For many companies, intellectual property (IP) – ranging from names and logos to products, websites and beyond – can be their most valuable asset. IP is protectable under federal and state laws to ensure that it will not be copied or used by other people or organizations.
IP can be separated into four main areas: copyrights, trademarks, patents and trade secrets. It is important for a company to not only identify what IP assets they have, but also to protect them, says Robert Andris, a partner at Ropers Majeski Kohn & Bentley PC.
Smart Business spoke to Andris about performing an IP audit to ensure protection from infringement.
Why is it important for a company to clearly identify and safeguard its IP?
Each one of the forms of IP is a valuable asset in and of itself. The use of illicit IP not only deprives the true owner of a sale, if the fake goods are of lower quality than the original, it can ruin or at least tarnish the image of the IP’s true owner. In some situations, when a business allows an individual or company to infringe on or use its IP for an extended period of time without contesting that use, the first owner can lose its rights to that IP.
In order to maximize the value of IP, businesses should take the steps to register trademarks or obtain patents from the U.S. Patent and Trademark Office. Similarly, the value of any copyrighted material can be maximized by registering it with the U.S. Copyright Office. Trade secrets are not registerable, and are generally governed more by state laws.
If a business or individual starts copying a business’s software, artwork, photographs or blueprints, the business who rightfully owns the IP can’t recover certain forms of damages unless and until it files a copyright registration. To protect a company’s IP to the greatest extent possible, proceeding forward with the registration process is critical. It increases the value to the company and discourages others from infringing. To further protect IP, many companies implement a protocol of performing an IP audit on a regular basis, usually every year or every two years depending on the business.
What is an IP audit, and what steps are involved?
Audits are designed to identify and determine the status of as much of a company’s IP as possible. What this generally entails is company representatives in various areas of the business sitting down with an IP attorney to identify what advertising has gone on in the past few years, what names and logos the company has been using and what products the company has been putting out on the market over a given period of time. Further, the process involves discussing whether or not there has been any attempt to obtain IP protection for names or products used, and what products in the works contain parts that are protectable IP.
For example, if a business has a base software program that it is selling but customizes for various customers, all the variations of the software should be copyrighted separately. Once an initial audit is performed to identify all the various company assets that are protectable under the IP laws, then subsequent audits become simply a matter of updating what has already been done and finding out whether the company has moved into any additional areas.
What if a business waits too long between audits?
If a business waits until after the infringement takes place in order to register its IP, it will oftentimes significantly lessen the exposure of potential harm that could befall the infringer. If a business or individual causes extensive damage for years before the rightful owner of the IP in question registers a copyright, then that owner will not be able to recover what are known as statutory damages that can range in the area of hundreds of thousands of dollars until the date that the registration is actually issued by the copyright office. An infringer still could face some exposure for actual damages if their causation can be proven with reasonable certainty, but significant power is lost in a cease-and-desist letter that a company might send to a potential infringer. If the trademark registration, copyright registration, or the patent is in existence, it will cause a potential infringer to pause and consider whether it wants to continue that business practice or discontinue it immediately until the dispute is resolved.
How can a company educate its employees about IP?
Most employment agreements have a provision in them that provides that all intellectual property generated by an employee is the property of the company. Some companies will not only set up protocols for employees, but also put in place incentives for individuals to come forward with patentable inventions. A best practice for companies is to try to gain trademark rights for a product or service before going ahead and placing a name or logo on it. Savvy companies will want to perform an IP audit to investigate whether or not anyone else has registered a name or whether anyone else is using a name that is desired.
Robert Andris is a partner with Ropers Majeski Kohn & Bentley PC. Contact him at firstname.lastname@example.org or (650)780-1634.
No business owner starts each day thinking that his or her company will be sued. Preparing to avoid a lawsuit isn’t on most owners’ to-do lists, but it’s a risk that should garner their attention — a reality of running a business is that it’s always a potential target.
“The statistics say that about 70 percent of all businesses in the United States find themselves engaged in litigation every 10 years,” says Richard L. Charnley, a partner at Ropers Majeski Kohn & Bentley PC.
Smart Business asked Charnley for tips on what to do if a company is sued and how a company can be prepared by taking appropriate preventive measures.
What are common reasons that a business may be sued?
