Commercial leases are typically written to allow for assignment or subletting with the consent of the landlord. Landlords, though, often elect to terminate a lease and draft a new lease with the new business tenant rather than accept the assignment. This is often much better for the business trying to get out of the lease, too. An assignment does not relieve the initial tenant of its obligations under the lease. It assigns or transfers the responsibility to a new tenant but does not remove the original tenant from the lease. It also typically does not remove any personal guarantees signed by the original tenant. So in the case of an assignment, the original tenant remains on the hook if the assignee fails to pay or otherwise defaults. The landlord then has the right to go after anyone and everyone on the lease to get payment. So why would the landlord want to start over with a new lease if they have more people to puruse under the assignment? The landlord may be able to get a higher rate on the rent by renegotiating from scratch. There may also be significant differences in the lease provisions if the business use has changed -- a restaurant will have different requirements than a retail store or office space so the lease as originally negotiated may not suffice. Finally, it's often simpler to manage the parties with fewer of them. They also want the owners of the business in the space to be driven to succeed which is their primary reasoning for requiring the personal guaranty. A landlord recently commented: "I want the business owner to lay awake at night trying to figure out how to make the business work -- the personal guaranty does that."
Labels: assignment, business, lease
I attended a CLE (legal education) course today on the current state of the private equity market. As we discussed the topics, I thought it might be important to distinguish "venture capital" from "private equity" for readers.
Venture Capital firms typically invest in startup companies, often in high growth industries. They usually take a preferred equity stake and a board position and work with the company to grow to a point where the company would reach a liquidity event such as an aquisition or public offering.
Private Equity firms typically invest in middle market companies looking to raise funds for growth. The deals are often "leveraged buyouts" or "management buyouts" and include equity and debt financing components.
Generally the private equity world is at a standstill as companies cannot get debt financing to help finance any transaction and private equity firms are not able to find transactions that offer them the return that they demand. Depending on who you ask, it seems this market will remain dead or slow at least through next spring and possibly through the end of next year. A lot depends on how effective the government's bailout is in getting the capital markets moving.
Virtually every businessperson I know is facing the issues of growing receivables and fewer customers willing to spend money. This is most notable in business-to-business companies but certainly being seen across all businesses on "main street" as the politicians would say. I received an email from Ann Guinn of G&P Associates, a business coach for law practices with the following steps that can help companies (not just law firms) in this market:
1. Evaluate Pricing. Get your pricing right or change your pricing to be more managable to your customers. This doesn't mean dropping your price but possibly offering early payment discounts or flat fees.
2. Closely Monitor Receivables. Stay on top of your receivables and be flexible with customers who are having difficulty making payments.
3. Adapt Your Business. You may need to expand your product/service base or adjust the products/services to serve a different niche that may not be as heavily impacted by the downturn.
4. Understand Customers' Current Needs. Recognize that your customers may not need the products/services that you normally sell but they may have different needs now than previously. Ask questions to understand how you might help them with their current needs.
5. Learn From Others. Evaluate what other companies in similar industries have done to better serve their clients or expand their client base in this type of economy and learn from them.
Ann is teaching a course on this topic for lawyers on October 28 and 30. It should be really valuable!
The Employment Security Department is notifying Washington State corporations of a recent change in the law affecting corporate officers. See RCW 50.04.165. Historically, corporate offers were, by default, exempt from unemployment insurance coverage unless the company specified otherwise. Beginning on January 1, 2009, corporate officers will be covered for unemployment insurance by default unless the company specifies otherwise. For small business owners who may want to specifically elect that their officers not be covered, they must notify the Department of Employment Security of their election, even if their officers were previously not covered. To read the language of the new RCW, click here. To exempt your officers, click here and select "Exempting corporate officers".
I have two clients in trademark disputes regarding the use by another company of an identical or very similar business name and in the same industry. They are on different sides of the fence bu each is facing the same question: Do I proceed with extremely expensive litigation or try to come up with some compromise? Neither wants to proceed to litigation but don't know how to think about a co-existence. One party has suggested a licensing arrangement where a percentage of sales goes to the priority user. Another has suggested something as simple as a website pointer to ensure consumers are taken to the appropriate site. Alternatives also include an agreement between the parties not to move into one another's core business or for one to pay the other to change their brand so as to separate the marks. The question to be answered is whether actual consumer confusion exists or is likely and what do the businesses have to do to alleviate the confusion. There is not one clear answer but usually something that works between the parties. It is important, though, when entering into these agreements to think about the future of the business -- where will the business be in 5 years -- and to ensure the agreement does not limit the business' potential growth by limiting the use of the mark or, worse, by allowing another party to leverage its success and dilute the mark.
Normally in my practice, I do not do litigation work. Over the past year, and more specifically in the past two weeks, though, I have seen very clearly why it costs so much and takes so long... I am working with a client through an appeal with the Board of Industrial Insurance Appeals in the Washington State Department of Labor and Industries. My client has been notified that it is a "successor" to a company that went out of business and owed the Department $25,000. The Department claims my client is a "successor" because it bought a "major part" of the property of the company going out of business. We feel confident that what it purchased did not constitute a "major part" but under the Department's rules, it must prove that it did not do so. In preparing to defend itself -- for a case that is really very straightforward with limited discovery, witnesses, and case law -- my client will likely incur $15,000 in legal fees. When I've been given a number like this from litigators in the past, it was difficult to understand why -- and now I truly understand it. From preparing the hearing memorandum to preparing witnesses (2) and evidence to attending the hearing, the time involved is exceptional. In my years of practice, I have had some difficult disputes and complex negotiations, but nothing that took the time, effort and energy that preparing for this did. Furthermore, it provides clarity as to why this particular successorship statute has no case law -- it's not worth it for most companies to fight it, giving the Department significant leverage in collecting from parties that should owe it nothing.
I worked on a merger for a client this spring. They were selling to another company in a deal that appeared almost too good to be true. A few weeks after the deal closed, management changed at the buying company and the buyer began threatening litigation, claiming a failure of my client to disclose all material facts with regard to the transaction. It's important to note that the selling company had a handful of contracts, no employees, and less than a year of operating history. The sellers entered into this agreement trusting that the buying company was acting in good faith and was shocked by the allegations when they arose. There's nothing to the allegations but the buyers want to get out of this deal (which may have been too good to be true for the sellers) and are willing to threaten a long, drawn out litigation with the sellers, whether or not they have any grounds to support their allegations. My client believes it likely would win any litigation but, again, the cost of doing so is outrageous. The parties are now trying to figure out how to back out of the deal as litigation is not practical for any of the parties.
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