Common areas of commercial leases that cost tenants money

There is no such thing as a standard commercial lease. Still, many tenants are content to sign one without much consideration for its provisions and what it means in terms of their responsibilities.

“Don’t go into a leasing situation with the intention of just signing a lease,” says Andrew Perry, Esq., a principal at McCarthy, Lebit, Crystal & Liffman. “It’s important to review the terms, especially clauses related to operations, maintenance and repair. Tenants that don’t scrutinize the terms and negotiate for a better deal could get burned by unexpected expenses.”

Smart Business spoke with Perry about how to get the best terms in a commercial lease.

What are the more costly aspects of commercial leases for tenants?
Tenants should first look at the basic rent amount. It’s common for a lease to stipulate that rent will increase annually on a price-per-square-foot basis. That sometimes goes unnoticed before signing and ends up being a surprise later.

Operating expenses that will be passed through to a tenant are always an issue that should be heavily negotiated by a tenant. Landlords generally pass through expenses to their tenants, such as operations and maintenance costs for a building, shopping center or industrial park.

That can simply mean lawn care, snow removal, security, etc. But often, a landlord will include terms in this section to pass on the cost of capital improvements, such as a new roof, new HVAC, other building systems or the repaving of parking lots. These can be a huge financial backbreaker for tenants that hadn’t preplanned for such costs.

Similarly, the maintenance and repair section should be closely scrutinized. Not knowing upfront what your obligations are for maintaining your space during the term and at surrender can also be extremely expensive.

The maintenance and repair section often requires a tenant to repair and replace anything that affects the premises, including repairs and replacements that are a capital expense. Those can become huge dollar items that can sneak up on a tenant if not negotiated before signing.

What should prospective tenants consider before signing a commercial lease?
Tenants with a growing business need a plan to physically accommodate that growth. The business will run into problems if a tenant signs a five-year lease on a 5,000 square-foot space that it outgrows in the second year.

The opposite is also true. It’s common for certain types of businesses (especially restaurants) to spend a lot of money to develop the look of the premises, only to go out of business because they weren’t able to achieve the level of growth needed to offset the investment. Tenants should tie the location and its expenses into the business plan to ensure it’s affordable and aligns with the company’s trajectory.

Often, it’s a tenant that wants a certain amount of changes to the premises before they move in. That can be handled any number of ways. A landlord could offer a dollar amount, called a tenant improvement allowance, to offset renovations, but require approval before any work is begun.

Similarly, the landlord might do the work on a tenant’s behalf up to the allowance amount. In each instance, it is extremely important that the tenant make sure that the cost to do the renovations is tied down upfront, otherwise they could once again be faced with unplanned expenses if the work exceeds budget.

Who can help prospective tenants negotiate the best commercial lease terms?
It’s best to enter negotiations with a three-person team — the tenant, an experienced broker and a knowledgeable attorney.

It is especially helpful if you can find an attorney and broker who specialize in a certain type of real estate sector. For instance, there are brokers who specialize in finding the best location for retailers, while others focus on office buildings or industrial space. They’ll each have a better idea of the incentives, prices, amenities and locations that are best suited for a tenant’s business.

Similarly, a good attorney will know what is reasonable for a particular real estate sector and which areas of the lease can be fine tuned to the tenant’s benefit.

The landlord generally determines what type of lease will be used. But there is negotiating room for tenants that either have clout or a savvy attorney and a good broker.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How to create and execute a family business succession plan

The one maxim that holds true for all business owners is that eventually they will be forced to exit their business — either on their own accord or involuntarily. For many, the next best thing to perpetual ownership is having their children assume control.

However, 80 percent of family businesses don’t transition to the second generation. And of the 20 percent that do succeed, 80 percent of those don’t make it to the third generation. Why is it so hard?

“It’s not only a complicated business transaction, but it’s highly emotional,” says Peter J. Smith, a Member at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke to Smith about the difficulties of family business succession planning and what steps can be taken to improve the likelihood of a successful transition.

Why are success rates for family business succession so low?

Because it’s family and there are so many emotional layers. You have parents coping with the thought of giving up control of the business they spent their entire lives creating and nurturing. For some, it is their entire identity.

The next generation may or may not see eye-to-eye on the future of the business or their place in it. There may be children who aren’t in the business, which must be addressed. And when it’s all done, mom and dad have to make sure the business survives and thrives so it can provide the cash flow they will need in retirement.