Commonly, businesses make the mistake of not having well-drafted employee handbooks or a set of company guidelines regarding Internet usage. Problems occur when companies use items off the Internet without getting permission. Companies become involved as defendants of litigation for using someone else’s artwork or logo and violating the intellectual property rights that belong to third parties. It’s very difficult for companies to manage the issue because their employees, looking to come up with a new design or competitive edge, regularly use the Internet for inspiration. Management relies on the employee’s ‘new concept,’ runs with it and somewhat innocently broadcasts it to the public. Then, suddenly, the owner of the original art files suit against the company for violating a trademark or infringing upon a copyright. Well-drafted handbooks and guidelines addressing Internet use can help businesses to avoid this.
What steps can a company take to avoid lawsuits, or make litigation easier should it occur?
Sometimes when a claim arises, there is a tendency to make light of it or to not deal with it straight away. Many lawsuits could probably be avoided if someone simply called the offended party, admitted to making a mistake, apologized and offered to discontinue the offending practice. It makes a difference to have someone in the chain of command in the company — for example, the president — make the call. People may file lawsuits because they think of companies as just being big nameless entities. Picking up the phone and calling someone who has a claim or a pending claim could eliminate the problem. Don’t lawyer up right away and try to keep it on a personal level, but scripting the message with input from counsel is advised as long as the message is not too ‘legalistic.’
When preparing for an anticipated lawsuit, business owners need to be aware that the current ‘big issue’ is electronic discovery. In any modern company, there are internal e-mails, people going on the Internet and a lot of outside e-mails coming through. There is a disturbing tendency for e-mail, especially inside a company, to be casual and inappropriate. But, regardless of content or source, almost all e-traffic is saved somewhere and its public release can be damaging and embarrassing. When a business is looking at a claim, a memo should go out to everyone that could possibly be included in the e-mail or e-traffic chain simply reminding them that everything that ends up in the e-mail rotation can eventually be discoverable. Businesses should make sure that all of their electronic data and electronic information is properly secured and not destroyed. A company can face serious financial sanctions for deleting electronically stored information.
What should a company do if it is being sued?
Lock down the house — Take charge of all the electronic data, the e-mail, the voicemail, anything that can be stored on a computer. Make an assumption that it’s going to end up being discovered and reviewed by an opponent. And, once again, advise everyone that all e-mail and computer generated documents can be obtained by the ‘other side.’
Tender the claim — One thing to keep in mind is tendering the lawsuit to the business’s insurance company. Insurance policies oftentimes cover a variety of risks that executives may not understand or may not recognize. Risk managers understand what is in an insurance policy and what is covered, but not all companies employ risk management professionals. Insurance is an old business. There are all sorts of insurance companies and all sorts of policies, and insurance language is often difficult to interpret. As a result, on first impression, some people assume they are not covered for a particular claim. It’s important to tender to every conceivable policy in order to potentially save hundreds of thousands of dollars in attorneys’ fees.
Horses for courses — Really consider the choice of lawyers and conflicts of interest. There is a tendency for a defendant business owner to pick up the phone and call a trusted business lawyer and send the case to the ‘go-to firm.’ But, instead of immediately sending the case to the business lawyer, a better approach is to meet with that lawyer to explain the particulars of the case. A good business lawyer will know when it is important to bring in a litigator, and he or she should be able to provide a referral to the right lawyer for the case. An important consideration here is the impact of ‘hometown advantage’ — the benefit of retaining local counsel that speak the language of the people and judges in the area.
Benefits of quick disposition — Early mediation is an option that is too often overlooked. Some lawyers don’t like the risks of early mediation. For example, in the first 30 days after you’ve been sued, a defendant really may not know much about the other person’s case. The concern here is that mediating or settling too soon may result in the defendant giving away too much money. Oftentimes, however, attorneys’ fees and an untold amount of time can add up to more than what either side would have spent with early mediation. There are ways to set up an early mediation to try to get a case settled and still protect the business’s interests. The reality is that every case will eventually be sent to mediation before moving to trial. For business owners and management, why not explore settlement early, take a shot at resolving the dispute and get back to running a successful company free from the burdens of litigation?
Richard Charnley is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2000 or email@example.com.
