Surveyors are professionals licensed from state to state with specialized training.  Licensing of surveyors is  supervised by the Missouri Board  for Architects, Professional Engineers, Professional Land Surveyors and Landscape Architects as provided in Chapter 327 RSMo and Division 2030 of the Code of State Regulations (20 CSR 2030).  Only a professional land surveyor   may locate land boundaries,  perform work involving land monuments,  and set boundary corners, prepare drawings depicting the shape, location and dimensions or area of land, and prepare plats and maps showing improvement and construction upon land, among other things.  (Section 327.272.1 RSMo.) 
(See also the Harry Styron materials in the 2007 REI book.)

What is a Survey?
      A survey is a visual depiction of measurements.   In addition, ‘to survey’ means the surveying activity including taking field measurements, preparing evidence, taking notes, reviewing data and forming opinions about the data. 

What is the Purpose of a Survey?

      Any time a property is being purchased, when improvements are being built,  or in connection with any financing transaction involving real estate, a current survey should be obtained.  Surveys are necessary in order to create plats, to divide lots, to create subdivisions and condominiums, and to create boundary adjustments.  Only with a survey can one determine that an improvement is where it is supposed to be  and that a legal description depicts what is expected.             It is important to have a survey also in connection with the issuance of  title insurance and obtaining the sort of title coverage that one would wish to have for as much coverage as possible from liability issues.  Under the standard ALTA (American Land Title Association) title insurance policy, normally only the exceptions for the encroachments or questions of location and for unrecorded easements (the standard survey exceptions) are removed if one provides a “spot survey” or if one provides a non-current survey.  However, this does little for the client in showing the location of improvements and encroachments over boundary lines, the location of utilities, the location of rights of way, the location of boundaries of adjoining owners, the configuration of parking, access to the property and other unrecorded matters affecting the property.

       Given the potential for liability and risk to a purchaser of real estate, whether residential or commercial, it is highly recommended that a current survey be ordered prior to any transaction. 
Initiating the Survey Process

             Ordering the Survey As soon as the real estate contract is entered into, if not prior to that time, the survey should be ordered.  Often, a seller of property, in marketing the property (particularly commercial properties)  will have a survey available that may have been performed when the seller acquired the property.  If so, it is sometimes helpful to have a copy of that survey sent along with the order for either an updated survey or a new survey from a different surveyor.  It is not unusual for a survey to take up to three or four weeks to perform, depending on the nature of the property.  The survey should be ordered as early in the process as possible.  Much of the due  diligence that is required to be performed once the sale contract has been executed hinges upon having the survey in place and having a title insurance commitment available. 
        Typically a written order is placed with the surveyor and includes the type of survey and the items to be included, the amount of time required to provide the survey, the fee for the surveyor and the cost or additional charges for indicating on the survey any other matters that are not standard.  The number of copies and to whom they are to be provided should be included.  In addition, it is helpful to inquire at the time that the order is placed, if not sooner whether or not the surveyor carries professional liability insurance and the amount.             In addition, it is helpful if the surveyor is provided with an existing survey, the record legal description and copy of the title commitment on the property, together with all exception documents shown on Schedule B of the title commitment, and any other important information that the client feels is necessary or helpful for the surveyor in performing the survey. 
      Formerly, it was necessary to be familiar with classifications for surveys including “urban, suburban, and rural, among others.”  In 1999, the standards were revised and the classifications are no longer important.

              Types of Surveys  Several  types of surveys are available, including boundary, land title, improvement location, and as built surveys.  Topographic surveys are often used when construction is contemplated on a property.               ALTA Survey       The most common type of survey that is used in commercial transactions these days is the ALTA survey which is a survey prepared according to the “minimum standard detailed requirements” adopted by the American Land Title Association and the American Congress on Surveying and Mapping, and the National Society of Professional Surveyors.  An ALTA survey typically shows where the boundaries are located, easements and locatable exceptions appearing on a title commitment for the property, major improvements located on the property, and utilities and access serving the property.  In addition to the usual types of items shown on these surveys, there is an optional items table that includes such additional items that can be requested such as showing the location of highways and major street intersections, flood zone designations, measured height of buildings, and parking areas and numbered spaces, in addition to other items. (See also the Harry Styron materials in the 2007 REI book.)

 Boundary Survey    These surveys are often used in residential transactions and when putting in a fence or making other improvements to property.  It is not as comprehensive as an ALTA  Survey, but it is far better than a “spot survey”.  Research is often done of surrounding tracts and requires field work and location of monuments.  Improvements, roadways and easements are located. 

 Surveyor’s Real Property Report (SRPR)  (aka “spot survey”)  Not as reliable or thorough as a Boundary Survey, this type of survey is often ordered in the standard residential real estate purchase or refinance.  It is a location of the improvements and a cursory check for encroachments.   These are not to be used for commercial properties.

  Certification    Another critical aspect in the ordering process is to order the form of certification that is important for your particular client and transaction.  The ALTA/ACSM standards have a short certification that states that the survey has been performed in accordance with the standards and includes specific  optional items.  The standard certification is what most clients seem to benefit from.  However, certain institutional lenders and others may require far lengthier certifications and these certifications need to be submitted to the surveyor to determine if they will provide them or not ahead of time.              In addition, in connection with the certification, it is very important that the proper parties be included in the certification.  Typically the certification is made to the owner, the buyer, the lender, and the title company.   Reviewing the Survey- Generally
          Once the survey is received, it is critical in any  transaction for the attorney to review the survey with an eye towards inclusiveness of items shown on the title commitment, and observing issues that were unknown prior to the survey being performed.  It is helpful to have a checklist available that is either customized for a particular type of transaction or a general one that can be used with any type of property or project, in order to make sure that all the bases are covered.            Some of the more important aspects of survey review include the following: 1.    The survey and the title commitment should conform; the legal description should match what is shown on the title commitment and the various encumbrances, appurtenant easements, and other matters appearing on the title commitment should all be properly shown on the survey;

2.       The surveys should be reviewed for additional matters that do not appear on the title insurance commitment, such as additional easements not appearing on the title binder, insuring that there is access as expected by the purchaser involved, that all utilities are present on the property, that there is sufficient parking, that there are or are not appurtenant easements to the property needed for utilities, that no structures encroach over the property line or into any easements;3.        That the survey shows the correct number of improvements with the correct addresses.           In looking at a survey, it is important to check the survey information including the scale, the north arrow, the legend, if any, the date the field work was completed, updated and the map drawn, the certifications and the surveyors seal and signature. 
Legal Descriptions and the Survey
      “Metes and Bounds” Legal Descriptions  Starting with the legal description, it is important to follow the “metes and bounds description” (meaning measurements and boundaries).  The review should start at the point of beginning of the survey which is typically where the first bearing  proceeds from  after the point of beginning.  The first bearing relates to a previously established line, perhaps a section line or a subdivision line, or a road).  The description then follows the property boundaries along the courses and distances shown on the survey back to the point of beginning.             It is important that the description closes.  The ALTA/ACSM certification assumes that there is closure in legal descriptions.  (There are various forms of software available that will review a legal description to make sure that it closes. )
          Oftentimes legal descriptions are created by non-surveyors including attorneys, title officers and real estate agents who know enough about real estate and/or have enough information to be able to properly create a legal description.  One who creates a legal description of the “south one-half of lot 1” usually will not have too much trouble if they know what “lot 1”  looks like.  However, it is important if not critical to have a surveyor prepare a correct metes and bounds legal description.            Typically, a surveyor in the field will attempt to locate previously set monuments establishing the boundaries of a piece of property.  Some older legal descriptions use boundaries of old fences, “the old oak tree”, or rivers.  Also, previously, some of the tools used were not exactly accurate.  These included metal chains that stretched and contracted with the weather.  (Older legal descriptions sometimes refer to “chains” and “links”  as measurements.)

          Rectangular System/ Government System  Another type of legal description is based on the rectangular system or government system which was adopted by the Continental Congress in 1785.  Legal descriptions of this type are common in Missouri.  They are based on portions of the sections in a certain township and range with reference to a particular meridian.  There are 36 sections in one square mile for a total of 640 acres. Each section is typically divided into further quarters and quarter quarter sections.
          If you are reading or reviewing a legal description that is based on the rectangular system (the township and range type) it is oftentimes easier to work backwards through the legal description to locate where you are.
          Subdivision Legal Description A third type of legal description is based on the subdivision of land.  Most real estate attorneys have been exposed to a legal description such as “Lot 5 in block 4 of Pleasant Hills Plat 2, a subdivision in Boone County, Missouri, according to the plat recorded in Plat Book 10 page 5 of the Boone County records.”  The subdivision name refers to a recorded subdivision plat that is recorded in the county recorders office.   Typically all of the easements roadways and utility easements are shown on the subdivision plats in connection with the approval process that typically occurs in the county where the subdivision is established.           The legal description on the survey should be the same as the legal description in the title commitment.  The legal description and the title commitment generally come from the last vesting deed on the property.  If there are differences between those legal descriptions, it is critical to determine those reasons for such differences because the seller of a tract of land that is described in a manner different than the deed where  he purchased the property can create significant problems for the seller.            Sometimes there are differences in the deed that is used by the surveyor to create the measurements on the survey.  Sometimes the measured call is different than the deed call.  There are any number of reasons why there would be discrepancies in the legal descriptions including that the surveyor may have either made a typographical error, or that he started the description in a different place than on the title commitment.  Regardless, it is important for the attorney to determine which is correct and have the surveyor reexamine and explain any discrepancies.             In addition to checking that the legal description on the face of the survey is the same legal description that appears on the commitment, it is important that the metes and bounds description should be followed around the boundary of the property and back to the point of beginning, paying attention to the calls to make sure that the distances and the directions are accurate. Often, there are reversed calls or other typographical errors.
 