What can parents do to make their family business succession plan more likely to succeed?

Plan ahead. A smart business person might plan two to three years out to sell their business, so as to position the business for maximum value and a quick, smooth sale. The same is true for implementing a business succession plan. If possible, they should start planning the transition well in advance.

They also need to start training the next generation to take over. This takes time. They should approach it like they are developing and running a management training program for their children.

What if there isn’t time to adequately prepare or the next generation isn’t ready to take over?

If there isn’t time to adequately prepare, the owners should consider hiring an outside CEO to run the business for a period of time so they can take a step back and plan a transition in the future when everyone is ready. They might also put a board of directors in place that includes non-family members to help guide the business and provide objective advice.

What can the second generation do to make the transition a success?

Be objective and be patient. They need to realize that mom and dad aren’t as dumb as they think, they’re not as smart as they think and running a business is hard. They also need to openly and objectively evaluate what is in the best interest of the business and not necessarily just for them. The kids must understand that everything doesn’t always have to be equal to be fair. There will be certain things that make sense for the business, but don’t put everyone on equal footing. It’s important to realize that this is okay.

What if mom and dad are concerned about treating each of their children fairly and equally?

There are other ways to equalize the treatment of their children using business or non-business assets — through gifting, estate planning, or perhaps the business real estate or a vacation home, for example. They can also set up a trust or an LLC for family members not in the business to receive distributions from the business and/or hold a capital interest in the event the business is ever sold.

What should a business owner do if he or she is thinking about business succession planning?

Put a team together. Talk to your lawyer, accountant and financial advisor. If they’re not experienced in family business succession planning, then find ones who are. The right professionals can make all the difference in the world.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How companies should handle media attention amid criminal allegations

When companies become tied to a criminal investigation, whether or not it or its employees have actually committed a crime, it can be on trial in both the criminal court and the court of public opinion.

Media coverage today is more than just TV, radio and print media. It now includes the internet and is delivered to personal devices through social media, blogs, videos and podcasts moments after news breaks. Also, while many get their news from social media, the accuracy of that source is often questionable. This has changed how companies handle the public relations aspect of a criminal matter.

“Not long ago, the traditional response to media inquiries regarding alleged wrongdoing by a company was ‘no comment,’” says Rob Glickman, Principal and head of the litigation and criminal practice at McCarthy, Lebit, Crystal & Liffman.

“That can no longer be the way most inquiries are handled. Adverse media attention can ruin a business. Even if a company that becomes embroiled in a criminal case is eventually cleared of any wrongdoing, it can still lose in the court of public opinion and be driven out of business.”

Smart Business spoke with Glickman about how companies should handle the media coverage often associated with facing criminal allegations.

What should companies do once they discover they or any of their employees are subject to a criminal investigation?
The moment a company finds out it or one of its employees is the focus of, or is even implicated in, a criminal investigation, a company can’t simply stick its head in the sand and hope it will all go away.

The company should direct its lawyer, if capable, or an outside law firm that has experience to conduct an internal, independent investigation of the charges. That way, if asked, a company can truthfully let the public know that it is confronting the matter head on, which will hopefully keep public confidence in the company.

What’s the best way for companies to handle media attention when they’re tied to real or alleged criminal wrongdoing?
In the absence of media coverage, it could be best to go silent and focus on the defense of the actual investigation and case. When it heats up, however, most often a company should respond to media inquiries. That can happen in a number of ways.

The CEO or defense lawyer doesn’t need to be the person who mounts a public defense. Communications firms are invaluable in these situations, and can be brought in to manage public relations and media statements.

Crisis communication consultants are best equipped to handle adverse media attention, especially if a company is dealing with a government prosecutor who is leveraging the media to generate public pressure. It’s important that the company forms a response that’s ethical and in the best interest of the company. That often requires the tact of a third-party consultant.

Social media during such events can be a shield and a sword. The medium makes it easier to respond to adverse attention, giving the accused a means of fighting back with appropriate force. Still, any public response should be run past the legal and communications teams before being released.

What should companies avoid doing when they’re in this position?
It’s important that the company doesn’t panic and respond hastily or through an employee without obtaining advice from a legal or a crisis communication partner. Companies can go on the offensive to attempt to assuage the adverse media attention, if at all possible, and put the company in a position to defend itself against the allegations. But they should do so carefully and after an appropriate internal investigation into the allegations.

