compensation insurance and income tax withholding to Social Security tax and OSHA regulations. Failure to observe the myriad of laws that govern the employer-employee relationship can result in severe (not to mention expensive) penalties for employers.

5. The Importance of Well-Drafted Legal Documents

Most business owners prepare for start-up costs. They have a plan for buying equipment, renting a location, and paying for advertising. Surprisingly, however, many new business owners cut corners and omit working with an attorney who can help them protect everything they are working so hard to build. When you’re starting your own business, that often includes personal assets as well as property owned by the business. From creating solid, operating agreements, personalized contracts and commercial lease agreements that anticipate contingencies to insulating your personal assets from the reach of business creditors, a business attorney will work one-on-one with you to reduce the long-term costs of doing business. Your operating budget may function on a shoestring, but your legal budget should be more robust. Your business will reap the benefits in the long run.

© 2014 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This information have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.