Join Empower U tonight from the comfort and safety of your home via your laptop, tablet or cell phone for a webinar on powerful tools for small business from the federal government in the CARES Act passed last Friday.

>>> The link to sign up for the free seminar is here. <<<

  • If you want to email questions in advance, click here.
  • For specialized assistance for your company, we are offering consultation through the program for a flat $1,500 fee to help businesses through the process.  Click here to get signed up and type “PPP” in the subject line of the email.
  • To have your email to be added to our firm mailing list and receive tonight’s PowerPoint, click here and say “add me to your list” in the subject line.

Joining us tonight are:

  • Attorney Rebecca L. Simpson who will lead the presentation primarily on Paycheck Protection Program and Economic Injury Disaster Loans available very shortly  to small businesses.
  • Attorney Stephen E. Imm who will answer questions of employers and employees about the COVID-19 crisis.
  • Melissa Knies from US Bank who will explain how to apply for the programs.
  • Attorney Christopher P. Finney will moderate.

We have a record audience for Empower U signed up for tonight. Please join us for this important program.

 

With the advent of the COVID-19 Crisis, Finney Law Firm and Ivy Pointe Title have quickly stepped to the plate, with technology that allows for the practice of law with appropriate social distancing, with attorneys who focus on practice areas to help their clients, and with cutting edge information on emerging programs to help businesses and individuals in need.

Technology allowing for electronic interaction

Finney Law Firm and Ivy Pointe Title  have carefully developed the tools to be prepared for a day such as this:

  • DocuSign allows for execution of documents from your computer.  By federal and state law, e-signed documents are fully enforceable as with “inked” documents. Our team is licensed and trained in DocuSign technology for all documents in which clients will allow an electronic signature.
  • Electronic notary.  Finney Law Firm and Ivy Pointe Title contracted with one of only a handful of licensed e-notaries in Ohio for exclusive provision of e-notary services. Using the platform DocVerify, we have the strongest technology to allow real estate closings and other transactions to proceed.  By Ohio law, it is permissible to have documents signed and acknowledged (notarized) without person-to-person interaction via electronic signature and electronic notary.
  • Electronic payments. We use e-billing and credit card payments (and wire transfers and EFTs) for clients who prefer this method of billing and payment.
  • Electronic discovery and electronic depositions. Your litigation does not need to stop because of the COVID-19 crisis. Most of the work pre-trial can still move forward using e-mail, Zoom.US or Microsoft Teams for depositions, and motion work that can be electronically filed with almost all Courts.
  • Work-from-Home. If you do need to visit our offices, you will find that most of our professionals are not at their desks. Rather, they are safely (for you and them) working from home with the latest technology including Microsoft Surface laptops, Microsoft Teams Video Conferencing, Microsoft Office 365 data in the cloud, so we can access your data from anywhere in the planet, but with tremendous Microsoft security technology and backups.

Practice areas to help your business

Our business lawyers are up to date and prepared to help you through the thicket of issues that arise or are heightened with the COVID-19 crisis:

Attorney Isaac T. Heintz is proficient in contract interpretation, including how to enforce or avoid obligations under a lease or other agreement. He has already written purchase agreements with COVID-19 contingencies to extend due diligence periods to the declared end of the crisis. As you might expect, Isaac has also had many clients initiate their estate planning, or finish long-delayed estate planning work.

Attorney Stephen E. Imm heads our employment law group, and is advising clients on a myriad of new COVID-19 legislation and addressing employment law claims under previously existing law and the new enactments.

Attorney Bradley M.  Gibson heads our litigation group which is dealing with a multitude of business-to-business disputes, including those arising because of the COVID-19 crisis.

Attorney Richard P. Turner runs Ivy Pointe Title and in that capacity has been using every tool at our disposal to continue to close your transactions “accurately and on time, every time.”  These include closings respecting social distancing, and we stand prepared to be one of the first agencies in Ohio to implement fully electronic closings.  We also can do drive-by closings where you come to our office and sign documents from your car, or we come to you and you can sign them on our car hood.