What do companies in this position need most from their legal team?
The attorney managing the case should be an expert in the subject matter of the investigation. He or she needs experience in the minutiae of what’s being investigated.

Adverse media attention doesn’t necessarily mean a company is headed for public disaster. If handled appropriately, it likely won’t be the death knell for the company.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

What you don’t know about realty transfer tax could cost you

Anyone who has purchased real property in Pennsylvania knows that one of the highest costs paid at “closing” is realty transfer tax. In Pennsylvania, this tax is imposed by the Commonwealth and the counties upon the transfer of ownership of title to real estate located in the state, unless certain exceptions apply.

“What many people may not know is that the tax can also apply to the purchase of all or a significant portion of the ownership interests in a corporation, partnership or limited liability company that owns real estate,” says Catherine Marriott, a member of Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Marriott about how realty transfer tax works, how it might apply to other real estate-related transactions, and the importance of hiring professionals to structure the most favorable terms.

How does realty transfer tax work?

The usual scenario is when a property is sold from a buyer to a seller in an arm’s length transaction. Upon the recording of the deed conveying the property, Pennsylvania and the county where the property is located collect a realty transfer tax based on the purchase price for the property. In that scenario, the realty transfer tax paid is equal to 2 percent of the purchase price, with 1 percent paid to the state and 1 percent paid to the county. The exception is Philadelphia, where the county tax is 3.1 percent. Buyers and sellers usually each pay half of the realty transfer tax assessed on the transaction.

Does the realty transfer tax apply to other real estate-related transactions?

Realty transfer tax can apply to certain transactions that involve the sale of all or a significant portion of a company that directly or indirectly owns title to real estate, even though a deed is not recorded in the transaction. If the company meets the definition of a ‘real estate company’ — essentially, a company that is primarily engaged in the business of holding, selling or leasing real estate and has real estate as a significant part of its assets — when all or a significant portion of the ownership interests in the company are sold, realty transfer tax may be imposed.

The rules for determining whether a company is a real estate company are complicated and vary in Pennsylvania and Philadelphia. If the company meets the definition and the transfer of enough of the company is completed, even over a period of years, the company is deemed an ‘acquired real estate company’ and the tax will be due.

How is the tax calculated when a real estate company becomes an acquired real estate company?

In Pennsylvania, the realty transfer tax assessed when a real estate company becomes an acquired real estate company is based on the computed value of the property. The computed value is the assessed value of the property multiplied by a factor issued by the Pennsylvania Department of Revenue for the county in which the property is located.

In Philadelphia, the realty transfer tax on such a transaction, assuming the sale is made at arm’s length, is based on the consideration paid for the interests in the company. This isn’t always simple to determine as the company may own other assets, and the buyer may pay cash, but may also assume debt of the company or purchase the interests subject to existing debt.

Can realty transfer tax be avoided or minimized?

The provisions of Pennsylvania and Philadelphia law relating to the transfers of interests in real estate companies are complicated. Transactions can be structured to legally avoid or minimize the realty transfer tax implications.

Potential sellers of real property or interests in companies that own real estate should consult with their legal and tax professionals before they commit to any terms in a transaction. Ideally, these professionals will be involved at the earliest possible stage of the transaction to structure the most favorable terms, from a business and tax perspective, before any verbal or written commitments are made.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Conflict resolution program could be used to resolve workplace issues

Restorative justice is a conflict resolution model that has found various applications in the criminal and juvenile justice systems. It focuses on the rehabilitation of offenders through reconciliation with both victims and the community at large.

Susan C. Stone and Kristina W. Supler, principals at McCarthy, Lebit, Crystal & Liffman, are confident this program can also be effectively used to address harm and conflict in the workplace.

“This tool provides bandwidth to address employee misconduct, ethical challenges, harassment and other divisive workplace issues,” Supler says. “One of the most important things that you can have in a business, or in any type of formal group setting, is an environment where people feel there is an opportunity to be heard. It helps to create a more cohesive workplace culture.”

The challenge that arises when one individual does something that harms another is reaching an outcome that allows everyone who is involved the ability to move forward and go on with their lives.

In a best-case scenario, reconciliation occurs and the parties are able to find a way to remain with the organization, avoiding the costly process to identify and hire new personnel.

“Employee turnover hurts productivity,” Stone says. “Restorative justice offers a means by which relationships can be preserved among employees.”