Establishing a foreign subsidiary may have lucrative business advantages, but if you’ve decided to pursue this strategy, it’s important to stay informed, plan ahead and follow proper compliance with both U.S. and international requirements. Failing to do so can result in undesired consequences and potential IRS penalties.
To ensure proper compliance domestically and abroad, engage a solid group of advisers in the initial planning stages, says Sonia Agee, partner at Ropers Majeski Kohn & Bentley PC.
“It is critical to have the right team in place,” says Agee. “Generally speaking, that team consists of a U.S. legal counsel, accountancy professionals on both sides of the operations who understand the coordination of the various tax and reporting requirements between the U.S. and foreign jurisdictions, and a foreign counsel who also has the same knowledge and understanding.”
Smart Business spoke with Agee about the steps to take when expanding overseas, and how to maintain compliance with both domestic and foreign regulations.
What initial talking points should business owners discuss with their counsel when they’ve made the decision to expand overseas?
When a business client first comes to us and expresses interest in looking at overseas opportunities, first and foremost we need to get a clear understanding of the goals and strategies for pursuing foreign operations. We assess the specifics of what the company plans to accomplish by expanding overseas, and how it may be different from or impact what they’re doing here in the U.S.
Once the company makes the determination to expand internationally, it is critical to ensure that the new business venture is properly structured overseas. The necessary steps will vary widely depending on the jurisdiction in which the company is looking to operate. In addition to U.S. counsel, it is important to have good counsel overseas who has worked with cross-border issues, because there is often a delicate balancing act to making it work overseas, as well as from a U.S. perspective. Not all forms of entity will work for all ventures, so making sure that the foreign venture is properly structured minimizes liability to the company.
What potential legal landmines exist with foreign subsidiaries?
Once the setup with regard to the actual structure is determined, you must look at the detailed aspects of the company’s operations. The company must coordinate a number of things, including the work force: will it be necessary to hire a foreign work force, or will the company be bringing key individuals from the U.S. or from other parts of the world into that new jurisdiction? In either case, there are both immigration and employment law issues to coordinate in the U.S. as well as from the foreign perspective. For example, if the company plans to replace a local work force by moving overseas, it is imperative to hire employment counsel because, depending on the size of the work force, there may be a number of formal requirements to avoid liabilities.
Additionally, many jurisdictions have varying laws surrounding intellectual property. Some jurisdictions simply don’t provide the same protection that we have in the U.S. in terms of intellectual property rights, so it is important to identify those issues and determine the best way to deal with them.
Finally, the company must be sure that appropriate reporting and compliance is in place. There is a myth that if you earn the money overseas and don’t bring it back to the U.S., you don’t have to report it. The general rule under U.S. tax law is that worldwide income is reportable and taxable in the U.S. If a company is formed as a subsidiary of a U.S. entity, the U.S. entity has a reporting requirement. Conversely, if a company goes overseas and is formed as a ‘sister company’ to the U.S. company (the ownership of the foreign entity mirrors the ownership of the U.S. company) there are still reporting requirements. Not only must the appropriate forms disclosing the existence of the foreign entity be filed each year, but, in addition, all income from the foreign entity likely needs to be reported here in the U.S., either through the U.S. entity or through the shareholders.
If a company has a foreign bank account for the foreign business, and a U.S. person has signature authority over the account, the U.S. person is required to file a reporting form disclosing the existence of that account as well as their authority over it. There is a significant penalty an individual can incur for failure to report; it can be up to a $10,000-per-year penalty for not reporting a foreign account, so it’s very important if you are looking to go overseas that those reporting requirements are dealt with each year. If they’re not, every year can carry its own penalty and fine.
What other issues should you consider to get the most benefit from a foreign subsidiary?
Another question to ask is ‘Can the entity here in the United States have a subsidiary overseas?’ In most instances, the answer is yes, but a U.S. company does not want to inadvertently forfeit U.S. tax benefits by having an entity formed overseas that may not work with the U.S. requirements — for example, S corporations may only have qualified S subsidiaries. A foreign entity may not comply with the requirements and the S status benefits would be lost.
Again, working with foreign counsel to ensure the form of the foreign entity chosen does not present any problems for the intended purposes is extremely important, as there may be other limitations overseas. For example, a company may not be able to have a direct foreign subsidiary due to specific limitations on ownership imposed by the foreign jurisdiction. Each jurisdiction has its own requirements that need to be understood in the context of the proposed foreign operations before making any decisions.
