Business-Lawfirm.co.uk Articles

Minimising the Impact of Business Disputes

Tue, 04 Nov 2008 12:44:06 GMT

(article first appeared in Cousins Business Law ezine September 2008)

As the economy slows down, we can expect more business disputes than ever.

Business disputes are bad for business due to the costs involved and the time that management must take in dealing with them.

So what can you do to try to minimise the effect of disputes?

Plan ahead in negotiations. Whenever negotiating a new project or contract, try to think of what could go wrong and make sure you address this, both in the contract and in your working systems - to try to prevent this from happening.
Put it in writing before problems occur. For large projects, make sure you have a written contract. For all projects and contracts, make sure that you have a written version of exactly what was agreed and try, as far as possible, to state who would be responsible for the problems you foresaw in 1 above. As was explained in our Feature article you can’t rely on a gentleman’s agreement.
Whatever you do in business, you should try to ensure that the people you are contracting with do so in accordance with your terms of business. Make sure you have in place a good set of terms and conditions and ensure that you agree that they apply to all your dealings.
Put it in writing as soon as problems do occur. If someone has got something wrong or you are not happy with the way they are performing, send them a letter or email stating this. This will solve many issues as to what exactly happened should the dispute later escalate.
Read our article on the Steps to Handling Business Disputes and follow the advice given.
Take legal advice as soon as possible when a dispute arises as, usually, the sooner action is taken, the better will be the overall result.

For advice on any business or commercial dispute you are experiencing contact Gary Cousins – who offers a free initial half hour telephone assessment.

Check your Lease - NOW

Mon, 18 Aug 2008 15:09:15 GMT

The vast majority of tenants never read their lease after it has been signed and frequently commit breaches of the terms of the lease through ignorance of the obligations imposed on them.

Commercial property lawyer Steve Petty points out just a few of the provisions you should be checking:

Rent payments dates

Amazingly, a significant minority of tenants have forgotten when they are supposed to pay the rent. Often what happens is that a payment will be made slightly late; the landlord overlooks this; the next payment is calculated by reference to the previous late payment and the official payment dates in the lease are forgotten. There are a couple of reasons why paying at the right time is important even if the landlord hasn't made a formal complaint about the late payments:

Interest - the lease will often provide that late payments of rent are subject to punitive rates of interest (typically 4%-5% above the base lending rate of a named bank). If you have allowed your rent payments to slip by a significant amount over time then you could be leaving yourself exposed to a significant interest claim by the landlord if it changes its stance on your late payment in the future. A classic example of this is where a tenant slips from paying rent quarterly in advance to quarterly in arrears.

Renewal - although tenants normally enjoy a statutory right to renew a business lease, there are various grounds which entitle a landlord to oppose the grant of a new lease. One of these is persistent breach of the terms of the lease. Persistent late payment of rent (especially if there have been other breaches of the lease) could be used by a landlord as a reason to refuse a new lease.

Break Clauses

If you have negotiated a right to end the lease early and are considering exercising that right, it is vital that you check your lease to see how much notice you need to give to the landlord and when the lease will end. You only have to be one day late serving the notice for it to be invalid with the result that you are trapped in a lease you don't want possibly for years to come.

Alienation Provisions

As I've mentioned in a previous blog, 'alienation' is a reference to a tenant's right to sell a lease on to a new tenant or sublet. If you are considering doing either then make sure you don't go through the process of finding a buyer for your lease or a subtenant before you understand the rules in the lease regarding assignment and subletting.

Alterations

If you are considering carrying out some alterations at the premises - even if this is just the erection of some internal demountable partitioning then check your lease first to make sure you are complying with your obligations. Most alterations provisions require you to apply to the landlord in advance for consent and even if consent is not required you need to notify the landlord's insurers to avoid committing a breach of the insurance policy (and possibly invalidating the policy leaving you liable for any uninsured losses).

