Issues With Mortgage Contingency Clauses in Purchase and Sales Agreements

During the drafting and negotiation of the purchase and sale agreement concerning any real estate transaction in Massachusetts, it is important to understand how your mortgage contingency clause may come into play if you are trying to sell your current residence and purchase a new residence.  Often real estate lawyers in Massachusetts are requesting a provision that does not allow a purchaser of real estate to withdraw from a transaction without penalty if a mortgage commitment contains a condition that an existing residence be sold prior to the purchase.  The clause will often read as follows: "The BUYER understands and agrees that rejections for mortgage financing on the basis of the unsold status of his/her present home will not be a reason to terminate Agreement pursuant to the mortgage contingency."  This provision can create substantial issues for a purchaser as the deadline to close rapidly approaches. 

It may be that a lender will not issue at mortgage commitment due to the fact the buyers have not sold their present residence.  In this instance, under the terms of above clause, the buyers will not be able to terminate the agreement pursuant to the mortgage contingency under this scenario. It must be for an entirely different reason other than failure to sell a present residence.  

Although a lender may issue a mortgage commitment, it may contain a condition that the buyers must close the sale of their existing home prior to loan approval or consummation of the purchase of the new property.  This will create a timing issue with the transaction; now the buyers are acting in two different roles (as buyers and sellers), and relying on two separate lenders to finance two separate transactions.  This situation involves a high amount of stress on the homeowners as well as puts deposits at risk, and may involve a temporary move to a hotel until the completion of the purchase.  

To avoid the severity of this clause, it should be disclosed as early as possible (preferably in the offer to purchase) to the sellers that you currently own a property that is presently for sale, and request a prior sale contingency. The timing of the sale of your residence and new purchase can also be adjusted, and you may have to consider a transitional period between your two homes.  If you are concerned that your offer will be rejected with a prior sale contingency, you should speak with a qualified real estate lawyer about carefully crafting the mortgage contingency provisions in your purchase and sale agreement.  

Important Clauses in Employment and Independent Contractor Agreements

Many Massachusetts employers and business owners are now turning to at-will employment contracts and independent contractor agreements to protect their interests and govern its relationship with employees and contractors. These types of employment agreements are commonplace in most management and professional job positions, as well as for skilled outside, independent contractors.  In all likelihood, if a business provides a lucrative job position to an employee, an employment agreement may become a condition prior to commencement of employment. 

What are the types of clauses that businesses, employees, and contractors can expect to see in a well-drafted employment agreement? 

Term of Service or At Will or Terminable Status - Typically, most employment agreements or independent contractor agreements are "at will." In other words, you are not provided to any continuing right to employment or payment for a certain term. In most cases, a business can terminate its relationship with employees according to the terms of the contract; the company's own policies; and within the bounds of Federal and State laws. So long, as businesses are compliant with these covenants, policies and laws, then the business can terminate employment for any reason. Some employment or independent contractor agreements do contain a set term of service.  If you are drafting an agreement or signing one, and you contemplated a term of service, make sure that this is clearly reflected in the document. 

Confidentiality - Most businesses and employers will take measures to put their employees and contractors on notice that its considers its data, systems, processes, lists, diagrams, and other information as confidential.  The Employer will restrict the employee or contractor's use of that information by setting terms on how such information may be used, and set limitations on that person's authority to use that information.  These clauses typically contain a continuing duty in perpetuity for an employee or contractor to maintain the confidentiality of information. 

Non-Compete / Non-Competition - Most businesses and employers will restrict an employee or contractors' ability to work or sell information to its competition or set up a competing enterprise.  Any non-compete must be reasonable.  It cannot impose draconian conditions that eliminate a person's ability to work for a different employer. Non-compete agreements are reviewed on a case by case basis, and a well-drafted and reasonable agreement will be enforced by a Court. In other words, the business or former employer may obtain an injunction that legally prohibits you from working for a competitor.  Most, if not all, employers now ask whether you are subject to a non-compete agreement prior to commencement of work.  The reason is that a potential employer can also incur liability by hiring an individual who is subject to this type of restriction.  

If you are a business that desires to set out the terms of your engagement with employees or contractors, or have questions about an agreement, please contact the Law Office of Stefan Cencarik, PLLC at 617-669-9780. We represent clients in the Boston and North Shore areas, including Boston, Cambridge, Lynnfield, Woburn, Burlington, Andover, Saugus, Peabody, and the surrounding towns and communities.  