Smart Business spoke with Supler and Stone about the benefits of using restorative justice to resolve workplace conflicts.

What led you to consider bringing the restorative justice model to the workplace?
In a recent case involving a young woman who filed sexual assault charges against a young man at her university, the woman recognized that returning to school and going through the legal process at the university had the potential to cause her even more pain.

Both sides, the man and the woman, agreed to restorative justice. The accused offender took responsibility for causing the woman harm and they collectively worked out an approach to allow both individuals to co-exist on the campus. With a collective background in employment law and discrimination cases, it made sense to explore whether this program could be used in a business setting.

How does restorative justice compare to traditional conflict resolution?
Restorative justice is a way for employers to engage in risk management. By creating a safe forum where an employee can be heard without fear of workplace retaliation, it levels out any uneven perceptions of power.

This tool also allows the harmed party to express the impact of the harm and what he or she is feeling as a result of the inappropriate conduct. It is a way for the person who caused the harm to have a dialogue about it and gain some understanding for the damage that was caused. This is a way to foster some sense of accountability, attempt to repair the harm and try to rebuild some of the relationship between the two parties involved.

What do companies need to know before they get started?
If a company wishes to make restorative justice part of its culture, it needs to be imbedded in the employee or corporate policy handbook. This gives employers a first step to try to resolve a conflict before deciding whether to terminate an employee. By including it in the handbook, it sets a tone that employees can expect to be heard no matter their status in the company.

It’s also important to note that the most severe conflict often occurs amongst high-level executives who have a difference of opinion in the company’s corporate vision. By embedding restorative justice in the policy handbook, high-level employees understand that they need to work through a process that addresses the conflict rather than lobbying or conducting back-room dialogue with others to get their agenda accomplished. This program is a way to get people on the same page.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How to protect sensitive information in the workplace

Every business, no matter how large or how small, receives private data or information from employees, vendors and customers. It’s the business owner’s responsibility to keep this information private and protected. If private information is leaked or falls into the wrong hands, a business could be subject to major liabilities, penalties and embarrassment. The monetary and reputational costs could be staggering.

“It’s no understatement to say that every business needs to have a plan in place for keeping information safe and secure,” says Matthew Kelly, an intellectual property attorney and certified information privacy professional at Semanoff, Ormsby, Greenberg & Torchia, LLC. “Businesses also need to know what to do in the event of a breach.”

Smart Business spoke with Kelly about some of the ways businesses can protect sensitive information and how to best respond if that information is ever compromised.

How should a business begin developing an information management plan?

The first step is to identify what kind of information the business is receiving and whether there are any industry-specific laws that come into play. For example, the health care industry collects personal health information of patients and is subject to federal laws known as HIPAA and HITECH. There are also specific federal laws that cover the financial services industry, the credit card industry, the telecommunications industry, the marketing industry and laws that cover educational institutions. These laws will outline what is required or prohibited in the collection and use of information specific to the businesses in those industries.

Once the legal requirements are identified, business owners should assess how to best handle sensitive information within their organization in a way that’s cost-effective and administratively efficient. Encrypting data, using a dedicated server, limiting access to certain employees and creating a secure method of disposal of information are just some of the ways that a business can protect the data it collects.

Though much information is stored electronically these days, paper files still exist and should be shredded or burned when the time comes to dispose of them. If a business creates a privacy policy that it communicates to customers, it needs to be sure to live up to that policy.

Are there risks in allowing employees to use their personal devices at work?

Each employee’s device increases the possibility of a data breach if it is lost, stolen or hacked. It also increases the risk of theft or copying of information by employees. To addresses these issues, businesses are increasingly implementing Bring Your Own Device (BYOD) policies.

A good BYOD policy will communicate clearly how an employee’s device is to be used in the workplace and how company data is to be handled on those devices. At a minimum, each device should be password protected so that if it does get lost or stolen, a third party cannot access the data.

Some companies prohibit the taking of photographs at the workplace, especially when dealing with proprietary technology or trade secrets. Employees should also be made aware that any business information stored on those devices is company property, and that such information will be returned to the company or deleted when an employee leaves the company or is terminated.

How should a company proceed if there is a data breach?

Data breaches can be very damaging to a company’s reputation and very embarrassing. No company wants to let down its customers or appear incompetent in the handling of sensitive information. For this reason, most states have adopted laws requiring companies to notify customers, and sometimes law enforcement, as soon as commercially possible when data breaches of a certain nature occur.

