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Friday, December 20, 2019

What are the Ways to Get Out of a Commercial Lease?

You found the perfect location for your business, retail store or office, and you are ready to sign the lease!  Unlike residential leases, which usually have a 1-year term, a commercial lease can be much longer, typically 5-10 years. Before signing a commercial lease, a business tenant should consider all the ways to get out of the lease should something go wrong with the business or the location.   

Commercial Tenant Exit Strategies

The first way to get out of a commercial lease is to simply walk away.  Close your doors and deal with the landlord. The landlord will keep your security deposit and, if you provided a personal guaranty, the landlord may go after the business and personal assets to recover the unpaid rent or damages.  

A business tenant should carefully review the lease to find out if the tenant is liable for the entire term of the lease (called a “rent acceleration” provision) or if the tenant is responsible for the balance of the lease until re-rented to a different tenant at the same or higher rent.  

It is also necessary to review the lease and the state specific law on the landlord’s duty to mitigate damages.  This duty requires a landlord to actively try to find a replacement tenant to “mitigate” the landlord’s damages. In states that do not impose such a duty (e.g. New York), the landlord can simply sit on the empty property and make the old tenant pay.  

Another exit strategy in a commercial lease can be found in the assignment and sublease provision. If the business tenant wants out of its commercial lease, it may assign the entire space for the entire term of the lease to an assignee via an assignment agreement.  Alternatively, a business tenant could sublease a portion of the space (or the entire space) for a portion of the term (which could be the term less one day via the sublease provision).  

Both an assignment and a sublease will likely require landlord’s review of the proposed assignment or sublease agreement, a review of the assignee’s or sublesee’s financials and landlord’s reasonable consent to the transfer.  The exit strategy of an assignment may provide for a full release of the business tenant’s obligations as well as release the original guarantor.  With a sublease, however, the business tenant remains on the hook for the lease if the subtenant doesn’t pay rent or breaches the lease in some way.  For these reasons, an assignment is a more effective exit then a sublease.  

Finally, another exit strategy is to negotiate a buy out. If real estate market rents are on the upswing, the landlord may be willing to let a tenant pay a lump sum payment to be released from the lease. This leaves the landlord with vacant space to rent to a new business tenant at a higher rent.  A win-win for both parties. 

In the end, a business tenant should carefully review the exit strategies with an attorney before signing a commercial lease agreement.


Friday, December 13, 2019

What is a "Good Guy" Guaranty?

A commercial landlord will want protections in the event that the tenant fails to pay the rent or otherwise breaches the lease. A landlord can obtain such protection by reviewing a tenant’s financials and requiring a security deposit in an amount that provides adequate assurances.

Another way a landlord can get protection is to request a guaranty from another individual or entity that is not the tenant under the lease.  Generally, there are three types of guaranties available under a commercial lease:

  1. Full payment and performance
  2. Full payment only (monetary only and no lease performance obligations)
  3. “Good Guy” Guaranty, commonly used in the New York market (sometimes also referred to as a “Good Gal” Guaranty)

Read more . . .


Friday, December 6, 2019

What is a Mechanic's Lean on my Real Property?

The law recognizes many types of liens on Real Property.  A lien is a claim or a means for enforcing the obligations of the owner of real property to pay for it.  Examples of liens placed on property include:

  • A judgment lien placed on real property because a judgment issued by a court was not paid
  • A tax lien on real property for the failure to pay to real estate taxes
  • A brokerage lien placed on the real property for failure to pay a broker a commission 
  • A mechanic’s lien which is a claim placed on real property by a party who provided labor or materials to improve the property and was not paid.   

Read more . . .


Friday, November 29, 2019

An Overview of Debt Collection for Small Business

For many small businesses, getting the sale is just the first step in the process. Many small businesses rely on extending credit to the purchasers in business to business transactions. As a business with many transactions, purchasing on credit from a seller can be ideal as processes are streamlined: purchase as necessary and then making payments within a set period of time. Given the thin cash reserves for many small businesses, having the flexibility to pay at a later date is necessary due to periodic cash flows. All in all, this system of seller-financed credit (the seller not requiring payment at the time of the sale) allows small businesses to flourish.

However, despite the agreement to pay, the purchaser may not always make good on the agreement, and as the seller providing the purchaser’s credit, you may be stuck with attempting to collect on that debt. The failure of the debtor to pay the bill can result from a few possibilities. First, the debtor could have simply forgotten to pay the bill in an administrative oversight. Second, the debtor could be illiquid or have insufficient cash on hand to pay the bill. Third, the debtor could be refusing to pay due to an issue such as nonconformity of goods (the goods received weren’t what they ordered). Finally, the debtor could be refusing to pay in bad faith in hope that you as the creditor will not attempt to collect on the debt, or would be willing to collect at a reduced amount. Regardless of which of the above is the case, you need to act to resolve the outstanding debt.