Sonia Agee is a partner with Ropers Majeski Kohn & Bentley PC. Reach her at (408) 947-4889 or firstname.lastname@example.org.
On March 25, 2011, the Equal Employment Opportunity Commission’s (EEOC) regulations to implement provisions of the American with Disabilities Act Amendment Act (ADAAA) of 2008 went into effect. The overarching federal law didn’t present many changes to the pre-existing California state law, but it did clarify several ambiguous aspects to the ADA, and defined appropriate steps for an employer to take to accommodate disabled employees.
Smart Business spoke with Lisa Aguiar, partner at Ropers Majeski Kohn & Bentley PC, about how businesses can properly adjust to comply with the new regulations.
What does the Amendment Act mean for employers?
The Amendment Act confirmed in its definition of ‘disability’ that there are certain conditions that will always be considered a disability no matter what — conditions such as deafness, autism, cancer, cerebral palsy, bipolar disorder, post-traumatic-stress disorder, to name a few. Also, unlike the federal law which requires accommodations be made when a disability substantially limits a major life activity, in California accommodations must be made in a disability that limits a major life activity, thereby expanding the number of employees potentially eligible for accommodations for their disabilities.
The regulations expanded and clarified the definition of major life activity. For example, if a disability affects sleeping, thinking, interacting with others, or it affects major bodily functions or bodily systems such as the immune system or cell growth, it will be considered a major life activity.
There had been some uncertainty as to how long someone must be afflicted with a condition in order for it to qualify as a disability under the ADA. The amendment clarified that a ‘short-term’ disability could be a disability requiring accommodation. Employers are now faced with potentially having to accommodate virtually any condition that lasts more than a couple of months.
How can a business ensure it is properly accommodating disabled employees?
Having a policy in place is critical. The law in this area is still developing and it is important that the policy be reviewed by an attorney who has experience in this area, who knows the changes and developments in the law. In addition, that policy should be reviewed on a fairly regular basis — every year or so.
Accommodations are required if an employer knows or should have known that an employee was disabled. Supervisors and managers interacting with employees on a daily basis are in the best position to determine firsthand whether an employee has a potential disability, so ensure that supervisors are trained on the policy and know what to look for, what to do if they suspect that there is a potential disability, whom to talk to, and what the company’s steps are in determining whether an accommodation is necessary.
What else should an employer be aware of when determining accommodations?
If an employee brings you a doctor’s note, it’s important to understand the limits on what information an employer is entitled to receive. In California, there are heightened privacy standards that may not exist in other states. For example, employers are not entitled to know the exact nature of an employee’s condition or diagnosis. Unless you have objective evidence that the doctor’s note is not accurate, it is generally best to accept the note on face value. However, it is acceptable and oftentimes necessary to contact the employee’s doctor in order to determine whether an employee can perform certain job functions or whether certain accommodations would assist the employee in performing the essential function of his or her job.
Be sure to engage in the interactive process, which is simply a dialogue between the employer and the employee. The employer has the right to determine what accommodation the company is able to provide, but it’s important to understand that if one accommodation doesn’t work, you must look into another accommodation. This interactive process can continue throughout the course of the disability, particularly if someone has a chronic condition. An accommodation on day one of the diagnosis could be very different six months later, and an employer has a continuing obligation to engage in that interactive process.
Dealing with certain types of accommodation may be very difficult and very frustrating for an employer, but the law requires the company to do so unless it can show that accommodating the disability will cause an undue hardship for the company. The standard for undue hardship is high and rarely can a company succeed in its argument that the accommodation causes an undue hardship.
What should an employer do if accused of violating the ADA?
Employers should always document their attempts at engaging in the interactive process. Documentation can be fairly simple, something along the lines of ‘I met with employee on this date, he handed me a note that says he requires this accommodation, we discussed these various forms of accommodation, and we decided to do X.’ Any documentation related to disability or accommodation issues never goes in the personnel file; it always goes in a separate medical file.