Attorney Christopher P. Finney heads our public interest practice, and the host of issues addressing government-to-business and government-to-individual interaction arising from the COVID-19 crisis.

CARES Act assistance for your small business

Congress just passed the CoronaVirus Aid, Relief and Economic Security Act, which includes the Paycheck Protection Program that will provide what essentially are grants to businesses with fewer than 500 employees and enhanced Economic Injury Disaster Loans (EIDL).

Attorney Rebecca L. Simpson has been counseling clients through this program, and on Thursday night she joins other presenters on a panel addressing “CARES Act, Including Paycheck Protection and Funds for Businesses.”

Conclusion

We are working furiously to meet the needs of our clients in this fast-emerging crisis. Let us know how we can help you or your small business navigate these turbulent waters to come to the other side safely and profitably.

And our hope is that each of you remain healthy throughout this pandemic.

 

 

You will soon hear the terms SBA 7(a) program and “Payroll Protection Program” as an important and significant program to help virtually every small business in the nation.

While labeled as a “loan program,” it in fact can operate as a generous grant program for any business or non-profit under 500 employees. The “loan” is 2.5 times your monthly payroll expenses. More details are available in this article from National Law Review.

Here are the key features:

  • You apply for a “loan” through an SBA-approved lender. Here is the SBA link to Cincinnati-Area approved lenders.  The Cincinnati-area list is very short: US Bank, Fifth Third Bank, The Huntington National Bank, First Financial Bank, PNC Bank, Center Bank and People’s Bank from Marietta.
  • The “loan” is in an amount that is 2.5 times your monthly business’ payroll, being the monthly average over the 12 months prior to the date the loan is made.
  • The “loan” is in a maximum amount of no more than $10 million.
  • The “loan” has no fees associated with it.
  • The “loan” requires no personal guarantees.
  • The “loan” requires no collateral.
  • The “loan” does not require proof that funds cannot be received elsewhere.
  • The “loan” has a simplified application process.
  • The “loan” will be funded quickly to avoid the economic impact of the COVID-19 crisis.
  • Most importantly, borrowers are eligible for loan forgiveness equivalent to the sum spent on covered expenses during the eight-week period after the loan is originated. 
  • Covered expenses include wages, benefits, rent, mortgage payments, and utility charges.
  • The “loan” is forgiven if you maintain your pre-crisis level of full-time equivalent employees for eight weeks after the loan is made.
  • If you fall below that level of employment, your loan forgiveness is reduced in proportion to the reduction in headcount. The same applies to salary reductions.
  • If you already have made staffing reductions, you qualify for loan forgiveness if you re-hire back to pre-crisis levels by June 30, 2020.
  • You do not need to demonstrate actual economic harm in order to qualify. Rather, you simply need to make a series of good faith certifications, primarily that (a) current economic conditions necessitate the loan to support ongoing business operations, and (b) that the funds will be used to maintain payroll and address other covered expenses.

In order to apply, you need to contact an SBA-approved lender Qualified SBA lenders are awaiting further instruction from the SBA.  Contact your lender to get on their email list to obtain application instructions as they become available.  We will update this BLOG as new information is forthcoming.

Here is an excellent article explaining the Payroll Protection Program from Inc. Magazine.

You may contact attorney Christopher Finney (513.943.6655 (o) or 513.720.2996 (c)) at any time for more information.

Attorney Christopher P. Finney

 

With the raging COVID-19 crisis and its economic fallout, the question that we are fielding the past few days is:

How can I get out of my contract to do “X”?

Each of the three analyses below hinges on the language of the contract.  Thus, “it depends.”

Contract Contingencies

First, with respect to contracts to buy companies, real estate or other assets, consider the contingencies in the contract.  For example, read here and here for easy “exits” from Cincinnati Area Board of Realtors residential contracts for buyers.

“Force majeure” provisions

But what about leases, long-term supply contracts, employment contracts, construction contracts and other commercial contracts?