Read more . . .


Friday, November 15, 2019

What is an SNDA and Why is my Landlord's Lender asking me to Sign it?

As a condition of a mortgage loan, a lender may require that the borrower (or landlord) obtain a signed Subordination, Non-Disturbance and Attornment Agreement (SNDA) from the tenants. A SNDA is a tri-party agreement between the lender (the mortgage), the borrower who uses the proceeds to purchase the property (the landlord) and the tenant. 

A SNDA will reference the lease, lease parties and execution date.  The purpose of the Agreement is the provide that the lease (and any modifications to the lease) will be “subject to” and “subordinate” to the mortgage lien.  This is the “S” in SNDA.  In exchange for the tenant’s agreement to remain behind the lender’s rights to the property, the lender agrees to give tenant protections in the event of a foreclosure. 

A foreclosure of the property would occur if the borrower/landlord failed to pay its mortgage or breached the loan documents and lender could take possession of the property.   In this situation, the ender agrees to leave the tenants in possession and not disturb the tenancy, provided that they have not breached the lease.  The covenant of non–disturbance is the “ND” in the SNDA.  


Read more . . .


Friday, November 1, 2019

3 Must-Ask Questions If You Are Considering Buying A Business

If you are considering buying a business, you need to ask several questions first. Getting the right information will be integral to determining whether this is a smart business decision for you. It will also help you decide how to best carry on the business after you have purchased it. You should ask the following questions before you commit to buying a company.

1. Do the financials seem sound?

The books are going to be very important if you are considering buying any type of business. As a buyer, you should be asking for bank statements and profit and loss statements. You may also want to see any contracts with employees, suppliers, or lessors. Ongoing deals with advertisers should also be examined.

Looking at the financials for specific product areas or by quarter can also be helpful. Smaller businesses may not have as detailed of records as you would like, but taking a look at what they have can be helpful. If they don’t have any records at all or the records consist of receipts in a shoebox, that can indicate a problem. Tax records may be a helpful place to start if the seller doesn’t have anything else.


Read more . . .


Friday, October 25, 2019

What is the Difference Between a Commercial Lease and a License to Occupy Business Space?

When one party agrees to let another party use its business space, they must agree on the terms of use, the fee, the term and how the occupancy will come to an end.  This is referred to as a license to occupy space, which is different from a commercial lease.  A commercial lease is an agreement between a landlord/lessor and tenant/lessee to lease real property.  The landlord-tenant relationship creates a leasehold interest.  A license to occupy real property, on the other hand, is merely a privilege to use the real property and no property estate is created.  

A license is generally revocable by either party upon notice, at will – with or without cause and is usually not assignable the way a lease can be assigned to another entity with the landlord’s consent.  A license to occupy is generally a personal right of the party to the license. The tenant and landlord have a relationship governed by the terms of the lease, and all the rights and remedies available under landlord tenant laws (including the eviction laws), whereas the laws of contract govern a licensee and licensor.  

Generally, a license is for a shorter term than a lease.  The parties may prefer a license agreement for an event to be held in business space for a seasonal duration (such as a Halloween store or a Christmas shop) or as a “pop up store” (which is test run to see if the business location works).  Also, in the retail context, a license for space in a larger department store is often called a “concession.” An example of a concession is a makeup counter in a retail outlet. 

In the office context, a landlord may give a tenant a license to occupy space in the building while the tenant’s permanent leased space is being constructed/renovated, sometimes called “swing space.”  Another example of a license of space is when a company licenses a conference room for an industry conference event to another business entity which event will may be occurring over only a few days.  The parties do not need to enter into a full blown lease with long provisions for such a short duration.  

Both the license and lease agreements will, among other things, list the parties, a description of the space to be occupied, with a floor plan exhibit if applicable, the term (commencement date to expiration date), the fee (called rent or license fee) and the insurance to be carried by both parties. Note:  A license to use space for a one time event where food and drink will be served should include appropriate liquor coverage under the insurance coverage. 

The Bottom Line

A license offers more flexibility for parties wishing to occupy space for shorter durations, with a simpler form of agreement.  A lawyer can assist in reviewing whether a license or a lease is most appropriate in a given context. 