          Improvements/No Encroachments   In connection with improvements that appear on the property, the survey should be reviewed for the location of the buildings and other improvements.  Of particular importance is to make sure that no building or other improvements encroach onto or off of the property.  In addition, it is  important to make sure that there is no encroachment over a setback line or into easements.  In addition, other types of encroachments into easements or encroachments onto or off of the property that should be reviewed include fences, parking areas, sheds, signs, etc.  If an encroachment is of a permanent nature, this can create serious problems for the purchaser and should be taken care of by a grant of an easement or monetary compensation before the closing of the transaction.  If there are encroachments of small or movable structures that are not too expensive to remove, these encroachments are of less concern and often the title company will insure over them.

Easements
          Any easements that appear on the title commitment should be located on the survey.  It is also important to have copies of the easement documents for review.          In connection with utility easements, if underground utilities are located on the property, the surveyor, if requested to do so, can review plans of the utility company to determine where the easements are located.  Otherwise, they can hire companies  with special equipment to detect where the utilities are located.          In addition to easements located on the property, appurtenant easements which benefit the property should also be shown on the survey.  Sometimes, it will be necessary to  obtain an  appurtenant easement in case a utility runs off the property without any apparent supporting easement.  If this is the case, it must be created and the adjoining owners will need to grant it.          Sometimes, it becomes apparent from the survey that there is an appurtenant easement that does not appear on the title commitment.  It is not unusual for a title company, once the order is placed on a particular parcel of property, not to include an a appurtenant easement on the title commitment.  If this happens,  it is important that the survey be discussed with the title company in connection with researching the title to the appurtenant easement.             Sometimes an easement will appear on the survey that is not shown on the title commitment.  Perhaps a gravel road across the property has been observed and placed on the survey by the surveyor.  It is important for the attorney to review these sorts of items with the title company to make sure that an easement is created or that it is taken into account in the title  insurance policy.  Other matters that ought to be recognized by a surveyor and shown on a survey might  be a possible prescriptive easement or right of way that is unrecorded affecting the property.  This may only be apparent from a visual inspection of the property by the surveyor.  If such an easement is discovered, it should be thoroughly investigated and proper documents to validate it be drafted. 
          Sometimes an easement appearing on the title commitment does not affect the property and the surveyor will be able to determine this and the attorney can then request deletion from the title commitment.
          As mentioned above, in connection with encroachments of improvements  onto a property or over a property line, the easement areas should also be carefully followed  for encroachments lying within them.  In connection with title insurance matters, some encroachments are not extremely risky or would be inexpensive to remove and a title company is likely to insure over them.  However, more permanent items, such as a swimming pool lying in the middle of a utility easement crossing the property would be another matter and likely need more significant measures to deal with removing them. 
Access and Parking 
          Another very important item to consider in dealing with property transactions is the access to the property.  One of the basic coverages under the ALTA forms of title insurance is insurance coverage that a property has legal access.  A survey showing access on a public street usually satisfies the question.   A survey showing access by way of a private roadway creates issues that need to be investigated to make sure that there is access from outside the immediate area. A private roadway must connect to a public right of way at some point.   Also, the attorney must make sure that any kind of private road agreement is properly drawn for the protection of all abutting property owners.  It is not uncommon, however, to find that a property has been transferred that ends up being landlocked because a survey was not performed or because of an error in creating the legal description over the years.
          If access is by an appurtenant  easement, when ordering title insurance, you should make sure that you have title insurance coverage for the appurtenant easement.  Typically, the title company will show the appurtenant easement as a second parcel on the Schedule A of the title insurance policy. 
          In addition to access issues, depending on the type of property involved, it may be important to show the parking areas in the survey.  Often in connection with a commercial transaction, the local zoning authority will require a certain number of parking spaces in order to satisfy its zoning requirements.  This would also be necessary to be shown on the survey in connection with trying to obtain an ALTA zoning endorsement. 
Utilities
          Any review of a survey should also include a review of the utilities servicing a particular property.  Easements that are designated for utility purposes, for example on a plat, should be reviewed  and the various utilities contacted to ensure that they are servicing the property.  Sometimes a utility does not have an easement upon which to support its services.  If this is discovered, it is important to make sure that an easement is obtained or that one is granted.

Certification and Other Matters
           The review of the survey should also carefully make sure that the survey certification is properly made to the parties that were on the initial order and that the items that were placed on the order for specification in the survey have been included.  In addition, you want to make sure that the certification states that an actual on the ground survey was performed and the date of the survey and any updating work.            After the survey has been totally reviewed, it is necessary to do a list for the surveyor and possibly for the title company in connection with correcting any discrepancies between the survey and the title commitment.  Once the thorough review and checklist have been completed with all discrepancies resolved, the attorney can be satisfied that he has provided a resolution to all title and survey issues possible in a proposed transaction.

Subdivision Plats

          Large tracts of land are often subdivided into building lots.  The plats take a larger tract of land and divide it into blocks separated by streets.  Each block is then further divided into lots.  The subdivision is generally given a name and the lots and blocks are numbered.  The plat is prepared by a surveyor showing the lot, block and including the dimensions and numbers. (Refer to the Harry Styron materials in the 2007 REI book as well as the Code of State Regulations attached.)
     
Condominium Plats

Condominium plats generally show the division of a building or buildings into separate units of living area that are legally created and transferable.  The information and detail required to be shown on a subdivision plat is also required to be shown on a condominium plat but with some additional detail and indications of future development. (Refer to the Harry Styron materials in the 2007 REI book as well as the Code of State Regulations attached.)
      
      TITLE INSURANCE COVERAGE
          RELATING TO SURVEY MATTERS

 The American Land Title Insurance Association Owners Form 10-17-92  is the most commonly used form in Missouri for residential property.  The coverages provided include coverage against losses due to  1)  title to the estate or interest described in Schedule A being vested otherwise than as stated therein;  2)  any defect in or lien or encumbrance on such title;  3)  lack of a right of access to or from the land; and 4)  unmarketability of title.

 Surveys are important in connection with the issuance of title insurance and getting additional coverage whereby the “standard exceptions” are removed.  The standard exceptions that often require  provision of a current survey  to be deleted are as follows: 

- rights or claims of parties in possession not shown by the public records
- encroachments, overlaps, boundary line disputes and any other matters that would be disclosed by an accurate survey and inspection of the premises
- easements or claims of easements not shown by the public records.

          If an encroachment is of a minor nature, a title company will often give full coverage (deleting the above encroachment exceptions) or will “insure over” an encroachment.  “Insuring over”  or providing “affirmative coverage” against a loss due to  an encroachment typically means that the title company will  take an exception  on the policy  for the encroachment,   but will not pay for any loss unless a court issues a determination that the encroachment has to be removed.

 If an encroachment is a serious encroachment, a title company will require that an easement  be given or granted, or the title company will take an exception to the title insurance coverage for such encroachment.  Often,  the title company does a risk analysis and a cost of removal analysis in making its decision to over full coverage or not.

 If a survey shows that the property is different than appears on the title commitment, the title company will usually require further investigation as to the reason for the differences. 

 A title company will most often delete all of it’s standard title exceptions upon receipt of a “clean” survey, including a mere  “spot” survey, (SRSP Survey).  However, because of the nature of a “spot” survey, a limited survey exception may be added to the title policy.

 Endorsements have been somewhat previously discussed in these materials, but they are important to extend the basic coverages of the title insurance policy.  Endorsements to extend coverage are routinely requested in connection with commercial transactions.  Endorsements to a title insurance policy come in many forms.  The scope of coverages available are extensive.  Many of them rely on the use of a submitted survey before the decision is made to issue an endorsement. 

 Samples of some of the available endorsements are attached.  The websites for First American Title Insurance Company and Old Republic Title Company include many of the forms of endorsements available.  Some of the endorsements that are often used with reference to surveys deal with access and street abutment, contiguity of parcels,  that the property shown on the survey is the same as that being insured by the title company, zoning coverage and affirmative coverages against encroachments.

Frequently, business attorneys are presented with a client’s lease for review and negotiation. This article will discuss selected issues of importance to small business owners in most commercial lease situations. The focus will be on office and retail leases although many of the issues discussed would be pertinent to other types of leases as well. The topics can be used as a checklist and are intended to raise questions that will lead to a fairer lease and less risk for the small business owner.