Many such contracts contain what is known as a “force majeure” provision that essentially contemplates precisely the situation in which we find ourselves today: Some unexpected exigency such as war, famine, or pandemic.

In its essence, a force majeure clause is a contract provision that excuses a party’s performance under a contract when certain circumstances beyond their control arise, making performance impracticable, impossible or illegal. These clauses are common in complex commercial contracts, such as a commercial lease (and we really don’t expect to actually use them).  Yet here we are and they can be a business-saving resource in determining how to proceed.

Can this provision excuse your performance and let you “get out of” a contract? Well, as you might expect your attorney to say: “it depends.”  It depends on the language of the contractual provision.

Here is a sample force majeure provision from a commercial contract:

In the event a party shall be delayed or hindered in or prevented from the performance of any obligation (other than a payment obligation) required under this contract by reason of strikes, lockouts, inability to procure labor or materials, failure of power, fire or other casualty, acts of God, disease, restrictive governmental laws or regulations, riots, insurrection, terrorism, war or any other reason not within the reasonable control of such party, then the performance of such obligation shall be excused for a period of such delay, and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay.

Would such a provision allow a tenant to terminate a lease? Would it allow an employer to terminate an employment contract for a term? Would it allow a manufacturer to avoid its obligations under a supply contract?

In this contractual language, we have the specific exceptions of “disease,” “acts of God,” and “restrictive governmental laws.”   Since we have a disease that is arguably an “act of God,” and government-imposed shutdowns, it would seem that there are multiple bases upon which to argue for termination.  But there could be countervailing arguments as well.  For example, payment obligations are not excused in this sample language.

Some courts have applied force majeure clauses very narrowly, meaning that the specific occurrence has to be contemplated by a force majeure provision. Thus, is the word “disease” in your force majeure clause? Well, COVID-19 would seem to fit tightly within that definition, but does it? Hamilton County, for example, as of this writing, has no reported cases, and yet tens of thousands of people have been thrown out of work because of the fear of pandemic.

Mere diminished performance or increased expenses to perform alone likely would not be a sufficient basis to excuse performance and invoke a force majeure clause.

Business Interruption Insurance

Do you have business interruption insurance that would cover the COVID-19 pandemic consequences?

If you were prescient or cautious enough to buy business interruption coverage, that usually covers only a direct physical loss such as a fire, flood or earthquake.  Some policies require that a loss be specifically designated, while other policies have no such requirement.

  • In the case of COVID-19, it may be tough to prove a direct physical loss but what if a workplace is contaminated and unusable due to a COVID-19 outbreak?
  • Possibly, business interruption coverage could be invoked if a supplier shuts down and can’t supply product or parts due to COVID-19

Additional considerations

Before triggering contingencies, invoking a force majeure provision or making a claim for insurance coverage, consider the following:

  1. Are alternative means to perform your contractual obligations.
  2. Will the other party to the contract consider mitigation of the performance problem, such as a rent reduction or other part-performance?
  3. Could the parties reach a mutual agreement to terminate a contract or delay performance?

Conclusion

Virtually overnight, our firm and our clients have found ourselves in the middle of single worst crisis in perhaps 100 years.  The first option should be to work towards accommodation with the other party to the contract.  Beyond that, we have the options set forth above to consider for relief in this incredibly challenging environment.

Call one of our skilled and experienced attorneys if you want to explore your legal options or pursue one of these remedies.

Finney Law Firm attorney Eli N. Kraft-Jacobs

So, you have decided to cease operations, close down your business, and begin the process of dissolving your entity.  You know that there are formalities that must be attended to, but the what/when/how remains elusive.  The first step is to identify if the entity is a corporation or a limited liability company.  Notwithstanding some unique provisions of the Ohio Revised Code, and without discussing the process for nonprofit corporations, professional associations, or partnerships, the following is a general overview of the steps necessary to dissolve domestic corporations and limited liability companies in the State of Ohio.