Choosing Your Next (or First) Business Purchase

It may be that you are bored with working for someone else, or you have a new source of capital that you want to reap financial rewards. Or you have just sold your business, have taken some time off, and are ready to re-enter the business and entrepreneur world.  The first decision that will inevitably need to be made is whether to: (1) Start up a new business and build it up from the ground level; or (2) Acquire an existing business  and try to operate it for a profit.   If an entrepreneur or small business owner is at this stage that person already has some semblance of the type of business and market that he/she would like to enter.  Then comes the next question: what do I do next? 

If you want to start a new business, the first step is to form a legal entity, such as a corporation or LLC, and consult with a small business lawyer to determine how to structure operations and ownership of your new company.  It is also important at this stage to determine the rights, responsibilities, and ownership structure if you are forming a new organization with partners.  It is very important to set out the terms of the partnership from the outset so as to avoid any confusion or dispute about profit and loss sharing, amount of capital contributions, or buyouts of other members when that time comes. Then you can set up entity bank accounts, pay all witholdings and taxes, and enter into legally binding relations in the name of the company, such as real estate lease agreements, equipment leases, bank lines of credit, mortgages, and other types of business contracts.  Then, in some cases, a new business can engage in various types of fundraising through private or institutional investors.  Finally, the next step depends on the needs for your type of business. You may require supplies, inventory, equipment, office or production space to further the goals of your business.  This is an oversimplified summary of the steps on how to start a business, and if you have questions on how to start a business it best to consult a qualified small business lawyer, certified public accountant, and/or a business consultant. 

If you decide that you would rather avoid the start up headaches and growing pains of a new organization, it may be better to purchase an existing business.  There are numerous business brokers and business to business (B2B) sale web-sites that are listing numerous business for sale.  When you buy an existing business you are buying an existing revenue stream, customers, goodwill, relationships, and, in some cases, inventory, equipment, employees, managers, commercial real estate leases, licenses and permits, and other valuable assets.  In this case, it is very important to verify with the broker what portions of the business are being sold, and you should contact a business lawyer to ensure that you receive the benefit of your bargain. After you gain an understanding of what you are purchasing, you should retain the services of a small business lawyer, accountant/ CPA, and other business consultants to assist you with your due diligence. This may sound like a daunting and expensive task, but the counsel and expert advice that you will receive will help you avoid significant financial and legal problems and ensure that you successfully operate your business.  The purchase of an existing business can be nothing short of a mine field of financial and legal liability, and it is best to err on the side of caution before you sign a letter of intent.  

The Importance of Buy Sell Agreements for Business Partners

Buy Sell Agreements can be an effective tool for eliminating any confusion or dispute when it comes time for a partner to exit a business relationship.  A Buy Sell Agreement is a contract between two or more business owners that specifies the terms and conditions for a "buyout" and exit for one of the owners. These agreements are sometimes embedded in an Operating Agreement for an Limited Liability Company (LLC) or a Shareholder Agreement for a Corporation. 

It is a common occurrence, at the beginning stages of a business, that the partners are so focused on fundraising, marketing, and management of the business that those individuals ignore the importance of organizational matters. In other words, the partners put off meeting with a business attorney to set out an agreement that will become essential when it comes time to transfer ownership of the business.  A Buy Sell Agreement should be viewed as a indispensable agreement that can structure a partnership arrangement, and ensure that the business founders set conditions for long term control and ownership of the organization. 

These types of agreements can avoid numerous issues and potential litigation as a result of a disagreement on the transfer of a founder's interest to a third party; termination of the founder's involvement or employment in the business; buyback of interest by the organization or other founders; or death, disability, or insolvency of one of the founders. 

One of the principal and most common features of a Buy Sell Agreement is a provision that provides other corporate shareholders or LLC members the rights to purchase the shares or interest held by the other owner.  For example, if an owner materially changes their involvement in the management and day-to-day affairs of the organization through resignation, or termination, then the Buy Sell Agreement would provide the remaining owners the automatic right to purchase the interest or shares held by the departing owner. The agreement should specify the method for determining the buyout price, such as: a predetermined value; valuation of the business; or formula. The agreement would also set out the time frames; methods of payment; process for valuation of the business; and other conditions of the partner's departure from the business. 