Identify Parties and Premises
Care must be taken to correctly identify the parties, and to fully and accurately identify the premises. An attached exhibit showing the precise location is desirable. In addition, it is important to include the dimensions and/or square footage of the leased premises. Both landlord and tenant need to make sure at the outset of the lease the precise square footage and how it is calculated to avoid disputes later because costs and expenses are often tied to the square footage of the premises. It is also helpful to determine if the square footage referenced is rentable (which includes portions of common areas) or useable (within the four walls of the premises).

Term/Commencement
The lease term is obviously an important term of the lease. Typically, it is the time period during which the tenant has exclusive possession and the obligation to pay rent. The commencement date and the termination dates are also vital because they impact other issues in the lease. The tenant’s needs must be known in advance to determine the length of the lease term. A short-term lease may be beneficial for the small business owner looking for flexibility, while a long-term lease can guarantee that the tenant will be able to keep a certain space at a known rent for an extended period. One way to avoid the pitfalls of either a short –term or long-term lease is to negotiate a short-term lease with options to renew for additional periods.

While most leases are dated and commence on the same date, in many cases the commencement date will be that date which coincides with completion of improvements that the landlord agreed to make. If the commencement date is different than the date of the lease, make sure that the following issues are dealt with: 1) objective tests should be set forth rather than ambiguous conditions. For example, “substantial completion” should be supplemented by a requirement of an architect’s certificate of occupancy certificate. 2) The tenant should consider including a provision to withhold rent until the landlord has substantially finished and a termination provision if the improvements aren’t finished and if the term hasn’t commenced. 3) A supplement to the lease should be executed to document the commencement date . 4) It should be made clear whether or not the tenant’s non-rent obligations begin before the commencement date.

Rent, Additional Rent, Expenses/CAM
The agreed upon rent should be clearly and consistently stated. Whether the rent is shown on a monthly or annual basis or based on square footage or a total for the full term, all amounts must be consistent. The due date for the rental payment should be clearly stated and a grace period negotiated before a penalty is charged. The penalty amount and whether it continues to accrue ought to be specified as well. Typically, the rent will be prorated for the first and last months to the extent that occupancy is less than a full month.

Carefully review the method by which the rent may be increased during the term of the lease. Increases might be based on the Consumer Price Index or a fixed percentage. Make sure that the lease is clear as to when any increase in the rent begins, e.g. the first day of the calendar year following the commencement date or some other date. A cap on any rental increases is of significant benefit in negotiating rent for future years. If formulas are used, the formulas and definitions must by carefully reviewed and negotiated, with particular attention being paid to what items are included and excluded from the calculations.

It is critical to review operating expense provisions (typical in office leases and certain retail leases and often called “additional rent”) and to negotiate clear terms that are understood by both tenant and landlord. The lease may provide that the tenant pay a pro rata share of any increases in operating expenses over some base year amount or charge the tenant a pro rata share of the year’s operating expenses. It is often helpful to look at the historical figures when negotiating the lease so that representations made about previous years’ expenses are confirmed. Determine whether the allocation of expenses is based upon a fully occupied building or , if not, that they are properly adjusted.

Review the expenses that the landlord will pass on and make sure that they are reasonable and directly related to the building’s operations. Certain costs should not be passed on to the tenant. These might include salaries of the landlord’s executive staff, capitalized expenses, taxes on income and costs related to a landlord’s violation of any governmental regulations, among other items. One method of protecting the tenant in connection with annual increases in operating expenses that the tenant is responsible to pay is to place a cap on what the tenant is responsible to pay. A tenant might also negotiate that it should not be responsible to pay any increased expenses or costs of the landlord, which result from the landlord’s or other tenants’ activities or improvements unless tenant participated in such activities or required such improvements.

The lease should also include a provision allowing the tenant to audit the books and records of the landlord , that the books and records include a detailed list of the expenses and the details of any increases. The standard for the accounting method used to keep the books and records might also be included (such as Generally Accepted Accounting Procedures). Other important terms related to additional rent and expenses to be included are the method for resolving disputes related to the types or amounts of expenses being passed through to the tenant (e.g. negotiation, mediation or arbitration) and the timing of any notices for dispute resolution.

Common area maintenance (CAM) charges are also an important area of concern to tenants, usually retail mall tenants. Many leases include a separate section dealing with CAM expenses that are passed on to the tenant for the landlord’s expenses for utilities, taxes and other costs related to the building or center where the premises are located. Simply put, the tenant is required to pay a certain percentage share of the costs of the landlord for maintaining, operating, repairing and replacing components of the building or center. Typically, the proportionate share is based on the tenant’s square footage divided by all leasable squared footage for the building or center. Some of the sorts of methods of limiting the CAM include simple caps, limiting included expenses to only repairs or agreed upon replacements or to cap the expenses by amortizing the amount over the life of the expenditures

Repairs and Maintenance
Another area of critical importance to a tenant is the responsibility for the repairs and maintenance to the premises and common areas. In many lease situations, the landlord is responsible for most if not all of the maintenance and repair obligations and the tenant is only responsible for keeping the premises in good order and condition, ordinary wear and tear excepted. However, in many situations, the repair and maintenance responsibilities may be divided. If so, it is necessary to thoroughly and carefully specify which party is responsible for what repairs and what maintenance. Structural repairs to be made by a tenant, including roof, exterior walls and systems could be more costly to a tenant than anticipated and might not be proportionately beneficial to him. One means of resolving these issues is to establish a maximum amount that a tenant will be required to expend for repairs over a given period of time. Another is to individually specify the items of maintenance and repair or replacement and to allocate responsibility that way. In addition, a tenant should not be responsible for repairs or maintenance that are not the result of the use or occupancy of the tenant. If the landlord is required to handle certain repairs and maintenance, it is helpful to include a requirement that a problem be addressed in a reasonable time following notice. Note too that the lease should be reviewed section by section to make sure that the repair and maintenance provisions do not conflict with other sections of the lease and create unintended liability for the tenant. Related to these concerns are minimum standards for maintenance of the property by the landlord (e.g. minimum maintenance in line with Class A office or retail space to make sure that building or center and common areas are maintained as a first class retail or office space).

Use Restrictions
While at first blush, a lease clause which specifically permits the operation of the tenant’s business (i.e., “the premises may be used for the operation of a retail shoe store and for no other purpose without the prior written consent of the landlord…”) seems to fit the bill, a tenant may find that such a provision practically inhibits his ability to sublease the premises or assign the lease in the future. A tenant should always seek to obtain the broadest possible use clause, ideally one which permits the operation of any lawful business. As a fallback position, a tenant may agree that the premises will initially be operated as a specific use, which in essence only requires that the tenant open for business under the required trade name or business category or that the use be for “general retail” or “general office” purposes. Tenants should similarly be careful to set forth with specificity any special use provisions required due to the nature of tenant’s business operations, such a outdoor storage and lighting or any environmentally sensitive uses.

Compliance with Applicable Law
The provisions in many commercial leases calling for tenant’s compliance with “all applicable laws” during the term of the lease seems innocuous at first review. After all, what is unreasonable about a requirement to comply with the law? In reality, however, such a requirement may make the tenant responsible for matters which were not in compliance at the commencement of the lease term. Tenants should address this concern by either (i) agreeing to comply with all applicable laws related to tenant’s use or business operations at the premises during the term or (ii) obtaining a warranty and representation from the landlord that the premises are in compliance with all applicable laws, regulations, ordinances and governmental requirements as of the commencement date.
Renewal Provisions, Rights of First Refusal and Options
Renewal provisions and complying with the technicalities of properly exercising renewal terms are important and merit special attention. It is necessary to make sure that the method for exercising rights at or near the end of a lease term are detailed in the lease. In many cases, a lease will automatically renew for an extended period of time unless written notice is received by the landlord by a certain deadline. Some deadlines for receipt of written notice can be as much as six months (or more) prior to the end of the initial term. Others are as little as 30 days. The appropriate deadline should be negotiated depending on the needs of the tenant and the space involved.

If the tenant is interested in acquiring additional space or to purchase the building where the premises are located, the tenant should consider negotiating a “right of first refusal” or an “option”. In the case of adjoining space, the tenant could include provisions allowing him the right of first refusal to lease such space if and when it becomes available. In the case of the building itself, the tenant could include provisions allowing him the option to purchase the building. The method of exercising an option or right of first refusal must be detailed in the lease, including triggering events, notice requirements and the method of exercising the right of first refusal or the option. With respect to an option to buy the building, for example, the terms that might be included in a sale contract are required, including the price (or method for determining the price), description, terms of title transfer and closing provisions.

Economic Concerns/Exclusives
Another significant area that should not be overlooked by the tenant is obtaining exclusive rights to sell goods or provide services. This is the best protection a tenant can have against competition from other tenants and any affiliate of the landlord. The tenant should also obtain a warranty that the landlord obtains agreement from other tenants (current or future) to honor existing exclusives granted to the tenant.

Often a retail lease will limit or restrict the goods and services sold by the tenant at the location. A use clause is one method of doing so by limiting what the tenant can sell. A radius restriction that prevents a tenant from conducting the same sort of business within a certain radius is another method used. Mostly, these restrictions are for the landlord’s benefit. It is especially important to get an agreement from the landlord, to the extent possible, that the landlord will not lease space to any competing business and will include a non-compete in other tenants’ leases.