Electing to Dissolve a Corporation:

A corporation may be dissolved voluntarily by the adoption of a resolution of dissolution by the directors or by the shareholders.  The requirements for dissolving the corporation by resolution of the directors differ from those for dissolving the corporation by the shareholders.

Once a resolution of dissolution has been adopted, and after obtaining the necessary tax clearance, a Certificate of Dissolution shall be prepared, which must include pertinent information for dissolving the corporation.  There are other notification requirements that must be met prior to filing the Certificate of Dissolution with the Ohio Secretary of State.

A corporation may also be dissolved judicially by either: (1) an order of the supreme court or a court of appeals or (2) an order of the court of common pleas in the county where the entity’s principal office is located.  If this is the path your company is taking, the good news is that the relevant court will, purposefully or otherwise, identify the things that need to be accomplished in order to dissolve and wind up the affairs of your company.  The bad news, of course, is that a court is ordering the dissolution of your entity and much of the process will be public record.  If the dissolution occurs pursuant to the supreme court or court of appeals, then the court may either: (a) order the directors to effectuate the dissolution and wind up the entity in the same manner as would occur during a voluntary dissolution or (b) direct the relevant court of common pleas to effectuate the same.  A court of common pleas may only order dissolution in an action brought by the shareholders, the directors, or the prosecuting attorney of the relevant county.

Regarding dissolution in a court of common pleas, if the action is brought by the shareholders, the court may only order dissolution if: (a) the articles have been canceled or the period of existence has expired, (b) the corporation is insolvent and dissolution is the only means through which to protect the creditors, or (c) the corporation has failed or is unable to meet its objectives.  If the action is brought by the directors, the court may order dissolution if there is an even number of directors who are unable to break a deadlock or there is an uneven number of directors, but the shareholders are deadlocked on a vote to elect new directors.  If the action is brought by the relevant prosecuting attorney, the court may order dissolution if it is found that the corporation was organized for, or otherwise engages in, activity including, but not limited to, the following:  prostitution; gambling; loan sharking; drug abuse or illegal drug distribution; counterfeiting; obscenity; extortion; corruption of law enforcement offices or other public officers, officials, or any employees; or any other criminal activity.

Electing to Dissolve a Limited Liability Company:

The process of dissolving a multiple member limited liability company (“LLC”) is similar to dissolving a corporation.  Regarding voluntary dissolutions, an LLC shall be dissolved upon the occurrence of any of the following: (1) the expiration of the period of existence as stated in the operating agreement or the articles of organization, (2) the occurrence of one or more events specified in the operating agreement as causing dissolution, (3) the unanimous written agreement of all members of the LLC, (4) the withdrawal of a member of the LLC unless otherwise stated in the operating agreement, or (5) a decree of judicial dissolution.  A Certificate of Dissolution must be filed with the Ohio Secretary of State in order to effectuate the dissolution of the LLC.

Regarding tribunal dissolutions, a tribunal may declare an LLC dissolved and order the business to be wound up upon the occurrence of any of the following: (1) an event making it unlawful for all or most of the business to continue or (2) a determination by the tribunal that any of the following is or are true: (a) the economic purpose of the LLC is likely to be unreasonably frustrated, (2) a member of the LLC has engaged in conduct relating to the business that makes it not reasonably practicable to carry on business with such member, or (c) it is not otherwise practicable to carry on the business.

The process for dissolving a single member LLC differs from the above process for a multiple member LLC.

Voluntary Winding Up:

Once an entity voluntarily elects to dissolve and files a Certificate of Dissolution with the Ohio Secretary of State, the relevant parties are authorized to proceed with the winding up of the corporation/LLC.  Winding up is the process of selling the assets of the business, paying off creditors, and distributing any remaining assets to the  members or shareholders in accordance with Ohio  law.  This is separate and distinct from a judicial or tribunal dissolution, during which the court will control the process of winding up.

There are some minor distinctions between LLCs and corporations with regard to the winding up process, but they largely follow the same path.

It is important to note that dissolution is not a magic wand with which one may avoid company liabilities.

While the dissolution process may seem straight forward, you should always seek legal counsel to ensure the I’s are dotted and the T’s crossed.