For most states, the notification requirements will not be triggered unless there has been a material breach of personal information, such as a person’s name and social security number. Businesses that suspect a breach are expected to act quickly to determine whether a breach has actually occurred, the identity of the customers affected and how to secure the exposed data to prevent further damage.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Open dialogue, respect are key to working well with municipalities

Municipal leaders must evaluate a number of factors when faced with a company pursuing a development project within their borders, says Charles A. Nemer, a Principal at McCarthy, Lebit, Crystal & Liffman. Business leaders who are willing to work with the community to address these details in a constructive fashion demonstrate a level of respect that can often help it move forward more quickly.

“When a business is looking to expand, it has typically studied the situation and crafted a plan that will allow it to capitalize on a particular opportunity,” Nemer says. “This type of project, however, is also likely to impact the municipality to some degree. Thus, it is imperative that company leadership describe the thought process behind the plan and show what it would mean for the community’s future.”

Smart Business spoke with Nemer about how building a stronger working relationship with municipal leaders can lay the groundwork for cooperation on important projects.

Where do companies run into trouble when undertaking capital improvement projects?
Zoning is the most common point of conflict. When a property/business owner seeks a variance for a particular use that is not permitted under the current zoning ordinances, it sets up a debate between the applicant and the municipality.

On the business side, the company can talk about how the new development will create jobs and therefore, strengthen its own market and industry positions. If the company has been around for a long time, it’s an opportunity for community leaders to reaffirm their commitment to the business. When it’s a new business, it could mean an influx of jobs as well as the chance to diversify the local economy. These are all worthy points for the company to make as it attempts to sell the project.

There is another side of the equation, however. What is the effect on the municipality? What would be the larger consequence of rezoning a particular parcel of land? How would it impact traffic? Does this location have the necessary roads, sewers and water lines to support this plan? How would the new development fit in with the other properties in that part of town?

In addition to physical changes, there are economic considerations when a business wants to build or expand. Tax abatements are desirable for businesses that want to minimize expenses, but they take valuable funding away from schools that rely on tax revenue to operate. What is being offered to ensure the schools are not harmed by this change? The burden is on business leaders to prove the worthiness of their plan and to craft it in such a way that the community benefits as well.

What can a business leader do to help this process along?
Business leaders need to show a willingness to sit down and talk about the details of their plan. Ideally, this is done before any applications for variances are filed with the municipality.

The company should work with its legal counsel to put together a presentation that highlights the benefits that would be realized for both the business and the community if the plan is approved. At the same time, it should not attempt to gloss over points that may be a concern to municipal leaders.

The purpose of the meetings is to discuss these potential hardships and benefits of the project and determine if solutions can be found. Open dialogue is an important part of this effort, as is the ability to see the project from other points of view.

Local government leaders are elected or appointed to represent their constituents, which includes business owners as well as the people who live in the community. Business representatives need to understand this dynamic and be mindful of it as they strive to get their project approved.

What role can legal counsel play in this process?
The company should work with an attorney that has experience in municipal law and can rely on that experience to initiate the dialogue between the business and the municipality. This is not something that will happen quickly. It’s about building relationships and patiently working toward a conclusion that benefits both parties. The company’s approach to this dialogue can go a long way toward determining the ultimate outcome.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

Medical marijuana: Issues surrounding its use in the workplace

Medical marijuana is no longer just an issue for employers in a few states. As marijuana use, both medicinal and recreational, continues to become legally accepted in the U.S., it may ultimately be removed as a Schedule I drug under the Controlled Substances Act.

If and when this occurs, Frank P. Spada, Jr., an attorney with Semanoff Ormsby Greenberg & Torchia, LLC, says employers will have a more difficult task of dealing with medicinal marijuana in the workplace.

“It is almost certain that employers, even in states with laws that don’t require employers to accommodate a medicinal user at work, will face challenges by attorneys who will seek to have the laws interpreted pursuant to these changing social attitudes,” he says.

Smart Business spoke with Spada about medicinal marijuana’s workplace impact.

How does medicinal use of marijuana affect the rights and obligations of employers?