Repairs

Check which repairs are your responsiblity and which are the landlord's. If the landlord is failing to carry out repairs then make sure that a written reminder is sent to the landlord pointing out the areas of disrepair and if this doesn't provoke an immediate response take advice from your lawyer. If you are failing to carry out repairs this can have a number of unpleasant consequences:

The landlord may be able to do the work and charge you for it (almost always more expensive than doing it yourself)
Breach of repairing obligations can also be used by a landlord as a reason for refusing to grant you a new lease
Any breach (but breach of the repairing obligation is probably the most common) may invalidate a right to terminate a lease early
If your lease contains an indemnity (see my early blog on this subject) then breach of the repairing obligation may cause the landlord to suffer all sorts of unexpected costs or losses for which you will be liable

If, having checked your lease, you still have concerns contact Steve Petty on 01926 620005 or email your specific question here.

Free Business Lease Review for Tenants here.

Do you need planning permission for change of use?

Mon, 11 Aug 2008 13:34:17 GMT

One of the areas of planning law that is frequently misunderstood is use classes and change of use. Before you buy or rent a commercial property you should always check with the local planning authority the currently authorised use. Uses are divided into use classes and to switch from one use to another may or may not require planning permission.

These are the most common use classes:

A1 - Shops
A2 - Financial and Professional Services
A3 - Restaurants and Cafes
A4 - Drinking Establishments
A5 - Hot Food Takeaways

B1 - Business
B2 - General Industry
B8 - Storage and Distribution

C1 - Hotels
C2 - Residential Institutions
C3 - Dwelling Houses

D1 - Non-residential institutions
D2 - Assembly and leisure

Unfortunately, those general classes can cover a variety of different specific uses. For example, B1 - Business covers offices that don't fall within Class A2, research and development, studios, laboratories, high technology and light industry.

If you have any doubt about the class under which your specific use falls, the local planning authority should be able to advise.

Being able to change use class without having to make a planning application is obviously very useful.

These are the use classes where a change of class is permitted:

A2 - permitted change to A1 where a ground floor display window exists

A3 - permitted change to A1 or A2

A4 - permitted change to A1, A2 or A3

A5 - permitted change to A1, A2 or A3

B1 - permitted change to B8 where no more than 235sq m

B2 - permitted change to B1 or B8 (B8 limited to 235sq m)

B8 - permitted change to B1 where no more than 235sq m

Finally some uses are described as sui generis (lawyers can't resist using a bit of Latin). A literal translation is 'of it's own kind' and it applies to uses that don't fall within any of the other use classes.

Examples of sui generis uses are: sale of motor vehicles, launderettes, petrol filling stations, theatres and night-clubs. If your use is sui generis then unless you are taking over premises which already have specific planning permission for that use, you will always need planning permission before you commence trading.

Your lawyer should be advising you on any planning consent issues before you commit to purchasing any commercial property. For advice on this and other issues relating to commercial property purchase contact Cousins Business Law here.

What's your landlord doing with your rent deposit?

Mon, 11 Aug 2008 13:22:22 GMT

First things first - what is a rent deposit?

In its simplest form a rent deposit should be a sum of money handed over by a tenant to a landlord at the start of a lease as security for payment of rent.

Rent deposits for residential premises are now protected by regulations. A landlord must join a Tenancy Deposit Scheme and failure to comply with the regulations entitles the tenant to sue for compensation equal to three times the value of the rent deposit.

For commercial premises there is no such protection, however. Frequently, landlords attempt to use rent deposits for a whole range of purposes. If you are worried about what your landlord might do with the depsoit once you have handed it over then you should ensure that the landlord's rights and obligations in respect of the rent deposit are documented either in the lease or a separate rent deposit deed. This is a fundamental first step. If there is nothing in writing dealing with the rent deposit then the landlord can put it straight into the bank and spend it.

What should be covered in a lease deposit deed?

Having established that the rules regarding the use of the rent deposit must be in writing, what things should be covered in the lease or rent deposit deed?

Who holds the deposit?
In an ideal world, the landlord should not hold the deposit. It should ideally be held in an account operated by the landlord's solicitor to ensure the funds are not misappropriated. If the landlord goes into administration or is declared bankrupt, suing for the return of the deposit will be a waste of time if the money has already been spent. It can be difficult to persuade a landlord to agree to this (usually because solicitors have no interest in managing a load of deposit accounts for their clients). At the very least, if the landlord is to hold the deposit it should be paid into a separate designated deposit account.