One important but often overlooked provision of Ohio corporate law is the requirement that “foreign corporations” (meaning any corporation established outside the state of Ohio) must obtain a license to transact business within the state of Ohio when doing business in Ohio.

No foreign corporation. . .shall transact business in this state unless it holds an unexpired and uncanceled license to do so issued by the secretary of state. To procure such a license, a foreign corporation shall file an application, pay a filing fee, and comply with all other requirements of law respecting the maintenance of the license as provided in those sections.

R.C. 1703.03.

Although a failure to obtain a license does not invalidate any contracts a foreign corporation enters into in Ohio, a lack of registration means that a foreign corporation cannot maintain a lawsuit in Ohio courts.

The failure of any corporation to obtain a license…does not affect the validity of any contract with such corporation, but no foreign corporation that should have obtained such license shall maintain any action in any court until it has obtained such license. Before any such corporation shall maintain such action on any cause of action arising at the time when it was not licensed to transact business in this state, it shall pay to the secretary of state a forfeiture of two hundred fifty dollars and file in the secretary of state’s office the papers required by divisions (B) or (C) of this section, whichever is applicable.

R.C. 1703.29.

A similar provision for foreign limited liability companies is located at R.C. 1705.58.

This is a common provision throughout the United States. In Kentucky the requirement is codified at Kentucky Revised Statute 14.9-20.

A recent Hamilton County Court of Appeals case highlights the importance of licensing your foreign corporation. In LV REIS, Inc. v. Hamilton County Board of Reviison, et al., C-160732. the First District Court of Appeals upheld the Common Pleas Court’s dismissal of a case brought by a Nevada corporation that had failed to register with the state before filing a Board of Revision appeal in the Common Pleas Court.

Had LVREIS been successful in the underlying case, it would have saved approximately $17,000 in property taxes per year – making the failure to register a costly oversight. It should be noted however, that even though the Common Pleas Court granted the motion to dismiss, it also provided some analysis of the merits of the appeal, suggesting that LVREIS would not have prevailed had the case been decided on the merits. 

If you are operating a foreign corporation or limited liability company in Ohio, this case should serve as a warning to make sure you’ve properly registered in every state in which you operate. If you are not currently registered in Ohio, you can register now.

For those involved in disputes with foreign entities corporations, this can be an important defense to raise in litigation, as even though a foreign corporation can cure the defect prospectively, the case law suggests that if an unregistered foreign corporation files suit but later registers with the state, such registration does not cure the lack of jurisdiction.

Contact Finney Law Firm for assistance with your corporate or property tax matter here.

Attorney Julie M. Gugino

“Joint and several liability” is a legal concept that provides that each obligor under a contract is fully liable for the obligations under that contract as to the other party to the contract (i.e, the party to whom the joint obligors are obligated).  So, in the instance that two or more guarantors sign a guarantee instrument to a bank for a loan, if they are “joint and severally liable,” it means that each guarantor owes the entire debt to the bank in the event of default.  The bank can’t collect twice the guaranteed amount, but it can choose which guarantor from which to obtain payment.

So, the question addressed in this article is “what is the default position as to joint and several liability on a contract if the instrument is silent on the topic?”  We address topic this under Ohio and Kentucky law.

The answer: In short, “joint and several” is the default interpretation absent language in the instrument that absolves parties of such liability.

General Contract Principles

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Restat 2d of Contracts, § 1 (2nd 1981). Further, where there are more promisors than one in a contract, some or all of them may promise the same performance, whether or not there are also promises of separate performances. Restat 2d of Contracts, § 10 (2nd 1981). Such is the situation when more than one individual signs a guaranty or a promissory note.

Standard contract language

The standard modern form to create duties which are both joint and several is “we jointly and severally promise,” but any equivalent words will do as well. In particular, a promise in the first person singular, signed by several persons, creates joint and several duties. Restatement (Second) of Contracts § 289 (1981). What this means is that, generally, under the common law, promises of the same performance create “joint” liability on the part of each promisor unless an intention is manifested to create a “solidary” obligation. Restat 2d of Contracts, § 289 (2nd 1981). However, many states have state specific statutes which have altered or refined this rule.