Many of the states, including Pennsylvania, that have enacted medicinal marijuana laws prohibit discrimination against employees based on an individual’s status as a certified user of medical marijuana. Most of these states, including Pennsylvania and New Jersey, protect employers to some degree with provisions in their respective laws that prohibit marijuana use in the workplace. Pennsylvania, for example, does not require employers to accommodate the use of marijuana on the job or ‘when the employee’s conduct falls below the standard of care normally accepted for the position.’ It permits employers to discipline employees who ‘are under the influence’ of medicinal marijuana in the workplace and specifies that employers may prohibit employees from performing certain safety-sensitive positions while under the influence.

New Jersey’s law does not presently require an employer to accommodate medicinal marijuana use in the workplace, but there are two pending legislative proposals that, if ultimately enacted, would limit the adverse action that could be taken against an employee for medical marijuana use before establishing that an employee’s ability to perform the job is impaired.

How can it be established that an employee actually used marijuana in the workplace?

Standard urine tests that are universally used by employers do not establish that an individual is ‘impaired’ by or ‘under the influence’ of tetrahydrocannabinol (THC), the psychoactive chemical in marijuana. A urine test measures, in nanograms, the amount of THC metabolites in the body, which are byproducts produced by the chemical changes in the body to THC after marijuana is smoked or ingested. It does not measure the amount of THC that is in the body. Even if a urine test could identify a level of THC in an individual’s body at the time the test was taken, there is not a universal agreement on what level would constitute impairment. Unlike alcohol, where a blood alcohol concentration of 0.08 percent is considered legal intoxication in every state, there is no such legal limit of THC under federal or state law (The PA law does prohibit a patient from specific jobs when under the influence of more than 10 nanograms of active THC per milliliter of blood in serum). Complicating the matter even further is that the THC metabolites are unlike most drug metabolites, which are water-soluble and can be excreted rapidly from the body. THC metabolites are fat-soluble and exit the body slowly, which can result in a positive test on one day and a negative on the next. Such a situation makes it difficult, if not impossible, to determine through a urinalysis when an employee last smoked or ingested marijuana.

Can employers take action against an employee who has tested positive for marijuana?

The Americans With Disabilities Act does not require an employer to accommodate an employee who is a current user of drugs that are considered illegal under federal law. Therefore, an employer’s reference to the presence of ‘illegal drugs’ in its policy, at present, is still a legitimate basis to take an adverse employment action for a positive drug test for marijuana use. Employers should be careful that their policies do not state that an adverse employment action will be taken if an employee is found to be ‘impaired’ or ‘under the influence’ since establishing impairment or being under the influence cannot presently be determined for marijuana use through a urine test.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

The importance of a prompt response to construction claims

No construction project is perfect. Regardless of how much experience the participants might have, mistakes, deficiencies and disputes happen.

“There is near certitude of flaws and conflict in the construction process,” says John M. Tedder, Shareholder and Director at Sherrard, German & Kelly, P.C., and a member of its Construction Services Group. “The most important aspects, then, are proper planning in the contracting process, and how the parties respond to claim situations when they do indeed occur.”

Smart Business spoke with Tedder about responding to claims in a construction project and mitigating them from the outset.

What is typically the basis for a construction claim?

Regardless of the size or complexity of the project, construction claims tend to fall into three primary categories:

  • Deficiencies in the actual design and/or construction.
  • Payment disputes for base contract sums that are due or any extra/changed work that has been performed.
  • Warranty items/correction of nonconforming work.

What is the best way to respond to a claim?

It is critical to get out in front of any claim that occurs on the project. In many cases, owners and contractors are focused on the task at hand and try to delay dealing with claim issues until a later date. This is the opposite of what should happen. Instead, at the first hint of a problem, the parties to the contract should pause, evaluate their rights and obligations under the relevant contract documents, and seek the advice of counsel to guide their decision-making.

There are often statutory or contractual deadlines and notice provisions that also must be adhered to in order to preserve certain common construction claim rights and defenses. Mechanics’ lien statutes, prompt pay act statutes, bond statutes or forms typically have some form of notice provisions and/or filing deadlines that should be evaluated and complied with so the respective parties do not prejudice their rights to a claim, or their defenses.

What should contractors, in particular, understand about notices?

There are statutes, whether involving mechanics’ liens or surety bonds, that require that certain notices be given or a claim filed within so many days of it arising, or the viability of that claim is jeopardized.

As a general matter with regard to contractors and subcontractors on commercial projects in Pennsylvania, there is a six-month window to file and perfect a lien claim. That starts from the date work is completed and claims filed after that time are invalid.