Who is entitled to interest on the deposit?
This should always be the tenant as it is the tenant's money. The lease or rent deposit deed should specify that the landlord should put the money into an account that pays interest and that the interest should be paid to the tenant (usually once every twelve months). The interest should not just be allowed to sit in the deposit account.

In what circumstances can the landlord withdraw money from the deposit account?
This needs to be very carefully specified. Landlord's solicitors will normally draft the documentation to allow the landlord to deduct money whenever the tenant breaches the lease to cover all losses and expenses incurred by the landlord as a result of the breach. Like indemnities, this gives the landlord a right to compensation and costs that the general law might not otherwise allow and is therefore intrinsically unfair. The landlord should only be allowed to withdraw money for non-payment of rent (and possibly interest on the unpaid rent if the lease provides for interest on late rental payments). The landlord should also not be entitled to withdraw money for non-payment of service charge as the reason for the non-payment may be a dispute over the amount of the service charge.

When should the deposit be repaid to the tenant?
The principle behind the rent deposit is that a landlord is entitled to ask for security where a tenant cannot demonstrate its ability to pay the rent (by producing accounts or references to demonstrate its financial position). That being the case, the tenant should be entitled to the return of the rent deposit if a point is reached during the term that enables it to demonstrate its financial strength. A common way of dealing with this in a rent deposit deed is to say that a tenant is entitled to the return of the deposit if it can produce three years accounts which show a net profit of three times the annual rent. The rent deposit should also be returned to the tenant if it sells the lease and also at the end of the term. Again, the landlord should not have the right to deduct from the deposit at the end of the term any amounts it sees fit to cover a potential dilapidations claim.

If you are concerned about your lease deposit or need any further advice on lease deposits contact Steve Petty on 01926 629005.

Beware of Indemnity Clauses

Mon, 04 Aug 2008 14:13:01 GMT

Indemnities can appear in a number of legal documents such as leases, purchase contracts and business sale agreements. They are often described as 'standard' provisions as though that automatically makes them reasonable. So what is an indemnity?

Here is an example of an indemnity from a lease:

The Tenant shall keep the Landlord indemnified against all expenses, costs, claims, damage and loss (including any diminution in the value of the Landlord´s interest in the Building and loss of amenity of the Building) arising from any breach of any tenant covenants in this lease, or any act or omission of the Tenant, any undertenant or their respective workers, contractors or agents or any other person on the Property or any other part of the Building with the actual or implied authority of any of them.

An indemnity is a promise by one party (party A) to reimburse another party (party B). Sounds prettty innocuous so far, doesn't it? The crucial questions are:

Under what circumstances is the party reimbursed?

The terms of the indemnity will provide when Party B should be reimbursed. The above example includes the circumstances:

Arising from any breach of any tenant covenants in this lease

or any act or omission of the Tenant

any undertenant or their respective workers, contractors or agents or any other person on the Property or any other part of the Building with the actual or implied authority of any of them.

The above examples show that there doesn't need to be any requirement for fault on the part of Party A. They also show that Party A may become liable for the acts or omissions of someone who is not under his control eg a customer in his shop or a workman attending his premises.

What is reimbursed?

Again the terms of the indemnity will set out what Party A is actually reimbursing. The above indemnity uses the words:
"all expenses, costs, claims, damage and loss"

In other words, all expenses - whether they are reasonable or not, all claims - with no obligation on Party B to defend such claims if it would be reasonable to do so, and all losses - whether or not they are foreseeable

English Law has established rules which set out when one person should pay damages to another where the former's acts or omissions cause the latter to suffer loss. In most cases, there has to be some element of fault and the injured party can only recover certain losses depending on the type of loss and how foreseeable the losses were.

What's the purpose of an indemnity?

What an indemnity seeks to do is remove all the limitations imposed by decided caselaw. On the basis that decided caselaw is the result of careful deliberation over many years, it would seem reasonable to suppose those limitations have been imposed for good reason.

You should always beware of signing a legal document that requires you to 'indemnify' someone else especially where the other party doesn't agree to indemnify you in return. Leases, for example, almost never include an indemnity by a landlord but almost always include an indemnity by a tenant. Any suggestion that either the tenant's indemnity should be removed or that the landlord should reciprocate is normally met with incredulity by the landlord's solicitor. Why? If it is such a reasonable provision then why is it unthinkable that a landlord should provide an indemnity?