Common law when contract is silent

In Ohio, an individual signing a note as a co-maker with another individual is jointly and severally liable for the debt, except as otherwise provided in the instrument. Ohio Rev. Code Ann. § 1303.14(A). Star Bank, N.A. v. Jackson, 2000 Ohio App. LEXIS 5567, *1. Under U.C.C. Art. 3, a party signing a promissory note as a co-maker is jointly and severallyliable for the debt. Darrah v. Leakas, 1994 Ohio App. LEXIS 220, *1. As among themselves, co-makers are presumed liable in equal amounts, however, these rights are governed by the particular terms of the contract between the co-makers. Poppa vs. Hilgeford, 1982 Ohio App. LEXIS 13658, *1.

In Kentucky, likewise, in the absence of an express agreement to the contrary, when two or more individuals execute a note, such persons are jointly and severally liable to the holder, even though the instrument contains no such express provision.  KRS 355.3-118. Schmuckie v. Alvey, 758 S.W.2d 31, 33-34.

Duty of contribution from co-makers

As between or among themselves, however, in the absence of evidence of a contrary agreement, co-makers are presumed to be liable in equal amounts and a right of contribution, based upon an implied contract of reimbursement and not the instrument, exists between or among them. 11 Am. Jur. 2d, “Bills & Notes” § 588 (1963). Id.

Conclusion

What this means is that if you sign a note or guaranty or other like instrument with another individual, the holder of that note, in their sole discretion, can choose to recover the full amount against you and only you. As between you and your co-maker, depending on your agreement, you likely retain the right to seek contribution from them pro-rata.

For more information on commercial instruments and personal guarantees, contact Julie Gugino at (513) 943-5669.

As we march through our lives, folks shove documents under our nose for signature all the time.  In reality, we should carefully, very carefully, read them and consider their implications before signing any of them.

After all, there are charlatans and fraudsters standing eager to take advantage of us at every turn.  And even if other parties don’t start out as such, life events can put people in default or desperate straits – and then “desperate people do desperate things” as they say.

Still, certain documents bear significant additional risk or have a history of resulting in litigation or economic calamity for the signer.

Here, we take a serious look at six transactional documents that frequently result in legal or financial problems:

  • Personal guarantee for debts of another. Your daughter and son-in-law are buying a house, but have bad credit, or you are starting a business and need to guarantee the lease or franchise agreement to provide the fiscal backing for the undertaking.  A personal guarantee is fine and in some instances both called for and reasonable.  But think it through:

–>  Am I financially capable of fulfilling this guarantee if the underlying obligation falls into default?

–>  Would the other party accept a guarantee limited in time, amount or some other cutoff?  Or proceed with no guarantee?

–>  If there are multiple guarantors, would the lender be satisfied with me just paying my pro-rata share of the underlying debt?

–>  Is there some other way that the transaction can proceed without my guarantee?  Can someone offer security for the loan instead?

