Be Careful When Signing Contracts for a New Company - 8/07
Buy-Sell Agreements - 8/07
A Common Mistake Can Cost You Your Commercial Lease - 8/07

BE CAREFUL WHEN SIGNING CONTRACTS FOR A NEW COMPANY
by Attorney William A. Abbott - August, 2007

Suppose you are starting a new business venture. Maybe it is just a single real estate deal, or maybe it is a regular operating business. In either case, you will need to sign some contracts to get the venture going. Perhaps you will be buying property or leasing space or maybe ordering supplied and equipment. Whatever it is, you plan to sign all contracts in the company's name to avoid personal liability.

Your intention is to organize the new venture as a corporation or limited liability company. This makes good business sense. Changes in the law over the last few years have made both the general partnership and the limited partnership disfavored for most purposes. A corporation or a limited liability company can furnish protection from personal liability without double taxation or other income tax problems.

So far, so good. There is only one catch. You have to get the organization legally formed before you sign any contracts. If not, you could have exactly the kind of personal liability you were trying to avoid.

Limited liability companies and corporations are not legally formed until the proper papers have been filed with the State. Further, the business is not fully organized until you have taken other steps such as capitalizing the business by placing assets into it in exchange for your ownership interest, appointing officers and directors for corporations, and entering into a signed operating agreement for LLC's-even a one-person LLC. Unless and until this is done, the company will either not exist or will not be fully organized. In most cases, this means that any contracts you sign in the company's name will be your personal responsibility. This is so even if you sign as "John Doe, on behalf of the ABC Corporation," or in some other similar fashion. This personal liability will not terminate later after the company is formed, even if the company expressly assumes the obligation. If the later company fails, you could be left holding the bag for any contracts you signed before the company's legal existence began.

Exception. An exception to the general rule is that you can expressly provide otherwise in the contract. For example, you can put in a provision saying that the contract is being signed on behalf of a company to be formed and that after it has been formed and has adopted the contract, the signer will be released from personal liability. In some cases, it is also possible to escape liability if it can be shown that both parties to the contract intended the signer to be released after the company was formed-but this is difficult to prove unless it is expressly stated in the contract and should not be relied upon.

Conclusion. If you are signing a contract on behalf of a new company, make sure the company has been validly and legally formed. If you know it has not yet been formed or are not sure, put a provision in the contract stating that you are signing on behalf of a company "to be formed". Also, state that as soon as it has been formed and has adopted the contract, you are released from all further personal liability.

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BUY-SELL AGREEMENTS
Downloadable PDF Guide prepared by Attorney Mark H. T. Fuhrman - August, 2007

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A COMMON MISTAKE CAN COST YOU YOUR COMMERCIAL LEASE
by Attorney William A. Abbott - August, 2007

You have signed the lease and moved into your new space. You got a great deal, of course, but the move was still expensive. Upgraded tenant improvements, moving expenses, lost productivity-all these things take their toll in time, money and energy. At least you will not have to move again for some years.

Or will you?

Unfortunately, many tenants neglect to get one thing that will protect their lease if their landlord gets into financial trouble-a non-disturbance and attornment agreement (a/k/a subordination agreement). This is a short agreement signed by the project's lender saying that the lender will honor your lease if it forecloses its mortgage. This is the "non-disturbance" part of the agreement. The tenant agrees, in turn, to accept the lender as the landlord and to pay the rent directly to it. This is the "attornment" part of the agreement. (This is not required if you lease predates the landlord's mortgage.)

Without such an agreement, the lender does not have to honor your lease if it forecloses. This is because the lender's encumbrances existed prior to your lease, and when the lender forecloses, all junior interests, including your lease, are wiped out.

A similar situation occurs where the project is on a long-term ground lease. If the ground lease is terminated, your lease also terminates unless you have a non-disturbance agreement.

After a foreclosure or ground lease termination occurs, the lender or lessor may offer you a new lease to let you stay on the same terms. Or, he/she may demand more rent, or may even force you to leave if it has other plans for the space. It is up to the lender or lessor and he/she can be expected to act for their own advantage, not yours.

The Lesson. If you are leasing space on a long-term lease-whether it be an office, store warehouse or industrial space-always require the landlord to deliver to you a non-disturbance and attornment agreement executed by the project's lender or ground lessor.

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DISCLAIMER: Information contained on this page, any links to it or documents that may be downloaded from it are intended to provide the reader with general educational information only. Such information is not intended to provide legal advice or opinion relative to specific matters or fact situations. Changes in the law may affect the contents of such information. Readers should not make decisions based on this information alone without first consulting with their attorney.