The answer, of course, is that indemnities are unfair.

If you are being asked to sign a lease or other legal document which includes indemnity clauses take legal advice. You can arrange an initial free consultation about just this subject with Cousins Business Law here.

Commercial Property Legal Jargon

Mon, 04 Aug 2008 14:01:11 GMT

Lawyers haven't always been known for using terms that are easily understandable by those without legal training. Here are a few terms used in the property sphere that are often not understood.

Alienation - a heading you frequently see in a lease to cover a tenant's right to assign, charge or sublet a lease.

Assignee - the person receiving the benefit of the thing being assigned. If you take over a lease from someone else then you are the assignee.

Assignor - someone selling or transfering the benefit of something to another. If you are selling a lease to someone then you are the assignor.

Authorised Guarantee Agreement - or AGA. A guarantee provided by an assignor of a lease guaranteeing the performance of the assignee. Most modern leases require the tenant to provide an AGA if it assigns the lease.

Charge - is a general term used to describe the document that pledges assets to a lender as security for repayment of a loan. A mortgage is a particular type of charge which pledges property as security.

Forfeiture - a landlord's power to terminate a lease, usually for non-payment of rent, but it can be for breach of any of the covenants in the lease. Going into administration even if you aren't behind on your rent can give the landlord the right to forfeit the lease.

Mortgagee - the person to whom a mortgage is given ie the lender (usually a bank or building society but can equally apply to a private individual).

Mortgagor - this is the person who grants a mortgage over a property. In other words, the owner of the property.

Official Copies - copies of the Land Registry's registers of title for a property. The electronic register held by the Land Registry is now the only evidence of ownership for registered land. An Official Copy of the Land Register is effectively your title deeds to the property.

Overage - a right to receive a share of the increased value of land. It is typically used where a developer buys land and the seller wants to share in any increase in value resulting from the developer obtaining planning permission to develop the land.

SDLT (Stamp Duty Land Tax) - It replaced Stamp Duty for property transactions (stamp duty is still charged on the transfer of shares).

Security of Tenure - usually refers to a tenant's right to a new lease once the existing one comes to an end. A landlord can remove a tenant's security of tenure in a lease if a procedure laid down by statute is followed.

Statute - another word for an Act of Parliament.

Unregistered Land - land which hasn't been registered at the Land Registry. It is now very rare but does still exist and the only proof of ownership of unregistered land is still the original title deeds.

Warranty - a statement of fact by a party to a contract upon which the other party can rely (and sue if the statement turns out to be untrue). It is most frequently used in contracts for the sale and purchase of a business.

I'm sure there are lots more terms that I haven't mentioned whose meaning is far from clear. If you are being asked to sign a legal document which contains terms you do not understand ask your lawyer to explain them - or contact Steve Petty of Cousins Business Law for legal advice in plain English.

Tenants Rights: I'm a Tenant Get Me Out of Here

Thu, 17 Jul 2008 10:03:35 GMT

You are renting commercial premises; business is tough; you want to move to smaller (or just plain cheaper) premises to cut costs. You dust off that lease you signed a couple of years ago to find there are another 8 years to run. What can you do?

This iaspect of tenants rights is one we're asked about a lot.

Many tenants sign up to 5, 6 or 10 year leases without giving a moment's thought to the enormity of the financial commitment they are making. One of the things I always point out to tenants entering into a new lease is the total financial commitment they are making. For example, a 5 year lease at £20,000 per annum is a total commitment of £100,000. It's amazing how few business people think of it in those terms.

In addition to the rental costs, there are the costs of keeping the premises in good repair which for an older building can be absolutely astronomical.

If you find yourself staring down the barrel of several more years' rent on premises you don't want with a nasty repair bill for the premises as the sting in the tail, there are a few strategies you can adopt to try and soften the blow.

Have your lease reviewed by a commercial property lawyer

Leases tend not to be written in the most straightforward of language and it is essential that you ask a lawyer who specialises in commercial work to review the lease to establish whether there are any clauses that can be used to your advantage. These are a couple of examples of provisions your lawyer will be looking for:

Break clauses - your lease may contain a clause allowing you to end the lease early but these clauses need treating with extreme care as very often conditions need to be satisfied and notices served in a particular way to ensure that you don't lose your right to end the lease early. Messing up service of a break notice is one of the most expensive mistakes a tenant can make.