Employees who sue their employers tend to feel like they haven’t been heard or treated fairly. Take any complaints seriously, have a meeting, listen to the employee’s concerns, and see if there is any way that you can right the perceived wrong. It is when you ignore the complaints, or when you discipline or terminate an employee that complains without adequate, well-documented grounds, that you could have a problem. As long as you’re working in good faith to try to resolve an employee’s concerns, then you’ve got a fairly solid defense should an employee decide to make a complaint at a state agency or file a lawsuit.
Lisa Aguiar is a partner with Ropers Majeski Kohn & Bentley PC. Reach her at (408) 918-4555 or email@example.com.
Launching a new product or implementing a new marketable idea can be an exciting time. You’ve invested time, labor and money into a promising project, and you’re looking forward to the profitable outcome. But imagine if just days after you launch the product, you receive notification from a company claiming that you have infringed on their intellectual property rights. What happened? And perhaps more immediately important, what will happen next?
Whether it’s for copyrights, trademarks, patents or trade secrets, if a company claims you have violated its legal rights, it is vital that you respond appropriately.
Smart Business learned more from Allan Anderson, a managing partner at Ropers Majeski Kohn & Bentley PC, about what to do if you infringe on another company’s IP.
What should you do if you’ve been accused of IP infringement?
The first notice that you’re going to get is usually in the form of a cease-and-desist letter, and what you don’t want to do is ignore that letter. You want to contact the person that wrote the letter to find out the facts surrounding the accusation.
If they send you a notification with a registered copyright or trademark attached to it and it appears that you might be infringing upon it, then you need to strongly consider what measures you can take to stop the offending activity. When you get a cease-and-desist letter, contact an attorney who specializes in IP to evaluate whether or not the mark that is being claimed to be violated is in fact a valid mark. You want to find out if the company has the registration, if it’s been filed, if it’s current, what the company is saying you’re infringing upon, if you have a legitimate right to sell this product, etc.
Ultimately, you need to decide under the circumstances if this is something you need to fight, or if it’s something you need to comply with. If it is legitimate infringement and you have no defense, then you should cooperate with the noticing party, discontinue any advertisement of the product, account for your sales and come to an agreement with the company.
The best way to deal with these situations is to immediately become involved and address the concerns of the person who is threatening to sue you. By completely ignoring it, it is not a situation that is going to get better with time.
What potential ramifications could you incur by infringing on IP?
On trademark in general, if it’s found to be a willful violation, you could see penalties up to $2 million. If it’s found to be an exceptional situation, the company might be able to get attorney’s fees from you. Otherwise, there are variations between $1,000 and $100,000 fines for infringements. Willful copyright infringement can cost you $150,000 per infringement, but the midrange is about $750 to $30,000. Patent infringement is also a statutory situation, so you can incur fees as well as penalties. So, in evaluating these issues, you have to really make sure that the person that’s telling you to cease and desist has valid IP rights to protect. After a cease-and-desist letter, they could possibly file a lawsuit and seek an injunctive relief — a court order preventing you from selling the product — which could basically shut down your business.
What are your options if you’re found to be in violation of IP rights?
If you’ve got a significant amount of inventory and they want you to return it or otherwise destroy it, sometimes you may just be stuck with it. But if you can cooperate early on, there are circumstances where perhaps the owner of the mark may be willing to grant you a limited license where they would allow a controlled sell-off, permitting you to sell the inventory that you have, but pay the mark-holder a certain amount of your profits to reimburse them for their IP rights.
You’ve got to look very carefully at the basis for the cease-and-desist letter, and the more immediately you respond to it, it gives you more options to try to resolve it or come up with a ‘business solution.’
How can you avoid infringing upon IP rights in the first place?
Evaluate the background of all aspects of your product by checking for a potential violation. Research it heavily beforehand. There’s the option to get something trademarked before putting it on the market by going through the Patent Trademark Office (PTO). There, you may find out there’s a history of that mark already and you can’t get it. But there are services available where you can research the history and see if there’s a prior use or an existing mark that you might violate.
Sometimes it makes more sense to spend a little money in the beginning to avoid spending a lot of money later. They’re usually not that expensive and that’s a good source that you should refer to before going through the expense of launching a big product line that you might ultimately have to shut down simply because somebody didn’t take the time to investigate whether it might be infringing upon someone else’s rights.