Friday, October 18, 2019

Considerations When Selling Your Business

Finding yourself in a position to sell your business is a monumental achievement. Establishing a business is hard work, and preparing to sell your business is no different. There are many reasons to sell your business: you may be looking to retire, take a less involved role, resolve an ownership dispute, or perhaps your business is now struggling and you are looking for a buyer to try to turn it around. Regardless of the reason that you’re selling, there are some key considerations that you need to be aware of.

Establishing a Strong Team

Selling a small business has many moving parts that will be discussed further below. As a result, it is essential that you establish a strong team to help you through the sale. The three team members that you will want to identify early on are an attorney well-versed in the sale of a company, an appraiser who can accurately value the business, and potentially a broker who will work hard to identify potential buyers. Your choice on these team members, and whether to include all three, will depend upon the complexity of the business and its potential valuation.

Timing

Timing the sale of your business is crucial, as is identifying that you intend to sell the business well in advance. Ideally, you will want to have identified an intent to sell two years prior to the anticipated sale date. By beginning the process two years ahead, you can ensure that you’ve established a strong team that you trust that will help you through the process. Additionally, there is tremendous due diligence that will need to be completed to value the business and ensure all legalities are sorted.

However, while planning two years in advance is ideal, it isn’t always possible. When an unforeseen event occurs that forces you to sell the business sooner than anticipated, you will still follow the same process but will do so on a more compressed timeline.

Valuing the Business

Your business appraiser should work diligently with you to ensure that the business is accurately valued. To value the business, the appraiser will analyze market conditions, the business’ operating history, and the business’ future potential. Ultimately, the appraiser will present a formal valuation of the business that can then be utilized when pricing the business for sale.

Using a Broker or Selling Yourself

A final consideration when selling your business is whether you want to sell the business yourself or go through a broker. The decision to use a broker should depend on a number of factors including your availability, who you intend to sell to, and the timeline for which you need to sell. If you’re selling to someone you know, then a broker will likely not be necessary as a knowledgeable business attorney will be able to handle the sale. However, if you’re selling on the open market, then a broker may be ideal as he or she is highly experienced in selling small businesses and will know how to command the highest price in the shortest time possible.


Friday, October 4, 2019

What is Title Insurance?

A new home is often the biggest financial investment for many individuals and families. With the down payment and all the costs of closing on a home, a buyer may seek to cut costs, however, title insurance is not the place to do this. Most consumers are familiar with health insurance and car insurance, but title insurance can be a bit confusing.

A Primer of Title Insurance

When a buyer purchases real property, the seller is conveying (i.e. transferring) title or legal ownership.  Ownership of real property can be held by a person, a husband and wife, two or more individuals or by a corporate entity, partnership or LLC.   A title company offers insurance that the title transferred is good and without defects. The amount of insurance taken is based on the value of the real property and is paid in one lump sum at closing.  It is not a continuing monthly payment like a mortgage. 

There are two types of title insurance policies -- a homeowner’s policy and a lender’s policy.  A bank will not want to give a mortgage to a borrower/buyer without the lender’s policy.  The bank wants to protect its interest in the real property, as does the homeowner. 

The buyer customarily orders and pays for both the homeowner’s policy and the lender’s policy.  The policy will vary depending on the type of ownership – condominium, cooperative, freestanding house or commercial property.  A title company will issue the title policy and provide the insurance. 

The policy will contain an abstract (i.e. summary) of the chain of title/transfers and will accurately describe the property with a legal description (referred to as “Metes and Bounds) that is more detailed than merely the address. The policy will also contain a list of any liens on the property such as tax liens or mechanic’s liens (for unpaid work performed by contractors), as well as a list of any “encumbrances” such as other mortgages.

A buyer wants to obtain “clear title” without any legal doubts or possible litigation.  A title company will provide some “exclusions” or items it will not insure against.  Examples of exceptions are an easement or right of way over the property or a mortgage by the prior owner (which should be paid off or assumed before transferring the property). 

Title insurance is also designed to protect against fraud in the transfer.  The title examiner will look for long lost heirs or an ex-spouse who could claim rights to the real property being transferred.  The title policy will run bankruptcy and Patriot Act searches on the buyer and the seller to ensure the transfer is not in violation of any bankruptcy or anti-terrorism laws.  The title company may also run environmental searches to determine if the property is located in a flood or tideland zone, which may affect its insurability.

When there is a tenant occupying the real property, a recording of the parties and a memorandum of lease is recorded in the county clerk’s records where the property is located. This provides notice of the tenancy to the potential buyer, and is listed on the title searches.