  • Non-Compete agreements. More and more employers are asking new employees to sign non-compete agreements or agreements wherein the employee agrees not to solicit customers, employees or vendors of the enterprise.  Employers are entirely within their rights to demand such agreements (the question of whether they are enforceable is addressed here).  But should an employee agree to restrict his future earnings potential and career path based upon this job opportunity?  If you really think it through, many time the answer is “No thanks, I’ll take a pass.”
  • Agreements with attorneys. We really hate to say this, but one of our clients was a seller under a land installment contract for the sale and purchase of real estate.  The buyer was an attorney.  After repeatedly falling into default, our client initiated a forfeiture action against the attorney.  He countered with a blistering series of arguments that were all untrue or frivolous.  Confronted with withering legal bills to prove their case, they quickly settled on relatively unfavorable terms.  Lesson learned.
  • Businesses with 50/50 ownership. It seems to make sense: Two partners throwing in equal shares of cash and effort to start a business; they should own it 50/50.  And in decision-making, decisions are 50/50, meaning it requires the consent of both parties to move forward with anything.  However, after years of addressing business disputes, it has become clear that these ownership structures – with no one in charge and everyone’s cooperation required to make decisions – are the source of operational and legal gridlock, resulting in painful, expensive and endless litigation.  I have even seen very difficult dispute resolution between former (or soon-to-be-former) spouses in a 50/50 ownership structure.  Indeed, getting into business with any third party can be the source of conflict, monetary losses and litigation.
  • Agreements you are not prepared to litigation to conclusion. If you think about it, in an instance in which you are investing time or money, you have two essential choices: Either be prepared to “eat” these investments by walking away or be prepared to litigate your claims to conclusion to defend your investment.  Is the person you are contracting with someone you are prepared to sue to enforce your rights?  Is the transaction structured and documented in such a way that you could prevail in that litigation? Will the cost of enforcing these agreements (or defending against a suit from the other party) of such magnitude that it will be worth litigating?
  • Indemnity and “hold harmless” clauses in leases and other contracts. It’s easy to sign a 50-page legal document that satisfies the major business terms you have negotiated.  But what about the fine print?  Buried deeply within a lease, loan documents, or asset purchase contracts can be all sorts of warranties, indemnities, and “hold harmless” provisions.  It seems simple that a seller or borrower should stand behind his obligations, but do you really want to give an open-ended contractual indemnity or warranty in this specific instance?  It is, as is addressed here, a potential blank check, open-ended access to your checkbook.

We are not saying that you should never sign any of the foregoing instruments.  What we are saying is that experientially these undertakings result in much conflict, legal fees and emotional angst, and should be undertaken only with great caution.

 

An issue that manifests itself in any number of scenarios is the seemingly odd question: Can a seller contract to sell something that he does not own.

Somewhat surprisingly, the answer can be “yes.”

Hypothetical sale of stock

Let’s take a theoretical situation in which a seller promises to sell to a buyer 1,000 shares of the Procter & Gamble Corporation for $100 per share on the 2nd of January, 2018 (a date that as of this writing has not yet come), but the seller does not own any Procter and Gamble at the time of making such agreement.  Is that contract enforceable against the buyer?  As against the seller?

Sure.  If the seller does not own 1,000 shares of Procter & Gamble Corporation at the time of the contract, he had better make arrangements to get that stock under his ownership or to find a party who does own those shares who will fulfill the seller’s promises.

OK, but what about real property?

But come on, that’s perfectly fine as to a publicly-traded stock, but what about property that is entirely unique, not replaceable with “equal or like-kind” property, and under the control of a third party?

Well, the same principle applies.  If the seller is going to make a binding promise to sell that asset, and he wants to avoid being sued for breach of contract, he had better figure out how to either get title to the property before the promised closing date, or otherwise arrange for the cooperation of the property owner.

The basis for fraud?

The story is as old as the bridge.  A gullible tourist goes to New York City and a local shyster sells them the Brooklyn Bridge.  The seller does not own the bridge at the time of the contract, so it’s an enforceable contract, right?

Well, in that classic case, and in the case of other instances of fraud, selling property that the seller does not own could well be a badge of fraud.  If he knew at the time of contracting that he did not have title, and could not obtain title to the property in question, then the promise to sell that asset clearly would be fraud.

What if the seller claims that he thought he would be able to obtain the asset before the promised closing date, but was just unsuccessful.  Depending on his intentions, and the affirmative representations made by seller in conjunction with the sale, the failure of performance could be simple breach of contract, or it could be actionable fraud.

The peril for the seller

The peril for the seller who does not own the asset he promises to sell is that in order to avoid claims both for breach of contract and fraud, he will need to “pay the price” to get that asset into his name before the date of his performance.  In the case of Procter and Gamble Stock, if the price on the NYSE rises of $150 per share before the first of the year, he may just need to take a loss at $50 per share to assure fulfillment of his contractual obligations.  In the case of unique property owned or controlled by a third party, the seller may be in great peril as he will be under the mercy of that seller to “name his price” and terms to transfer the asset to the seller who has promised it any a date certain to a certain buyer.