In the case where an affiliate of the landlord located in the same shopping center is or may compete with sales of the tenant, or to prevent another tenant from moving in and competing with certain sales of the tenant with a competing business, tenant should insist on protective language in the lease to protect the tenant’s business from such competition.
Basics of Sublease and Assignment

The right to sublease and/or assign the premises can be very critical provisions for a tenant, and are often key tools to manage changing business needs. Accordingly, these provisions deserve careful attention. Standard commercial leases provide strict prohibitions against tenant’s right to sublease or assign unless the landlord’s consent is first obtained. Often, that consent may be granted or withheld in landlord’s sole discretion. That notwithstanding, a tenant is well advised to go beyond this basic concession and seek additional protections. A landlord may be willing to negotiate specific terms and conditions under which a tenant may have the free right to assign or sublease, including establishing a set of baseline standards which, if met, vitiate the need for landlord’s consent. These may include the creditworthiness or financial strength of the proposed assignee or subtenant, compliance with existing use restrictions, or demonstrating that the proposed tenant does not violate exclusive use provisions granted to other tenants in the building or shopping center. Consider also adding a provision that the Landlord’s consent shall have been deemed given if written consent is not received by Tenant within a certain time after requesting such consent.

Exceptions to Anti-Assignment Provisions
At the inception of the lease term, the tenant should be optimistic about the potential for growth of its business, and should provide a strategy for business succession, retirement, sale or merger opportunities. Stated in the opposite, a lack of forethought with respect to these issues may actually restrict opportunities to raise investment capital, acquire complimentary businesses or be acquired by other, similarly successful ventures. A competitor desiring to enter the market where the tenant is already established may well want to acquire, by merger or asset purchase, tenant’s on-going business operations. Typical anti-assignment provisions would impair such opportunities or may adversely affect timing or valuation issues during negotiations. In order to avoid such a result, a tenant should seek a framework within the lease terms to permit the tenant to assign the lease without first obtaining landlord’s consent. Examples of such triggering events include the sale of all or substantially all of the business assets of the tenant, or any sale or merger involving a publicly traded or other company with assets substantially greater than those of the tenant. Transfers owing to the death or retirement of the principal shareholders, or the admission of additional shareholders, partners or investors which increase the capitalization of the tenant entity are examples of circumstances which arise on a regular basis but are seldom contemplated at the time the lease terms are negotiated. Waiting to negotiate such terms until after commencement of the lease strips the tenant of its negotiating leverage.

Recapture Provisions “Recapture” refers to the right of the landlord to prematurely terminate a tenant’s rights under the lease. The triggering event is the mere request for landlord’s consent to a proposed assignment or sublease transaction. The risk of the landlord exercising a right of recapture could not only prevent the tenant from realizing economic benefits but the mere existence of this right within the lease document could chill the interest of a potential assignee or sublessee. For example, a tenant whose lease provides for a below market rental rate or whose leased premises are located in a high demand area may be fearful of requesting consent to a transfer or assignment as the increasing value of its leasehold could be lost to the landlord who would be happy to retain the value of a new lease with a new tenant. It is appropriate in most instances to seek the removal of any recapture provisions as one of tenant’s key negotiating points. Alternatively, a tenant should seek to limit the time in which the landlord may exercise the right of recapture, in order to lessen the chilling effect on potential subtenants or assignees, as noted above, and to limit the expenses incurred by a tenant pursuing a subtenant or assignee (i.e., brokerage and attorney’s fees) only to have the landlord exercise its recapture rights.

Relocation Rights
Standard commercial leases, particularly leases for office space, often give the landlord the right to move a tenant to a new location within a building or center. While landlords often cite the need to provide flexibility to accommodate larger tenant’s expansion needs as the rationale for this provision, location can be equally important to a small business tenant. If a tenant is unsuccessful in deleting this provision during lease negotiations, it should at least set parameters on where a landlord may relocate tenant’s business operations. Options to consider include whether the tenant must remain on the same floor, within the same building, at certain heights (i.e., ground floor for visibility and street traffic or the top floors for views), etc. If a landlord exercises its relocation rights, it is imperative that the landlord pay all costs and expenses of the move, including the costs of printing new business papers with the new address, changing phone and technology wiring, and perhaps even some advertising costs to notify customers and clients of the change of address.

Default: Notice and Opportunity to Cure
Tenants are investing more and more dollars into high value locations, technology and leasehold improvements. Coupled with greater marketing dollars and time spent promoting its business presence, the scope of a tenant’s investment in a leasehold location is greater than ever. This investment must be protected from inadvertent failure to comply with the strictures of the lease, particularly given the increasing complexities of commercial leases and the burdens they impose on a tenant. While most leases offer a grace period for compliance after a stated deadline for performance, it is more often the case that a tenant misses a deadline not because of an inability to perform but because it is unaware that the performance requirement was not met. Accordingly, notice from the landlord is imperative to allow tenant the opportunity to comply with lease obligations. Typically, a landlord is willing to permit the tenant 15 to 30 days after written notice in which to cure any non-monetary lease defaults (i.e., failure to provide year end financials or evidence of insurance). Most negotiations over landlord’s obligation to provide written notice of default center on whether this obligation should apply to the failure to timely pay rental obligations. Given that a tenant could lose its entire leasehold investment if a rent check is one day late, this revision should be number one on a tenant’s list of requested lease revisions. Most landlords will permit tenant a short cure period after written notice for a rent default (typically 5-10 days), however, in order to prevent abuse of this provision by habitually delinquent tenants, the number of times landlord is obligated to give such notice and cure, either over the term of the lease or within a given calendar year, is often limited.

Default: Mitigation of Damages
Tenants enter into leases with the very best of intentions and goals of success. However, the possibility of a failed business must be considered during any lease negotiations. An important provision to negotiate is to require the landlord to mitigate damages. Typically, a landlord is not required to mitigate a tenant’s damages absent a provision in the lease. With a clause requiring mitigation, the landlord is required to use reasonable efforts to mitigate a tenant’s damages and re-let a tenant’s space in a reasonable time following default.

Eminent Domain/Condemnation
Given the spotlight that this topic has occupied since the U.S. Supreme Court’s decision in the City of New London vs. Kelo it is only fitting to discuss how the exercise of eminent domain by a municipal or other governmental body may impact a tenant’s rights and obligations under a lease. Standard lease provisions will allow a landlord the right to terminate a lease as of the date the condemning authority acquires title to the property. In the case where less than all of the landlord’s interest in the building is being taken and tenant’s ability to operate its business is not adversely affected, the tenant’s lease will remain in place. This may be problematic for a retail or other tenant which relies heavily on customers or clients of other tenants in the building as a source of revenue, and tenants in such a position should negotiate appropriate provisions to protect them from the adverse effects of such events, which may include the right to terminate the lease if a certain percentage of the building is impacted by a successful condemnation proceeding. As is more often the case, however, the issue between a landlord and tenant often centers around allocation of any monetary award made by the condemning authority based on the value of the property taken. In most instances, a standard commercial lease will provide that the entire award is the property of the landlord. Tenants, particularly those who have significant sums invested in leasehold improvements, should seek to modify the allocation of any monetary award. Ideally, the lease should provide that the tenant has the right to pursue its own claim for the value of its leasehold, separate and independent from that of the landlord. In many jurisdictions, however, the condemning authority will only issue one award, encompassing the entire value of the property taken. In such cases, tenant should provide a mechanism for fairly allocating the award between the landlord and the tenant. This is often achieved with some form of arbitration provisions, failing agreement by the parties within a specified time frame.

Exit Strategies for the Tenant’s Benefit
Depending upon the relative bargaining positions of the tenant in negotiating a lease, the retail tenant should also consider negotiating provisions for its protection in case vacancy rates rise to a certain level or if the tenant mix changes drastically such that the tenant’s business is adversely affected. A strictly retail shop that finds itself among medical, dental and financial services offices in a formerly all-retail center will find its business suffering unless provisions are negotiated for the tenant’s protection.

Business/Operational Needs of the Tenant
The tenant must carefully identify his operational needs and include terms that ensure his ability to operate his business successfully. Such matters might include available customer parking, operational hours of the building where the premises are located (e. g. heating and cooling requirements for weekend hours), and delivery requirements (e. g. dock availability and hour restrictions). Many standard leases do not address the services that will be provided to a tenant. This is an important area to be included, especially if the tenant has weekend hours or other special needs. A clause that requires “such services as generally provided by other “Class A buildings” or specifically setting out the quality and quantity of services may be necessary. Related to this is the importance of reviewing the “Rules and Regulations” that often accompany a lease to ensure that they don’t conflict with the tenant’s expectations and to make sure that the landlord cannot arbitrarily change them without notice.

Mutuality
It is wise and often easy to negotiate reciprocal provisions in a lease. Many leases are drafted from a pro-landlord standpoint but can often be negotiated to be “fairer”. Attorney’s fees clauses, waiver of claims, indemnification and waiver of subrogation are areas that are often made reciprocal through negotiation.