Allan Anderson is a managing partner with Ropers Majeski Kohn & Bentley PC. Contact him at firstname.lastname@example.org or (213) 312-2048.
For many employers, having to deal with employee use of social media is a relatively new phenomenon, and it can be difficult to know where to draw the line. Facebook, LinkedIn, Google+ and other social sites are invaluable resources when it comes to marketing and interacting with customers, but these and other social networking sites can lead to uncomfortable situations if utilized inappropriately by employees, such as when used as a platform for sharing trade secrets or conveying negative thoughts about the company.
How can you protect your company without getting into legal hot water?
Smart Business spoke with Curtis Smolar, a partner at Ropers Majeski Kohn & Bentley PC, to find out how to navigate the unfamiliar terrain of social media policy.
Why should business owners be concerned with social media use in the workplace?
For the first time, not only do companies have direct access to customers, but individual employees are also put in direct contact with their customers. The widespread use of smart phones, all of which are equipped with social networking capabilities, is literally placing the outside world in the palms of the employees’ hands. In that regard, there are a number of different issues: marketing, privacy and company trade secrets.
How can a business owner protect the company?
Companies dealing directly with external customers should have policies regarding social media regulation. Companies in the banking, pharmaceutical and legal industries are highly regulated and should have policies detailing acceptable social media usage for employees, as well as regulations stating what can be said directly to the public. Policies should be industry-specific, yet broad enough to cover any current or future device or form of communication.
Internally, any e-mail policies should specifically discuss the use of cloud-based e-mail providers like Google and Hotmail, making mention of social media communications and informing employees that such communication may be monitored by the company. In regard to workplace device use, companies are going to have to look at what is private and what is corporate. This can be achieved by making certain websites password-protected and differentiating between sites that are hosted by secured servers and those that aren’t, with protected sites signifying employee use that is personal and separate from the business.
What legal issues should employers be aware of when putting guidelines in place?
If you’re planning to monitor your employees, do so with caution. Although workplace surveillance is legally acceptable to some extent, the more invasive the surveillance becomes, the more likely it is to be considered in discordance with privacy laws. Companies should have policy explicitly describing employees’ diminished expectations of privacy. Policies should state that any personal communication on social networking sites conducted at work is not private, that computers and any other devices are to be used solely for company business, that communications are monitored to ensure compliance, and that these policies apply not only to internal communications, but also to external cloud-based communications.
As a caveat, though, be warned that social media policies cannot uniformly discourage employees’ rights to concerted activity. The National Labor Relations Board (NLRB) actively enforces employees’ rights to discuss working conditions. People today use social media to organize, which can be associated with the right to unionize and the right to congregate, neither of which may be legally denied.
Restriction of offensive or rude conduct or discourteous behavior, disparaging remarks about the company or inappropriate discussions of the company’s management is also prohibited. However, this is true outside the workplace. If you do want your employees to be using social media networking to communicate with customers and advertise your products, qualify the distinction by stating that you can’t partake in personal social networking activity at the office during work hours.
What can a business owner do if an employee is abusing company guidelines?
Companies should have internal policies dictating the corporate response under these circumstances. Policies must be enforced uniformly. Otherwise, companies run the risk of claims of disparate treatment, inviting potential lawsuits. Abuse of company policy should be documented in detail, highlighting the incident and the official response. Make sure that you are following your company’s guidelines to avoid the perception that you are firing employees arbitrarily.
Curtis E. Smolar is a partner with Ropers Majeski Kohn & Bentley PC. Reach him at (415) 972-6308 or CSmolar@rmkb.com.
Business owners might avoid bringing an attorney to the table when negotiating a lease, but the advantages of having an advocate in their corner far outweigh the cost.
“In my experience, when you see a lease where an attorney was not involved on behalf of the tenant, you get a lopsided, landlord-favoring lease,” says Jesshill Love, a partner with Ropers Majeski Kohn & Bentley PC. “The attorney’s job is to think ahead to what happens if something goes wrong to make sure the tenant will be treated fairly.”
Smart Business spoke to Love about the pitfalls a tenant can avoid by partnering with an attorney before signing a commercial lease.
Why should an attorney be present in the negotiations?