Lien claimants other than contractors — subcontractors, sub-subcontractors and suppliers to first-tier subcontractors engaged by contractors — must precede this lien claim by a 30-day notice of intent to lien before filing that claim, the filing of which must be ahead of the six-month deadline.

Additionally, the standard form construction contract documents published by the American Institute of Architects contain a number of notice provisions that stipulate the number of days a contractor or owner has to give notice of a claim, condition or issue. Failure to adhere to these contractual notice provisions may result in waiver of a party’s potential claim rights.

What can the parties do from the outset to limit the possibilities of claims?

It is important at the beginning of a project not to rush through the contract negotiation and preparation phase, whether you are an owner, design professional, contractor or subcontractor/supplier. Engaging with legal counsel from the outset as goals are set and before a project starts can help protect each side’s interests during a project and limit exposure to claims.

Still, no perfect construction project has ever been performed or will ever exist. Bank on the fact that problems will arise. To mitigate the effects of these problems, proper planning is needed and that is aided greatly by involving counsel from the start of the contracting process, and thereafter getting counsel involved early on when the prospect of a claim appears on the horizon. At the first sight of a problem, be proactive. Delaying a response almost always results in bigger issues and potential litigation that is more expensive for everyone involved.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Defending your business reputation that is under attack

Businesses have access to many forms of legal restitution when false statements are made that damage their reputation, says Defamation Attorney Christian R. Patno, a Principal at McCarthy, Lebit, Crystal & Liffman.

“As defamation claims become more commonplace online and otherwise, businesses need to proactively take steps to ensure they are prepared to respond,” Patno says. At the same time, businesses also need to make sure they are protected if they are accused of defamation.

“Defamation coverage is available, but not all insurance companies offer it. It is very important that companies review their policies to make sure they have enough coverage for their employees and officers,” he says.

Smart Business spoke with Patno about defamation and how businesses should respond when they believe it has occurred.

What can a business do when false statements are made in the media that damage its reputation?
Defamation is defined as any false statement that hurts someone’s good reputation. Libel is a written falsehood while slander is spoken. If someone is stating an opinion rather than a fact, defamation does not apply.

When a false statement is broadcast on TV or published in a newspaper in Ohio by the media employee, there are statutory rights to demand that a correction be broadcast or published within a short time period. Media outlets that do not provide that corrective action risk statutory penalties.

What are business responses to defamation claims in the non-media arena?
When a potential claim arises, there are two perspectives that should be considered. One is the legal aspect of the case and the other is how the pursuit of the case will affect the business non-legally.

At the claim stage, the defamed business has the ability to negotiate an appropriate settlement to avoid litigation. This might involve a retraction and corrected statement, a cease and desist, as well as financial compensation from an insurance company or the personal assets of the accused if damage has occurred.

If unsuccessful, the claim then moves to litigation, subpoenas get issued, records are opened and the privacy of the business victim and defendant is broken as the process runs its course. This unfortunately may result in information coming out through litigation that the defamed company would prefer to keep confidential.

The ultimate question at each stage that must be asked is whether the gain from litigation is greater than the toll it takes to obtain it. The statute of limitations in Ohio for libel and slander is one year from the date it occurred.

However, if a false statement was published three years ago and is republished, the clock starts again and the entity that republished it would be liable for a defamation claim. In Ohio, compensatory damages for defamation have been capped between $250,000 and $350,000, depending on factors. Past economic damage leading up to trial and post-trial are also considered.

What are some risks that businesses must confront in relation to defamation?
Defamation claims in the business sector often involve a competitor or former employee, and something that is posted online, tweeted or told to the media or the next prospective employer. There could also be a claim where a potential customer is told something about a competitor that exposes that company.

There are also situations where business owners can make statements. The question in these business owner situations becomes whether the defamation was made in a personal capacity, as a business owner or both. It is important to avoid making any statements that could be construed as being untruthful about employees or competitors.

Organizations should train personnel to couch statements in the form of opinion and specifically use the words, ‘In my opinion.’ When talking about former employees, the best advice is to avoid negative statements. If the statement is made in good faith and is not malicious, it is probably safe. Remember, truth is an absolute defense.

Immunities also apply, depending on where the statement is made, who the defamed victim is and the content of the statement. If the statement is made with malice or reckless disregard for the truth, it could create the risk of punitive damages and attorney’s fees.

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