Insurance Matters
Insurance requirements in the lease should be thoroughly reviewed by the tenant and the tenant’s insurance agent to make sure a) that they are reasonable, and b) that they can be satisfied. Some leases contain outdated requirements or inaccurate descriptions of coverages required. Other times, certain obligations set out in the lease cannot be provided by the insurance company. Nevertheless, the best interests of the tenant and his obligations under the lease should be discussed with the insurance agent.

Environmental Issues
Although coverage of environmental issues affecting leases is critical, the depth of the topic is beyond the scope of this article. However, environmental issues can be of great concern to a tenant and should not be overlooked by the tenant in performing his due diligence. A tenant should obtain an inspection and /or attempt to negotiate a warranty from the landlord as to prior uses of the premises, among other strategies.

Damage or Destruction of the Premises
Many leases contain a pro-landlord language dealing with what happens in the event of damage or destruction (or partial damage or destruction) of the premises. Typical clauses take away all or most control of the tenant so that the tenant is not able to have the repairs done and has no idea how long his business will be closed. It’s often a good idea to limit the time within which the landlord has to repair and complete the repairs. In addition, it may be that a method may need to be decided upon to break a stalemate as to the frequently seen condition that the premises be determined to be “uninhabitable” or “untenantable, and who decides how this condition is defined Another aspect of this that is crucial is that for any period of time that the tenant’s doors are closed as a result of casualty, the rent should be abated.

Guarantors
Most landlords will demand that a tenant provide a personal guaranty in connection with a lease. It is often possible and quite advisable to limit the exposure of the guarantor. If it can be negotiated, a dollar limit, a time limit, or a provision making the guarantor secondarily liable are all ways to limit the guarantors’ exposure.

Conclusion
Knowing the important and practical issues involved in commercial lease negotiation in advance will facilitate the most effective representation of the small business client and will serve the business lawyer well.

This article was written for attorneys and business buyers and sellers, presented at The Missouri Bar Real Estate Institute in 2005.

I.   Introduction
It is important for any real estate attorney to be familiar with the legal and practical issues that arise with the purchase or sale of a business.  More often than not, buying or selling a business involves the real estate attorney  because  real property where the business is located, or real property otherwise used in the business,   is  included in the deal. Buying “a business is a box” involves  many critical issues that  are not strictly  related to real estate  or within the usual experience of the real estate attorney.
Many  of the same  issues arise whether the business being bought or sold  is a small restaurant or a multi-million dollar  hotel.  With the bigger transaction  and the larger client, the issues increase in number and complexity.  This article discusses issues common to most  sales of a “business in a box” in the form of the sale of assets, including the real estate.   However,   complex issues  normally involved only in larger transactions are also discussed..

II.  Preliminary Stages of Buying or Selling a Business
Before the Purchase and Sale Agreement (the “Sale Contract”) is executed, there is an entire phase of the deal that must be completed.  Typically,the Seller will first work to position the business for sale, legally and financially.  The Seller will investigate the business, its assets and liabilities, pending or threatened litigation, corporate governance details and the value of the business..  The proposed structure of the sale will be explored, the sale criteria will  be defined and the offering will be made.
In this preliminary phase, the interested Buyer will start to investigate the proposed sale, its structure and the price.  The Buyer will explore financing issues and the feasibility of proceeding. A letter of intent or other form of agreement preliminary to a Sale Contract will be executed.
Finally, the parties are ready to enter into the Sale Contract.  A well-prepared Sale Contract covers the issues that are likely to arise in a clear and concise manner.  The Sale Contract should then become the blueprint for the deal.

III.  The Purchase and Sale Agreement

A.  Typical Contract Provisions – The sale of a business through the sale of assets  requires a contract that includes many provisions common to other types of transactions as well.

1.  The Parties
The Sale Contract should include all parties  to the agreement. In addition to the Buyer and Seller, principals of corporate parties should join in if they will be bound on indemnifications, notes or covenants that are part of the deal.  Others that might be included are the brokers, if commissions are due, and any others whose interests might be affected by the transaction “as their interests may appear”.

2.  The Purchase Price
Once the purchase price has been negotiated and established, one of the issues that arises is allocating the purchase price among the assets, the real estate and the good will.  Tax reasons create a tension between the Buyer and the Seller  in making the allocation with the Seller pushing for the allocation to be more heavily on the intangibles.   The Buyer is more interested in allocating more to  the hard assets because of depreciation.  Allocations are made based on the agreement of the parties and/or with the use of appraisals.  It is important  to have your client’s accountant involved with these decisions, and as early in the process as practical.
It is also important  to make clear what adjustments are to be made to the purchase price at closing.  Adjustments need to be made for prepaid items, security deposits, taxes, and  licenses and permits that have been paid for, depending  upon the deal.  Significant adjustments are also required at closing for inventory and other items that are determined after the contract is entered into.

3.      Adjustments  to the Purchase Price

Various adjustments are required to be made to the purchase price for any number  of items including prepaid items, security deposits, taxes and license fees, among other items.  For further discussion  about adjustments to the purchase price, see  Article IV.

4.     Identifying the Assets to be Included or  Excluded

Identifying the assets to be included in the sale of a ‘business in a box’ would seem easy enough.  However,  Sellers and Buyers often get careless  about this, so  it is important to carefully review what is and what is not included in the sale.  In  smaller transactions, all assets are generally specified, although some may be grouped.  In  larger transactions,  it is sometimes  easier to describe  everything as  included except for specifically excluded items, and/or to add exhibits and schedules
Generally,  soft assets such as  cash and receivables  are not included in the sale.  Hard assets, depending on the business, could  include furniture, fixtures, equipment, supplies, hardware, software (to the extent allowable), cell phones/radios, trademarks, copyrights and trade secrets and  telephone numbers.
Specific categories  of assets may include:
i.    Machinery and equipment
ii.    Accounts receivable
iii.    All customer, supplier and other business records and intangible items, including good will and growing concern value
iv.    All contracts, leases, licenses and other agreements listed or described on a separate schedule
v.        Non-competition agreement
vi.    Cash, usually excludes cash and amounts     in bank or other financial institution accounts, but may include cash in the registers
vii.    Inventory and supplies:  the parties usually mutually determine such inventory and supplies as of the close of business on the day prior to the closing date with an agreed on form of valuation such as:
1.  published price list
2.  percentage of invoice cost (determining invoice cost may involve agreement on accounting methods such as FIFO, LIFO or LCM)
3.  work-in-process:   raw materials at percentage of invoice cost and direct labor as determined from seller’s books of account at a particular percentage
The contract may give the buyer some discretion as to what is acceptable quality and age of inventory.  The purchase price of inventory may be payable outside closing.

Identifying the assets to be excluded from a sale involves careful review.  Typically, the Seller’s liabilities and other obligations are excluded from the sale, unless perhaps the Buyer is undertaking an obligation as part of the deal.  In addition,  non-owned items must be fully specified.  In addition to tenant property, for example, coffee service/equipment, beverage equipment and dispensers,   vending machines, ATM machines, pay  telephones and intellectual property may need to be identified.

5.    Closing  Provisions- Closing Date and Deliveries

a.  The Closing Date – The closing date is  an important consideration in preparing the Sale Contract.  It is often the attorney’s role, in consultation with the parties and other advisors to the deal, to establish a realistic closing date.  The parties are often anxious to close the deal as soon as possible without making a realistic assessment of the work involved after the contract is signed.  It is also important to determine whether time is of the essence. Unless  strict performance is required for some compelling, reason, some flexibility should be included in the contract provisions for unplanned events or delays.

b.   Deliveries at Closing  -    While it may seem like a  great deal of  work early in the game, it is important to specify in the Sale Contract the documents that will be required to be provided by the Seller and the Buyer at closing.  Forms of each document to be delivered at closing should be attached to the Sale Contract.  This serves as a work checklist and  a closing checklist.   It also generally prevents arguments over the forms of documents or the requirement that they be provided at closing.  A listing of typical “Seller’s Deliveries” and Buyer’s Deliveries”, is  included in the materials that follow this article.

B.  Representations and Warranties – Critical Element of Deal

Some of the most important  provisions of the Sale Contract are the representations and warranties provided by the parties, particularly the Seller.  Representations and warranties can save time and money because they generally result in less investigation being needed and provide some assurance to the Buyer that he is getting what he bargained for and that he won’t have problems after the closing.  A provision or provisions should also be included to reflect that warranties survive closing to avoid any argument that the warranties didn’t survive closing or that there was a merger.

A related issue involves recourse in the event of a misrepresentation or breach of a warranty.   Typically, the Seller will agree to indemnify and hold harmless the Buyer from any number of problems, including warranty problems.  However, this is not necessarily  enough protection for the Buyer.   For example, if the Seller is a corporation  that will be liquidated within a short time of the closing, the Buyer will be without recourse in connection with any  problems.  Therefore, it is important to obtain  personal guaranties from as many of the shareholders, partners  or members of the Seller as possible.  In addition, and perhaps more importantly, is for the Buyer to assess the financial resources of the guarantors.  If the guarantor is concerned about his exposure, the guaranty  can be limited in duration and/or capped by a dollar amount.