Any smart businessman or woman is going to employ both an attorney and tenant broker, because they have different roles. A broker is going to be more focused on lease rates, market factors, square footage allocations and tenant improvement allowances. An attorney is going to focus on protections for the tenant from the point of view of the ‘legalese’ of the lease. This can include indemnification, attorney fees, arbitration and mediation issues. Sometimes an attorney has to interpret multiple provisions together in order to get to the conclusion that the lease actually pushes more of the obligations and expenses onto the tenant than it should. The role of the tenant’s attorney is to make sure that the tenant is well represented and receives the benefit of the bargain in the negotiation process.
What is the role of the letter of intent?
This is often where tenants misstep: they start talking to the landlord about deal points or even move to a draft lease before considering the letter of intent (LOI). The LOI is what will set the tone for future negotiations, and if you don’t drive a hard bargain at the LOI stage, then you’re leaving money on the table when the lease is signed. Once the LOI is established, it’s going to serve as a framework for the actual drafting of the lease itself.
There’s a tremendous amount of standard language thrown into a lease, such as forum selection clauses, attorney fee provisions and indemnification and insurance provisions. All of this is fairly standardized in the industry, but the framework of the main deal points from the LOI is what’s going to set the tone for the lease when it comes to flexible items like tenant improvements, common area maintenance (CAM) expenses and operating expenses, and how they’re defined.
What are some provisions a tenant should push for in a lease?
These can change every couple of years as the market changes. Also, as new case law is handed down, attorneys on both sides of the negotiation will angle to push off certain costs or obligations on the opposing party. The big ticket items now are tenant improvements, free rent, environmental concerns, termination provisions and risk of loss provisions.
It’s still a tenant’s market, so negotiating for free rent up front is something you want to try to do, if possible. Also, try to negotiate a cap for any structural improvements with an absolution period and landlord indemnification of the tenant for any pre-existing structural or environmental problems. Mediation and arbitration as well as attorneys’ fees provisions are additional issues to look out for.
Landlords on triple-net leases will try to define everything as a tenant responsibility: roof, plumbing, sewer line, heating, ventilation and air conditioning (HVAC) and electrical problems. A tenant attorney should push back in an effort to make a major structural problem involving the building envelope the responsibility of the landlord.
Another thing you’ll definitely want to have is a clear definition of default, particularly if you have a letter of credit. You don’t want the landlord to be able to draw down on the letter of credit for something that’s an immaterial default under the lease. Also, when lease rates start to increase, landlords are going to be looking for any type of breach they can in order to cancel the tenant’s lease so they can lease to somebody else at a higher rate. Landlords will attempt to define default broadly to effectuate this purpose. We have seen multiple over-reaching default definitions, such as violation of local zoning and use laws and operating hour violations. The attorney’s job is to make sure that a breach of a lease for which the landlord can actually terminate is material; this should be limited to non-payment.
What should tenants avoid in a lease?
First, tenants should avoid personal guarantees when possible, as well as excessive security deposits. Relocation provisions should also be avoided or, at a minimum, limited. Relocation provisions are common in leases with multiple commercial tenant or office spaces. They allow the landlord to move a tenant if the landlord wants to incorporate the tenant’s space with adjoining spaces for a prospective tenant. The tenant has no choice but to move upon notification from the landlord. Relocation could result in a tenant being buried in the back of the office building, or the franchise in the shopping mall could end up tucked away in a space with little foot traffic. This is obviously not what the tenant initially negotiated for when the lease was signed. The tenant must negotiate relocation preferences and safeguards prior to signing that lease.
Further, some lease agreements require a tenant to continue to pay rent even if the space is rendered unusable. For example, if there’s a fire in the building, and the tenant cannot continue to operate the business, the tenant is still required to pay rent. Although the tenant’s lost business can be covered by business interruption insurance, it is not in the tenant’s best interests to have an open-ended time period for the landlord’s repair of the premises. Most large commercial leases are drafted that way — even if it’s not the tenant’s fault, the tenant is not allowed to terminate the lease pending the landlord’s repair of the premises. Litigation surrounding these matters between landlords and tenants can be company killers. There have to be provisions in the lease that say, if this can’t be fixed within a reasonable time period, the tenant gets to walk.
Jesshill E. Love is a partner with Ropers Majeski Kohn & Bentley PC. Contact him at (650) 780-1611 or email@example.com.