Alienation Provisions - see what I mean about the language used in leases? 'Alienation' means your right to deal with the lease by either selling it on to someone else or alternatively subletting. These provisions tend to vary from lease to lease and again it is essential you understand what you have the right to do before you embark on the search for someone to take the premises off your hands.

Cousins Business Law offer a free lease review check - more details here.

Approach your landlord and ask for a rent reduction

This might sound like a pretty stupid suggestion but when commercial tenants are thin on the ground the last thing a landlord wants is for the obligation to pay the rent to push his tenant into bankruptcy or administration. I currently have a client who has agreed to temporarily reduce his tenant's rent from £90,000 per annum to £45,000 per annum to enable the tenant to trade through a bad period. The alternative was that the tenant would have gone into administration and the landlord would have received nothing. In the current climate the premises would be difficult to re-let and landlords now have another issue to consider - business rates on empty properties which came in on 1st April this year.

Consider winding up your company and tranfering the business to a new company

This might be morally objectionable to you but if you are fortunate enough to have negotiated a lease in the name of a limited company with no directors' guarantees then by winding up the company you can effectively escape your obligations. Before you consider this approach you will, of course, need specialist legal and accountancy advice.

As ever, if you are concerned about these issues please feel free to contact me for further advice.
plain English legal advice from commercial property lawyer Steve Petty of Cousins Business Law - you can reach Steve on 01926 629005.

Time to Review Personal Guarantees

Thu, 17 Jul 2008 09:55:55 GMT

If you have ever signed a personal guarantee then now is the time to review what powers your bank has and the true extent of your liabilities

Every new business that needs a startup loan from a bank tends to be in a weak bargaining position. If you are forming a limited company the bank will probably require the directors to provide personal guarantees for the loan to the company.

Do you realise the true extent of your liability under that guarantee?

Personal guarantees are promises by individuals to be responsible for someone else's debts. These guarantees can be limited or unlimited. A limited guarantee in theory states the maximum liability of the guarantor. Be aware however that the bank can almost always add interest and costs onto the maximum figure stated in the guarantee so it isn't really a maximum figure at all.

Even if the business pays off that initial loan, the guarantee will still be in force so that if your business arranges a new loan in the future or uses an overdraft facility then the bank can rely on the original personal guarantee for those debts as well.

Guarantees are also cumulative so that if you sign a guarantee with a limit (say of £10,000) and the bank asks you to sign a new guarantee (perhaps because the business needs to increase its loan) with an increased limit (say £20,000) then unless the bank expressly releases you from the first guarantee, your liability will now be £30,000 not £20,000.

If you have personal savings with the bank, then the guarantee will allow it to seize these at any time to pay off any monies owed by your business.

The only way to bring your liability under a guarantee to an end is either to ask the bank to release you (don't hold your breath) or to see whether there is a provision in the guarantee document allowing you to terminate the guarantee. Normally you will have to give notice to the bank (typically three or six months) and at the end of the notice period, your liability under the guarantee is capped at the amount owed by your business to the bank on the last day of the notice period.

The trick here is therefore to serve notice and make sure the business owes the bank as little as possible (preferably nothing at all) at the point the notice period ends to reduce or remove completely your liability under the guarantee.

If you have ever signed a personal guarantee (or even worse cannot remember) ask your bank for a full list of the personal guarantees it is relying on as security for the liabilities of the business and ask for copies of the guarantees if you cannot find your own copies.

Then start to take steps to reduce or eliminate your liability under those guarantees.

For more advice on this subject contact Cousins Business Law.

A Landlord's Best Friend

Thu, 17 Jul 2008 09:43:23 GMT

In the current economic climate tenants may begin to fall behind with their payments (or worse go into administration or bankruptcy). Who (or what) is a landlord's best friend to protect against the risk of rent arrears? Here are the candidates:

A Rent Deposit

This is a sum of money provided by the tenant at the start of the lease (usually equal to one or two quarters' rent). It is held in a deposit account and can be accessed by the landlord if the tenant misses a rental payment.

