When you have a new landlord

Recently I read an article about a shopping center and change.

A shopping center has existed at this particular spot for at least forty years. I used to live close to this center and shopped there often. Over the years the center became old; the stores that were there closed and nothing reopened. The center was slowly wasting away.

New developers bought the center, tore down the existing buildings and constructed a new “village” of up-scale shops and restaurants. Tenants came back. New leases were signed.

I doubt that any of the new tenants were concerned about whether moving to this vibrant new center was a move they would later regret. Customers would come to the restaurants and while waiting for a table to become available would wander the village and spend money in the specialty shops. The original developers sold the center to a new entity and things changed. The new owners weren’t responsive to the tenants. Common Area Maintenance or “CAM” charges that were part of every tenants lease suddenly soared, increasing the cost of rent. Anyone who had a lease term ending but who had not built in renewal options at a specific rental rate found demands for much higher rent.

There are three things that these businesses could have done that could blunt these changes. All of them required negotiation before they signed their current leases and in most cases that means having a lawyer review the lease and ask for these changes. The question is how many of them did that? How many thought, the only thing I’m interested in is how much rent do I have to pay right now? I don’t need a lawyer to find that out.

What could they have done?

Have current CAM charges set out specifically and have increases limited.

Have options for additional lease periods with specific rent for each extension to prevent massive rent increases.

Negotiate a buy-out clause which states that for a payment of a fee (e.g. three months’ rent) they can get out of the lease.

Why would the landlord agree to this? Because the landlord is trying to rent the property and wants it filled with particular types of businesses. Like anyone else, the landlord really doesn’t believe that these problems will ever come up so why not agree to these clauses.

The money you spend to have the lease reviewed will be a mere fraction of the money you will save if you need these provisions. The tenants in the center in the news article didn’t think they would need these clauses but now they do and hopefully they have them to fall back on.

Don’t assume anything

I just talked with a client who has an unoccupied building that he is currently trying to sell. With the recent cold snap, his pipes froze and burst. He previously had insurance coverage which covered a similar claim (even though the premises was closed and was not being used at the time). He changed insurance to save money on his premium, for what he understood was identical coverage. Turns out that was an incorrect assumption. The same claim is not covered under his new policy and to make it worse, he was specifically notified, in writing, that the specific coverage was not included. Unfortunately, this is not a rare occurrence. It is an example of a busy small business owner who is focused on providing the service that brings in his income and not so much on details like reading a new policy to see if there is a change in coverage and making the informed decision that I will or will not save money on the premium and accept the risk of not having coverage. He “assumed” he had the same coverage and didn’t have time or the desire to wade through the policy and compare coverages. He received a notice but considered it nothing he really needed to take the time to read or question.

If you don’t have time to read the policy or you don’t understand what it says, ask your agent or consult an attorney. If you already have the policy, read it now. If there is something in it that causes a problem, change it or cancel it now and get what you need, before your “pipes burst.” Your unearned premiums will usually be refunded. Don’t assume anything.

Conduct a year-end review of your business

October is Fire Prevention Month which generates a lot of public service announcements to change the batteries in your smoke detectors to prevent fire emergencies. October is also Breast Cancer Awareness and February is American Heart Month with reminders to get check-ups and to take better care of health. There are a lot of articles and news segments when it is tax time to tell you what all you need to prepare your taxes and make possible changes to reduce your taxes in the coming year. Very little is written on what you, the small business owner, should do to make sure your business remains is compliant with legal issues such as filing your annual reports with your Kentucky Secretary of State. Do you have contracts that might need updating to meet current laws. Have you reviewed contracts you have with suppliers that are going to expire. How about your lease? Do you need to give your landlord notice that you want to exercise your options. Let me share various items that a small business owner should review to make sure their business remains in good working order.

Kentucky requires two things each year for every corporation and limited liability company doing business in the state. Both are relatively simple and both will cost you if you don’t file them on time.

First, every such entity must file an annual tax return and must pay a “franchise tax.” You must pay the franchise tax whether your entity makes money or not and even if it is not being used to operate or own and active business at the time. The franchise tax is the fee the state charges for the privilege of maintaining a corporation or limited liability entity in the state. The failure to file and pay this tax will result in penalties and interest.

Secondly, every such entity must file an annual report with the Secretary of State, providing current information about the entity. These must be filed by July 1 and the filing fee is $15. Filing after July 1 will result in an increased fee. Not filing by September 1 will result in the entity being administratively dissolved by the Secretary of State. In other words, it ceases to exist and so does the liability shield for owners that the entity provides. While the business can be reinstated it is an involved process that requires getting clearances from the Kentucky Revenue Cabinet indicating that all returns have been filed and taxes paid. In addition, there is a $100 reinstatement fee.

Each year a card is mailed to the entity, reminding it of the need to file and providing simple ways to do so (including on line). Act as soon as you get this card but don’t rely solely upon being reminded by the Secretary of State’s office. Things happen. Most often people get it but think it is junk mail and they ignore it or the office address changes and the Secretary of State has not been notified of the change. It is best to put a reminder on your calendar for May 1 that the annual report is due.

You don’t need a lawyer until you have a legal problem

It is a waste of good money to pay for a lawyer unless you have a problem. Seems like that makes a lot of sense. Same philosophy applies to “don’t see a doctor until you are really sick” and “don’t do any preventative maintenance on a machine until it breaks down.” Unless of course by the time you consider yourself sick, the disease is now at a stage when it is un-treatable or the machine now needs to be replaced because proper regular maintenance wasn’t done.

Most businesses that don’t have in house lawyers just can’t justify spending money for legal advice unless they really have to. They just don’t realize when that is until it is too late.

For example, Mr. or Ms. Business Owner is going to open another location in a shopping center. He or She has signed and negotiated leases in the past. No need to pay money to a lawyer who is going to charge $300-$500/hour to tell you what you already know. It is a shopping center lease, multiple pages, prepared for the landlord by some other lawyer. It is standard. Everyone in the shopping center signs it. All that matters is what the rental rate is and you know how to negotiate that. The problem is that you may be avoiding spending money now to avoid problems in the future that will cost a lot more later to solve (if they are not already un-solvable at that point).

First of all, leases (like all form contracts presented to business owners) can always be changed. Even though the landlord may have a standard contract the landlord will usually change it to get a good tenant. The landlord is in the business of keeping his rental income coming. The form lease they use is written with every possible aspect being in the landlord’s favor. The time to get the landlord to take out some of the one-sided nature of his form contract is in the beginning when the landlord’s main concern is renting the space to a good tenant.

There are many things that the normal business owner will not even think about at this stage. Experienced lawyers will know from experience that these matters need to be addressed now. How is the CAM charge calculated? Are you paying for the property managers outrageous flat overhead mark-up? What happens if the shopping center remodels or expands? What effect will it have on your business? Will you lose traffic flow, close in parking and/or visibility? Does the landlord have the right to make changes in the center that can cause these problems? Can you get out of the lease if this happens? Lets say you have done your homework and think that this is the best location for your business? What if you are wrong? Did you get an escape clause that allows you to reasonably buy out your lease if you need to? Is the landlord restricted from renting to a competing business in your own center? Who is responsible for repair and particularly replacement of major systems like HVAC, sprinkler systems, electrical, exhaust systems? And this is not a even a complete list.

Companies with in house counsel can have input at every stage of this process. Smaller companies who take advantage of services provided by My Corporate Counsel can too.

What you don’t know can hurt you.