The Bottom Line

Title insurance is a critical component of buying a home. As with any financial purchase, selecting a reputable title company is key as is shopping around for competitive prices.  American Land Title Association otherwise known as “ALTA” is an industry organization that attempts keeps high standards for title insurance companies.  Ultimately it is a valuable tool that will provide you with peace of mind when making such a large financial investment.

 


Friday, September 27, 2019

What Is A Joint Venture Agreement ("JV")?

There are several types of business organizations that are recognized by the law as a legal entity. This includes an individual (a natural person or individual proprietorship), corporation, partnership, limited liability partnership, joint venture or any other form of business organization. 

A joint venture is an agreement between two or more entities to combine their property and/or efforts for an undertaking and to share the profits and/or losses equally (unless otherwise specified). Each party to a joint venture agreement (a “joint venturer”) contributes to and has control over the business venture.  There must be intent by the parties to associate as joint venturers either by their actions or by a written joint venture agreement.  

A joint venture’s closest entity “cousin” would be a partnership.  The difference is that a joint venture is usually for a single limited purpose whereas a partnership is typically formed for an ongoing enterprise.  A joint venture has a duration that is specified in the agreement, or if not stated, then until the undertaking is completed or no longer possible.  A real estate example would be a joint venture to build a development.  The joint venture would end when the agreement states it ends, when the development is built or when a municipality declared it not permissible to build.

A joint venture agreement should clearly define the scope of the joint venture and what activities are permitted and prohibited.  In addition, a joint venture will have tax implications that should be considered and addressed upfront.  The parties to a joint venture may also agree to confidentiality and non-competition agreements as well.  

An important concern in forming a joint venture is potential liability to third parties.  A lawsuit brought by a third party for damages or personal injury caused by one joint venturer can be imputed on the other participants. For example, joint venturer A could be liable for the negligence of joint venturer B in the undertaking.  

In the context of a real estate transaction, a typical provision found in a commercial lease to protect the landlord and tenant from the possible imputed liability of a joint veture is:

“No Joint Venture.  This Lease shall not be construed to create a partnership, joint venture or similar relationship or arrangement between Landlord and Tenant hereunder.”

The Bottom Line

At the end of the day, a joint venture can be quite an “adventure” and parties to a joint venture agreement should consider the benefits and risks before collaborating resources with the goal of mutual gain. 

 


Friday, September 13, 2019

What You Should Know About A Brokerage Agreement Before You Sell Your House

When engaging a realtor to list a home, the realtor will ask a seller to sign a listing agreement which will detail the broker arrangement and the terms of paying the commission.  You should consult an experienced real estate attorney before you sign a brokerage agreement  

Key Terms of a Real Estate Brokerage Agreement

A brokerage agreement should properly identify the property (by address or block and lot) and the price the home is offered for sale.  Additionally, the agreement should list a term and expiration date. If the house doesn’t sell during this time (usually 6 months or less then a year) the seller may want to engage a new broker to sell the home.  

In any event, a seller should not enter into a brokerage agreement with no end. In addition, there will often be a “grace period” whereby if anyone that the agent showed the property to buys the property within thirty (30) days after the termination of the listing agreement, the agent is entitled to the commission.  The agreement should provide the percentage of commission the listing agent will receive as well as the commission the buyer’s agent will receive. A total commission of 2-6 percent of the sale price is customary and varies from locale to locale.   

An exclusive agency agreement means the realtor is entitled to a commission even if the seller brings the buyer.  In some instances a seller may ask for exclusions to the exclusive agreement, meaning the agent is not paid if a neighbor or relative of the seller’s buys the home after the seller showed the property.  

A seller will want to be clear if the agreement is with a particular agent at a real estate office.  If the seller enters into the agreement without a named agent (i.e. “Christian W. Breyers” of We Sell Homes Realty), anyone in the real estate office who consummates a sale is entitled the listing commission.   

When a listing agent who represents the seller also brings the buyer, that is called a “dual agency” and both parties (Seller and Buyer) must be notified that the agent represents both and that each party should provide written informed consent to any conflict of interest.  The agent’s fiduciary duties of disclosure and undivided loyalty will not be the same in a dual agency. 

The agreement should list the methods the agent will use to market the property, such as internet sites, newspaper listings, and open houses. The agreement should state who pays the expenses of marketing and photographing the property (generally the agent’s expense.)

The Takeaway

A listing agreement to sell a home is an important agreement in a real estate transaction that should be reviewed by your attorney for the foregoing issues.


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