This is a useful short term protection for the landlord. The main benefit is to enable the landlord to forfeit the lease; remove the tenant; and attempt to relet. The landlord can continue to draw money from the rent deposit account even if the tenant has been thrown out for non-payment of rent.

Directors' Guarantees

These are used when the tenant is a company and the landlord wants someone else to sue if the company doesn't pay the rent. In theory these can be a useful protection but in practice landlords (despite taking up references for the tenant) frequently forget to look into the financial position of the directors to establish whether their guarantees are worth anything.

Parent Company Guarantee

Major PLCs often use a subsidiary to enter into leases to keep the liabilities under their leases separate from the trading arm of the business. Landlords should be alive to the fact that this subsidiary may have no assets even if the tenant is a household name. In those circumstances, it is essential that the parent company stands as guarantor. An excellent protection provided the parent company is financially sound.

A Former Tenant

This is often overlooked by landlords. If a lease is sold on then the tenant selling the lease is often required to provide an Authorised Guarantee Agreement (AGA). Essentially an AGA is the same as a directors or parent company guarantee except that liability under the guarantee ends if the tenant taking over the lease subsequently sells it on. This is a useful protection provided the landlord remembers when it drops away.

References

Taking up references should be the landlord's first step when considering a new tenant. By far the most important reference is the bank reference. The landlord should write to the tenant's bank explaining the nature of the commitment the tenant is considering (ie rent and term of the lease). The bank will then reply stating whether or not the tenant is considered 'good' for the purpose of the landlord's enquiry.

So who (or what) is a landlord's best friend? The first four 'friends' are all designed to protect the landlord against a tenant who cannot pay the rent but surely the best protection of all is to find a tenant who can provide references that show it is financially sound and therefore is not likely to fall into arrears in the first place?

Landlords needing advice on landlord and tenant law, help in drawing up or negotiating lease agreements should contact Steve Petty of Cousins Business Law on 01926 629005.

A Quick Guide to Lease Negotiation

Thu, 17 Jul 2008 09:30:04 GMT

Many small and new business tenants end up negotiating leases themselves, usually with a surveyor acting on behalf of the landlord. This often puts a tenant at a disadvantage as they are dealing with a professional who negotiates leases every day for a living.

Here are a few tips to redress the balance:

Don't agree to pay the landlord's legal costs - it's not standard practice.
Ask for a rent-free period - you're likely to get it in the current market and it improves your cashflow for a few months (especially important if you are a new business).
Another way to improve your cashflow is to negotiate payment of rent monthly rather than quarterly.
Ask for a break clause (a right to end the lease early). It gives you vital flexibility and is an easier way out of a lease than trying to sell it on or subletting.
If the landlord agrees to a break clause, think about when your business might need to move premises and make sure the timing of the break suits your likely needs.
Consider the Stamp Duty Land Tax (SDLT) consequences. SDLT on leases involves a complex calculation but as a rule of thumb multiply the rent by the number of years of the lease and then deduct £150,000. Your SDLT liability is roughly 1% of the figure you have left. eg £25,000 rent on a ten year lease would give rise to a SDLT liability of roughly £1,000.
If the premises are in anything less than perfect condition insist a schedule of condition is prepared. This will detail any items of disrepair already existing at the start of the lease so that you don't have to foot the bill for these repairs.
If you can possibly manage it, ask for the lease to be put in the name of your limited company (if you don't own one then you can form one for very little cost for this purpose) and offer a rent deposit rather than directors' guarantees if the company cannot provide adequate references. This ringfences your liabilities.
If there is a service charge, request that it be capped to avoid a very nasty shock when the landlord asks you for your share of the cost of replacing the roof.
Have all signage and initial alterations approved before signing the lease. If you wait until after the lease has been completed, you may be required to complete a formal licence and pay the landlord's legal and surveyor's fees.
If the rent is to be reviewed during the term of the lease then ask for an upwards-downwards review rather than the traditional upwards-only review.
If the value of your business is linked to the location of your premises (eg shop, restaurant) then consider asking for a longer lease and strongly resist the landlord removing your statutory right to renew the lease at the end of the term especially if you plan to sell on your business as a going concern once you have built it up.

If you still feel out of your depth then please feel free to contact Steve Petty for more tactical advice.