Some of the more common warranties include the following:

1.    Financial Condition.

Financial statements are accurate or present fairly the financial condition of the company; the business has been operated only in the usual and ordinary course of business consistent with past practices and there has been no material adverse change in the financial condition, assets, liabilities, results of operation, business or prospects of business

2.  Condition of equipment  and inventory.

Equipment is in good operating condition and repair, is suitable for the purposes used and is adequate and sufficient for all current operations of the business in the usual and ordinary course

All items of seller’s inventory and related supplies being transferred to buyer are of a quality and quantity useable and merchantable in the usual and ordinary course of business.

3.    Employment matters.
a.    Seller has no right, claim or agreement pertaining to the employees of the business which would affect the right of buyer to employ such employees and seller recognizes and agrees that buyer may, but shall have no obligation to, employ such employees

b.    Seller is  subject to no collective bargaining agreement and no union or like    organization has organized or is attempting to organize the employees of the business and there are no pending, threatened or reasonably anticipated labor disputes or grievance proceedings relating to such employees.

4.    Others.

a.    There are no sales or use taxes or other taxes payable by seller or buyer as a result of the sale of the assets and the business to buyer other than federal, state and local income taxes
b.      All contracts, leases, licenses and other agreements listed or described on attached schedule are binding and in full force and effect.  The copies of such documents delivered to buyer are accurate and complete.  None of the payments required under such agreements have been prepaid more than 30 days prior to the due date thereof; there is not any default thereunder; and such contracts, leases, licenses and other agreements are adequate and sufficient for the operation of the business in the usual and ordinary course

c.   Other typical representations and warranties of the Seller cover  the   following areas:
i.    Corporate existence and authority
ii.    Execution and Delivery of Agreement Authorized
iii.    No third party consents required
iv.    Complete and accurate listing of assets to be sold
v.    Binding effect of agreement
vi.    Ownership of Assets
a.    Representations/Warranties re:  Real Estate
(i)    Seller has insurable title to real estate
(ii)    Leases are in full force and effect
(iii)     No pending or threatened actions
b.    No litigation pending or threatened
c.    Environmental matters, not known
d.    Intellectual property rights free and clear
e.    Insurance information accurate
f.  No liabilities besides those expressly provided

d.   Buyers also generally provide representations and warranties, but not as many nor as significant as the Seller’s.  Typical Buyer’s representations and warranties cover the following areas:
i.    Corporate Existence
ii.    Corporate power and authority
iii.    Execution and Delivery of Agreement Authorized
iv.    No Third Party Consents Required
v.    Binding Effect
vi.    Financing

C.  Covenants of Buyer and Seller
In addition to the representations and warranties made by the parties, certain covenants are also typically made.  Most covenants are those of the Seller and are to be performed or relate to the business pending closing. However, other significant covenants occur at closing and relate to closing or post-closing matters.
1.     Conduct of business.
Seller covenants to carry on the business in the usual and ordinary course and consistent with past practices diligently and substantially in the same manner as before and
a.   will not change the rates of pay or fixed compensation of its employees or change any contract or commitment with employees
b.  will not enter into any contract or commitment or engage in any transaction not in the usual and ordinary course of its business and consistent with past practices
c.    use, operate, maintain and repair all tangible property with due
care
d.    seller will use best efforts (without making any commitments on   behalf of buyer) to preserve the organization of the business intact, to keep available to buyer the present employees of seller, and to preserve for buyer the present relationships with the suppliers and customers of seller and others having business relations with it.

2.      Other Covenants of the Seller
While not all-inclusive, some of the other covenants often made by the Seller include the following:
a.    Broker’s fees to be paid by  Seller
b.    Access   to Information prior to Closing will be given to Buyer.
c.        Seller will give full cooperation to Buyer
d.       Completion of Improvements by Seller Pending Closing
e.    Transition Services to be provided to Buyer by Seller Post-Closing
f.      Confidentiality of the transaction will be maintained
g.    Further assurances and cooperation by Seller
h.     Seller  covenants not to compete with Buyer
i.     Environmental Remediation will be done

3.      Buyer’s Covenants
Covenants  of the Buyer are fewer and not as significant as the Seller’s.  Typical covenants of the Buyer deal with the following:
a.      Buyer Performance of  his obligations
b.    Confidentiality will be maintained
c.      Employment of Seller’s Employees
d.      Cooperation will occur
e.      Brokers’ Fees will be paid
f.      Seller’s Access to Books and Records After Closing

D. Due Diligence
The Sale Contract typically includes provisions governing the due diligence  period.  The Buyer is given a period of time during which to conduct its due diligence investigations, at its sole cost and expense, in connection with information and documents provided by the Seller.  Typically, this “portfolio” of information includes copies of financial information, title policies, surveys, contracts, licenses, permits, insurance policies, leases, environmental reports and any other information the Seller has available.  In addition, the Buyer is usually given access to the property involved in the sale and the books and records located on site.  If the Buyer is not satisfied with any matter related to the provided information, he can terminate.  Obviously, the more information that the Seller discloses  early in the game, the better.
In addition, during the due diligence period the Buyer will  conduct his own investigations, and have title reports, surveys and environmental assessments done.  Once the title and survey are available, the Buyer will work with the title company  and the Seller to remove unacceptable title and survey matters, or seek means of  dealing with the risks through insurance coverage.
In connection with contracts that are assignable, the Buyer may or may not assume them after reviewing them.  During this period, the Seller and Buyer determine which contracts the Buyer will assume, and follow up with efforts to notify the contract providers.  This aspect of any transaction needs to be carefully handled to determine which contracts are assignable or not.  If not, the Seller needs to determine what costs, if any, are connected to any termination.
Licenses and permits must also be carefully reviewed and the Buyer should investigate with the local and state departments involved which, if any, licenses and permits for the operations of the business can be transferred or which must be newly obtained.

E.  Additional Contract Provisions
Conditions to Closing,  Indemnification Provisions, Remedies, Contract Boilerplate  – Usually,  various conditions of closing for the Seller and the Buyer are set out in the Sale Contract.  In addition to the discussion concerning indemnification, infra,  see the materials included at the end  of this article for  examples of indemnification provisions, remedies provisions and typical contract boilerplate.

IV.  Closing the Deal
A.  Plan and Prepare  It is critical to properly prepare for the closing of any  “business in a box” so that it proceeds smoothly and on schedule.  Everything that is done before closing should be done with a view towards closing.  Planning,  preparing, delegating and double-checking are necessary for a proper closing.
1.  The Sale Contract should be able to be used as a checklist of documents  to be provided and adjustments that are needed.
2.  Proper preparations need to be made in advance for the pre-closing walk-through and  taking inventory.
3.  In a large transaction,  people charged with making sure non-owned  assets are removed,  reading meters, removing cash,  taking inventory and  figuring cash adjustments need to cooperate and coordinate their activities so that the proper information is timely provided to the title insurance company.
4.  It is recommended to have a “dry closing” a day or so before the actual closing date to make sure that as much as possible is prepared for closing and to avoid unforeseen problems.
5.  It cannot be stressed enough to the Buyer to plan ahead for the lender’s requirements.  The Buyer should make sure that the lender understands the entire transaction ahead of time and that all of the lender’s requirements are or can be met.   The Buyer should check and double-check that the lender’s needs are satisfied well in advance, or as much as possible in advance, of closing. Too often, the Buyer’s lender creates havoc at the last possible moment because of some requirement not having been met.
B.  Closing Instructions/Closing Statements  It is also necessary to provide detailed closing instructions  to the title company, paying close attention to any instructions that may not necessarily  be the normal responsibility of the closer.  For example, in a large transaction such as the sale of a hotel where  teams of  Seller’s representatives and Buyer’s representatives are working on the adjustments, cash and ledger calculations, inventory, etc.,  they can be responsible for preparing an addendum to the closing statement with the net result being included on the closing statement by the closer.  As soon as the closing statement has been prepared by the title company, it should be reviewed immediately and revised if necessary to prevent any further delay.
C.  Execution of Documents    While it may seem obvious, the parties to the transaction should make sure they know where the closing is taking place.  While it should be designated in the Contract, sometimes it’s not clear or it’s left to the parties.  Sometimes  there are out of state attorney’s involved or an out of state title insurance company, so it’s important to clarify the place of closing with everyone involved.
In addition, it is important to make sure that the authorized parties have executed or are available to execute the documents when needed.   Often,  a principal will be traveling at the time of closing or otherwise unavailable, even if other documents have been pre-signed.   If it is necessary to appoint someone else to execute the closing documents, the Seller should make sure that that person is authorized in advance with a resolution or power of attorney.

V.    Special Situations and Areas of Concern in Buying or Selling a Business in a Box

A.  Special Situations – Special situations  often arise that are unique to  particular types of transactions.  In addition, there are various areas of concern that  are important for the attorney to be familiar with.