Conclusion

This concept comes into play in various scenarios.  And the first instinct of parties — and attorneys — is to think you can’t promise to sell that which you don’t own.  A seller can.  But he should carefully consider the consequences of that decision.

What due diligence steps should a tenant undertake with respect to a commercial property before signing a lease?

Due diligence customary in a commercial real property purchase

Step back and consider for a moment that when we buy a piece of real property — for our home or for our business — it is prudent and customary by both the buyer and the lender to conduct due diligence investigations of the property:

  • title,
  • survey,
  • physical inspections of the structure and mechanical systems,
  • environmental, and
  • checks of governmental records for notices of liens for violations, zoning, traffic engineering, etc.

The list can seem endless.

Isn’t a commercial lease low-risk for the tenant?

But when simply signing a lease for a term of years, why should the tenant be concerned with these things?  After all, his upfront cash may not be significant (relative to a purchase) and if things don’t work out, the tenant can just leave, right?

Well, sometimes that is the case.  The cost and time needed for due diligence would outweigh the risk the tenant is undertaking by simply signing the lease and moving in.  If so, then by all means, proceed.

But, wait, consider this!

But consider these countervailing factors:

  • Tenant is spending significant monies on tenant buildout costs.
  • Tenant is spending significant monies to move, including moving of furniture, fixtures and equipment, the installation of computer and phone systems, and printing of letterhead, envelopes and business cards.
  • The disruption of your business arising from a move (and if things don’t work out a second move).
  • The image you are building at the new location.  What will be lost if a second move is necessary?  Think of a restaurant or bar, retail store,  or bank branch.  The location is intricately tied to a business’s identity in the mind of the consumer.  It may not be easy to just pick up and move.

The reality is that if the tenant does not undertake the kinds of due diligence implemented for a property purchase, he could “lose” the property in many of the same ways as in a purchase — i.e., he could lose the out-of-pocket costs associated with the activities noted above and have the inconvenience and loss to reputation by relocating to a second location.

The types of risk potentially borne by a tenant that due diligence could avoid

Indeed, in certain circumstances the tenant could be obligated to pay rent throughout the lease term, but the property cannot be occupied for its intended purpose.  (Consider a situation where the property cannot be occupied but where the landlord does not appear technically in default of his obligations under the lease.)

  • When signing a significant lease for property, a title examination, possibly a survey, and assuring lender buy-in of the lease can be absolutely critical.
  • If, for example, the landlord has a mortgage against the property, and the mortgage is in default, that lender legally can extinguish a later–signed lease concurrent with the foreclosure.
    • To avoid this risk, one asks a landlord to execute a subordination, non–disturbance and attornment agreement agreeing that so long as tenant makes prompt and full payment of rent (to the landlord or– when in default of the mortgage — to the lender), the lender or a successor buyer will honor the lease.
    • A tenant’s policy of title insurance can be issued, transferring that risk to a title insurer.
  • If the property does not comply with the regulatory requirements, zoning for example, of the jurisdiction in which the property is located, the tenant could be required to make extensive property modifications or to move.
  • If the property has environmental problems, the cost of compliance — in an unlimited manner — could be transferred to the tenant.
  • If the property has structural problems or the HVAC system is old and inoperable, depending on the lease language (shifting repairs and replacement of the HVAC to the tenant), the burden of fixing the problem could fall to the tenant.

Conclusion

Many times tenants will assume these risks in smaller leases.  Negotiating with the landlord’s lender and conducting full-scale inspections and other due diligence may just not be practical.

But a tenant in a commercial setting should carefully consider the risk-benefit to foregoing certain due diligence steps to prudently protect their investment in their new premises.

Call Isaac Heintz (513-943-6654) or Eli Krafte-Jacobs (513-797-2853) to address your commercial leasing questions.