1.  Title to real estate and business split between two entities.
One such special situation is where the title to the real estate and title to the  business  is split between two entities.  Usually the situation arises because the purchaser is interested in the business.  In the event the land is not owned or the purchaser or an affiliate under its control, then the seller’s interest in purchasing the land may arise because the terms of the lease are not satisfactory.  For example, if the business is a franchise operation relatively near the end of the franchise term, then the buyer will want to negotiate lease options and extensions before taking over the franchise. In the alternative, the buyer’s best course of action may be to purchase the land from the seller’s landlord, particularly if the seller owns the building and leases only the land from the landlord.  Issues that arise:
a.  Seller of the land will negotiate hard for an “as is” contract, especially if the property is leased under a ground lease and the business owner developed the property and owns the building.  In any event the asset purchase agreement for the purchase of the business assets should  include the following:
i.  representations and warranties, covenants, indemnities and conditions to closing concerning the real estate all of which take into account the business owner’s obligations to the landlord
ii.        that the closing of the real estate contract is a condition to closing under the asset purchase agreement (and the real estate contract should include a condition to closing for the closing on the asset purchase agreement)
iii.    the due diligence periods in the two agreements should be dovetailed and it is likely that the asset purchase agreement will govern the real estate inspections since the tenant is the party controlling access to the property and the tenant will likely have the duty to satisfy any objections based on the inspections.  Therefore,  a careful review of the lease is imperative.
b.   It may occur that land is owned not by the seller, but by an affiliate under its control.  Presumably, the sale could be accomplished with two separate contracts in which case the foregoing discussion would be relevant.  Often, both selling parties are a party to the same purchase agreement.  This situation can be favorable to the buyer if both selling parties make most of the representations and warranties.  Where the parties are less sophisticated, it may occur that only one of the selling parties, likely the business owner, enters into the purchase agreement and the buyer learns later, such as upon receipt of the title commitment, that another entity holds title to the real estate.  As that entity is likely to be a single asset entity, the greatest concern is whether the seller has control and whether there are other parties whose authorization and execution are required to effect the transfer of the real estate at closing.
Another  issue that may arise when the property is titled separately from the business is whether the purchase price allocation is workable.  The seller may need a particular amount of the funds to go into the real estate entity to pay off lenders.
Finally, the buyer may wish to take title in two separate entities both for the benefit of limiting liability and in order to keep the lease in place and facilitate a later sale of only the business or only the real estate.

2.  Employee Issues

Typically, in an asset purchase the seller will terminate its employees and the buyer will wish to hire the same employees.  If collective bargaining agreements are involved, then consulting with an attorney specializing in labor law is imperative.  The purchase agreement needs to be explicit that the buyer is not assuming any of the seller’s obligations and that the seller should not take any action that implicitly or explicitly promises anything to an employee on behalf of the buyer.  When meeting with employees, the buyer should be meticulously careful to control all communications to them so that no representative of the company makes any statements that lead employees to believe that they will be paid a certain amount, promoted, receive benefits from buyer that were accrued with the seller, and so on.  Hopefully, the buyer will have good policies and procedures in place and these should be implement immediately, since it is likely that some employees will be unhappy with new management and a spate of unfounded unemployment, wage, and discrimination claims will occur.

3.   The WARN Act.

Usually, as real estate attorneys we are urged to pay attention to the Worker Adjustment and Retraining Notification Act (29 U.S.C. §§ 2101-2109) in hotel transactions.  However, the Act may apply in other situations.  Briefly and very generally, the act applies to a business enterprise that employs  100 or more employees, excluding part-time employees (or 100 or more employees who in the aggregate work at least 4,000 per week excluding overtime hours).  Under WARN, an employer may not order a plant closing or mass layoff until at least 60 days after it services written notice of the order to each representative of the affected employees or if there is no representative, then to the affect employee.  Notice must also go to the state dislocated worker unit designated or created under Title III of the Job Training Partnership and on the chief elected official of the local government for the area in which the closing or layoff occurs.  The terms “plant closing” and “mass layoff” are defined by the statute.
In the case of a sale of the business, any person who is an employee of the seller, other than a part-time employee, as of the effective date of the sale, shall be considered an employee of the purchaser immediately after the effective date of the sale.  Effectively, the notice obligations are allocated to the seller through the date of the sale and to the buyer thereafter.  Depending on when a WARN event might be determined to occur, the seller may be acting as the agent of the buyer in providing the notice.
Therefore, if the parties to a transaction determine that WARN applies, then the purchase agreement should include a clear definition of the effective date  of the sale for WARN purposes and a clear delineation of duties, approval rights, and indemnities.

4.  Bulk Sales Act  (subsequently repealed in Missouri 2004)

The Bulk Sales Act is covered in the “Uniform Commercial Code – Bulk Transfers” Article, Sections 400.6-101 et seq.  The purpose behind the act is the protection of creditors from  two types of commercial fraud.  One type is where the Seller who owes debts, sells out his “stock in trade” to a friend  for less than its value, paying his creditors less than they are owed with the Seller later trying to get back in the business later. The other situation is where the Seller who owes debts sells his “stock in trade” to anyone and disappears without paying the creditors.
a.    “Bulk Transfer” is any transfer in bulk that is not in the ordinary course of  the business. Some  transfers of assets fall outside of the provisions of the Bulk Sales Act, but sometimes it is difficult to make the determination.  Most consensual sales of businesses require compliance with the Act.  However, many times the parties waive compliance.
b.    The Bulk Sales Act requires that before a covered event occurs, the Seller’s creditors must receive notice of the sale.   The Seller provides a list of the creditors and the amounts owed, and the parties prepare  a schedule of property to be transferred and retains the list for six months or records it in the recorder’s office.  Ten days before the earlier of the  transfer or payment, the Buyer must notify all creditors on the list.  Contents of the Notice are set out in Section 400.6 107, V.A.M.S.  As a practical matter, nonintervention by a creditor during the ten day notice period constitutes assent who can no longer maintain a claim against the assets sold.
c.   Because of the burden that compliance with the Bulk Sales Act presents to the parties, the parties will typically waive compliance.  Common ways to protect the Buyer if the parties are going to waive compliance include obtaining a sworn list of creditors and amounts owed,  payment of outstanding debts out of sale proceeds, escrowing a percentage of the sale proceeds for six months in case of later claims, obtaining indemnification from the principals of the Seller, including set-off provisions for any non- indemnified liabilities if the Seller is financing any part of the deal.

5.  Sales Taxes – Successor Liability

a.  Under RSMo §144.150, upon the sale of all or substantially all of a business that is required to collect or remit sales or use tax in Missouri, the seller and buyer has certain requirements.  The seller is required to request from the director of revenue a statement or certificate setting forth the taxes, interest and penalties, if any, due from the seller and present such statement or certificate to the purchaser prior to the consummation of the sale and secure the purchaser’s signature thereon as validation of receipt. The seller is subject to a penalty of 25% of the tax delinquency at the time of the sale for failure to present the statement or certificate.  The statement may include other types of taxes as well.
b.  Except as otherwise provided, the purchaser is required to withhold sufficient of the purchase money to cover the amount of such taxes and interest, additions to tax or penalties due and unpaid until the seller produces either a receipt from the director of revenue showing that the taxes have been paid or a certificate stating that no taxes are due. If the purchaser of a business or stock of goods fails to withhold the purchase money and remit at the time of purchase all amounts so withheld to the director of revenue to pay all unpaid taxes, interest, additions to tax and penalties due from the former owner or predecessor, the purchaser shall be personally liable for the payment of the taxes, interest, additions to tax and penalties accrued and unpaid on account of the operation of the business by the former owner.

6.  Service Contracts

In purchasing an operating business, service contracts necessary for the operation extend beyond those such as contracts for the maintenance of elevators, HVAC systems, security and fire systems and may include contracts for software and hardware systems such as cash register computer systems and maintaining other equipment used in the operation of the business.
The buyer should review all contracts for anti-assignment provisions and determine whether it wishes to take assignments of each contract, attempt to negotiate a new contract with the existing provider, or be prepared to have another service provider in place at closing.

7.  Liquor Licenses

In every state, liquor sales are only permitted by entities that hold a current license.  Even though liquor licensing might appear to be just another item on the checklist of pre-closing matters to be handled, obtaining liquor licenses or transferring liquor licenses should not be treated lightly. In a restaurant or hotel, a liquor license is extremely important to the deal.  The complexities involved, the regulations and the application and approval process can lead to significant delays in closing or damages as a result of the inability to get the liquor licensing.  Investigation into the status of the Seller’s liquor license and the application/approval process should start early in the process.
The Seller should provide information for review.  The attorney for the Buyer should review the licenses and the entity or entities that hold them and determine whether there are any eligibility issues and whether all changes since licensing were reported.  If discrepancies are found between the Seller’s information and that of the regulatory agency, steps will need to be taken immediately to correct the problems and to comply with the regulations.
The Buyer must also investigate its own organization to determine compliance issues.  If there is a pre-closing management  team or the post-closing management team, care must be taken to make sure that all signature and fingerprints and pertinent information are provided for the approval process. A delay in the closing is often the result of not  properly taking care of the liquor license due diligence.
In addition to these issues, timing approval by local governments is critical also.  Failure to figure in the time required in the approval process by the municipal authorities can lead to significant delays.
If eligibility problems occur or there are timing issues, strategies to overcome these problems include restructuring the ownership of the license among other strategies for working around the problem.

8.    Franchise Agreements

If the business is subject to a franchise agreement, then the buyer may need to consider options of terminating the existing franchise agreement in order to operate the business without a franchise agreement or to enter into an agreement with a different franchisor.  The buyer may wish to renegotiate the existing franchise agreement.  Clearly these options need to be explored early in the process so that there is sufficient time to complete the negotiations and obtain the required approvals.
Often franchise agreements such as retail fast-food franchises cannot be negotiated.  In unusual situations, such as a work-out to effect a sale of a poorly performing business, the franchisor may make concessions.  Even then, however, it will be unwilling to vary the terms of its franchise agreement or the assignment documents, so that those concessions will have to be documented in later side agreements – effective after the date of the assignment in order to avoid the effect of the integration clause in the assignment documents.
While an in-depth discussion of franchise agreements and operations is beyond the scope of this discussion, the following points will be helpful in the situation where the buyer is assuming the an existing franchise agreement.
a.  Ownership Structure
i.   The buyer must be qualified by the franchisor
ii.   The franchisor may require individuals to enter into franchise agreement and may have various requirements for ownership structure, requiring that at least one individual participate directly in the operation of the business
iii.   The franchisor will likely require that the organization documents, and any stock certificates, contain certain restrictions, including restrictions on the transfer of ownership whether as a shareholder, LLC member, partner or individual
b.  Transfer of Franchise
i.   The franchisor may have a right of first refusal
ii.   The franchise will impose transfer fees, probably on the seller
iii.   The franchisor will have approval rights with respect to the buyer and the terms of the transaction
iv.   The assignment is likely to require the buyer to assume all of seller’s obligation including the obligation to pay any accrued and unpaid royalty and advertising fees regardless of whether the obligations accrued before the effective date of the assignment
v.    The franchisor may have remodeling, repair and update requirements
either triggered by the sale, or coming up at a particular date under the franchise agreement.  When triggered by the sale, the franchisor may require that funds necessary to pay for the work be set aside in escrow.   Usually, the work will be determined after the parties have entered into a purchase agreement. The purchase agreement may allocate this burden either to the seller or the buyer or both, with a right to terminate the purchase agreement if the requirements exceed a certain dollar amount. Often the funds will be withheld from the sales proceeds, though the buyer might end up delivering separate funds at closing.

c.   Franchise Term – The buyer’s position here will depend on whether it is acquiring the underlying real estate, whether it intends to continue the franchise in the particular location, or whether it is buying the location with the intention of closing it down and negotiating a purchase price accordingly.  The franchise term will be critical to the ability of the buyer to obtain financing on the basis of the business.

d.    The buyer will want to be assured that any lease terms plus option terms are sufficient to match the term of the franchise agreement;

e.   Depending on the remaining term of the franchise, the buyer may need to negotiate with the franchisor for an agreement to enter into a new franchise agreement.  In this situation, even more onerous re-modeling requirements may come into play which may or may not require further funds be placed in escrow.

9.  Management Contracts
In the restaurant and hotel business, it is common to have the business operated by a management company.  The relationship between the Seller and the management company is governed by a detailed management contract.  If it is a “branded” manager (one that  represents a prominent brand),  the contract is set up to assure that the operations are consistent with the standards of the brand.  A hotel owner can also operate the hotel under a franchise agreement.  Otherwise, the owner hires a non-branded management company to operate the business.
When a management contract is in place with respect to a restaurant or hotel, as with other contracts that become part of the deal, the parties need to determine if the management agreement can be terminated.  Termination on sale clauses are often part of these contracts, but they also usually  involve payment of a price.  If there is no termination clause, then the parties should consider the performance clauses in the contract  to see if there is cause for termination, or look at other provisions of the contract for breaches.  If so, a negotiated termination might be possible.  In the case of non-branded management contracts, the manager can often be terminated without a problem, but if there is a cost involved, it should be borne by the Seller.

VI.  Conclusion

It is inevitable that a real estate attorney will be called upon to handle the purchase or sale of a “business in a box” at some point in his career, especially  because “real estate law” is so intertwined with other areas of practice. While there are many aspects of the business transaction that  are directly related to the size of the transaction and the parties involved, there are many areas that are common to both the transfer of a small business  or a large business. Only after gaining  a proper  understanding of the mechanics of the sale process,  and the business and commercial issues involved,  can the attorney  adequately protect the client.

Multi-Use Projects: Some Key Concerns for the Commercial User

By:  Maryanne Newman

This article was written for mixed-use condominium developers, landlords, and tenants, published in St. Louis Commercial Journal in 2007.

In recent years, mixed-use developments have grown in popularity—a response to high land prices, higher development costs, tighter funds from municipal governments and the need to reduce sprawl.

Among the popular forms of mixed-use development are vertical condominiums that combine residential, office, retail, entertainment and sometimes hotel spaces. Often located in urban and downtown areas, this type of mixed-use development includes new construction and conversions from warehouse spaces, office and apartment buildings.

The multi-use developer must perform a balancing act. The goal is to build into a project the flexibility to achieve sales and leasing goals, while preventing future legal issues. The inherent tension comes from the fact that commercial users want to be able to freely conduct their operations without unreasonable restrictions, while residential users in the same development want to enjoy a quality of life that isn’t negatively impacted by other users’ operations or activities. Through careful planning, this balance can be accomplished in a condominium mixed-use development.

Of the many issues that should be addressed and investigated by a  purchaser or prospective  tenant of a commercial space  in a condominium development, three critical areas of  concern should be particularly closely examined: permitted uses, common expenses and control.  To better understand the nature of these concerns, it is important to first understand the basic condominium structure.

Condominium Structure

State law provides the governing provisions for the condominium form of ownership.  Its very flexibility allows for creativity by developers to complete a multi-use project.  A condominium form of ownership allows ownership of  a separate unit of space, typically (but not always)  in a larger  structure.  Commonly used or shared areas and facilities are owned   with all the other owners in the building.  The land on which the building sits, the common hallways and lobbies, the roof, garage and recreational facilities are generally commonly used  by all unit owners.  These are the  “common elements”.

The common elements are proportionately divided, and a proportional interest is allocated to each owner of a separate space.  A typical method of apportionment based on square footage of a unit over the total square footage of  a condominium results in a fractional figure. This is the proportionate ownership allocation in the undivided common elements.  Limited common elements are those that are common elements but which are allocated to the use of only a certain unit owner or type of unit owner.

The condominium is administered and governed by a condominium association, usually  headed by a board of managers.  Often, the condominium association is established as   a not-for-profit corporation.  The key documents governing the condominium development that need to be carefully and thoroughly reviewed by the commercial user are the Condominium Declaration, the Bylaws  and the Rules and Regulations.  In particular, the commercial user should focus on how these documents deal with permitted uses, expense allocations and control.  Permitted Uses  Residential users want the benefits of mixed-use amenities; at the same time, they expect to be  unimpacted by a neighbor’s uses or activities.   Food odors, customer noise, sidewalk seating,  increased pedestrian and vehicle traffic can be serious concerns for the residential unit owner.   These concerns are often addressed in the condominium documents, and restrictions are put in place as a result.

On the other hand, the commercial user wants to freely operate his professional office or retail business,  provide normal  access  to and  serve his clientele, operate his club or restaurant into the late evening hours, accept deliveries during usual business hours, establish sidewalk seating, provide adequate parking and  conduct all activities normally associated with the sort of business planned.  The commercial user wants to make certain that the uses and activities permitted are conducive to his business plans.

For the commercial user, whether a purchaser or a tenant, the uses for each unit in the condominium must be carefully analyzed to make sure that intended operations are not restricted in any way.  Most condominium documents specify prohibited business activities.  Often, these are limited to businesses that might be undesirable in an upscale neighborhood such as thrift stores or adult book stores.

The Rules and Regulations also must be carefully examined, as these often set out more detailed and extensive restrictions that can directly impact the commercial user’s operations.  Restrictions dealing with   signage,  building façade,  lobby  and loading dock access, parking availability and  noise restrictions after certain hours are only  a few.   Allocation of  Common  Expenses  Another important consideration for   the commercial user is the allocation of expenses among the various residential, office and retail unit owners. Neither the residential nor commercial user   should   pay for  more than its fair share.   Typically, a predetermined expense allocation for each of the  owners is based on some  formula or other method.  Often, this is based on the unit owner’s fractional common interest allocation. Other methods account for the commercial user’s limited access to some common elements.

Control

A commercial user or prospective owner should make certain that it is adequately represented in the governance of the condominium development so that measures cannot be taken to restrict or hamper its  business   activities without  its  consent.   The commercial user also does not want to be outvoted by the residential users on matters that affect it.  Supermajority requirements needed to amend the condominium documents might also offer protection.

The commercial user will also want to make certain that the Bylaws provide for proper representation on the Board of Managers  for all unit owners, but particularly the commercial users.  Methods of extending control to the commercial user can also include establishing class voting for each type of user (residential, office, retail), or establishing different voting on certain matters set out in the declaration.   Conclusion  A mixed-use development can be a perfect place for a commercial user, whether an  owner or tenant.  However, the condominium documents should be thoroughly and thoughtfully reviewed — and any critical adjustments handled — before any commitment is made to purchase or lease.