The other types of situations that necessitate a Buy Sell Agreement are changes in the financial, health, and domestic status of one of the shareholders or members.  A business partner could face severe financial troubles that could cause a partner to become insolvent, or subject to numerous lawsuits involving personal creditors. Those creditors may seek to attach any dividends or equity disbursements of the partner, or the partner may be placed in receivership or bankruptcy.  In those instances, a receiver or bankruptcy trustee would be looking to claim all profit rights of the owners, or liquidate the business interest to a third party. This is an undesirable position for the other business partners particularly in the context of a private, closely held organization where the affairs of the business, in part, would be exposed to a public court proceeding. 

Additionally,  it may be that a business partner enters a divorce proceeding, and it becomes important to preclude shares from being held by a former spouse. Finally, there are the health and life consequences of death, disability, and/or incompetence.  A business partner may be permanently unable to participate in the affairs of the business, and  this will create problems at the management and ownership levels since owners are also typically key employees of the business.  In each of these circumstances, a well drafted Buy Sell Agreement can specify the buyout process, conditions, and price for transitioning ownership of the business to the remaining partners. 

A properly drafted Buy Sell Agreement can help business partners can help make all of the expectations and conditions clear out the outset when it comes time for a partner to move on. Attorney Stefan Cencarik, a Boston area business lawyer, works closely with business partners and entrepreneurs to help create Buy Sell Agreements, and is available for consultation at 617-669-9780. 

Small Business Owners and the Personal Guaranty - How Can You Avoid Liability?

The easiest method of avoiding personal liability for a debt as a small business owner is to never sign a personal guaranty. However, banks and other institutional and private lenders are mindful that most start up businesses, entrepreneurs, and young businesses have very few valuable assets, thin capital, and unpredictable revenues to obtain sufficient security when issuing a loan. In other words, it is nearly impossible for a small business to obtain a loan without providing the lender the security of a personal guaranty in addition to other commonly used types of security, such as a collateral assignment of leases and rents, security agreement and UCC- 1 Financing Statement ("UCC-1"), or a mortgage  on the commercial property, and, sometimes, the owner's personal residence. 

It is all too common an occurrence that when a business owner decides to exit the business, wind down operations, or sell the assets of the business to a third-party, the personal guaranty may become a significant issue.  For example, if a business debt is owed to a bank for a commercial loan, and the business owner or partners decide to terminate business operations while the debt remains unpaid, it is highly likely that the bank will demand payment from the guarantor under the terms of the personal guaranty.  As another example, a business owner may be personally liable on a loan or lease agreement, and the assets of that business are being sold to a third party.  Not only does this create an issue if the bank holds a UCC lien on those assets, the question arises, for the business owner, as to how the debt will be satisfied so that he/she may be released from the obligations of the personal guarantee.  No business owner should sell a business or its assets, and remain personally liable on any of the business debts, particularly if the debt is tied to those assets.  

How does a business resolve the liability associated with a personal guaranty? 

The easiest way to manage a personal guaranty is to make payment arrangements, or negotiate a payoff of the debt and release of the guaranty.  In this instance, the lender will look for cash and may be willing to accept some type of equity or other type of security as consideration.  It all depends on the circumstances, as well as the viability and nature of the acquiring business. 

The other method of dealing with a personal guaranty is litigation.  If you fail to pay a debt upon reasonable demand of the lender under the terms of the personal guaranty and promissory note, then it is likely that you will be dragged into a state court legal proceeding. Litigation is costly, time consuming and expensive for all participants.  If you are defending the enforcement of a personal guaranty, the best method of defense is equitable principals. In this instance, you are relying on the lender's acts and omissions during loan issuance and administration to provide you with an equitable defense to enforcement. For example, has the lender negligently handled the loan by failing to notify the guarantor of material changes in the loan, such as loan amounts, credit line increases, term, and the like? Did the lender take actions that indicate that it waived its rights to enforce the guaranty, or did it enter into another agreement that satisfies the debt, in full or part? Did the lender fail to adequately provide adverse information concerning the business financial affairs that somehow increased the guarantor's risk?  Did the lender allow the default and permit the debt to accumulate interest and principal? These are all questions that any Boston area business owners should ask when faced with a personal guaranty. 

There also may be issues with the personal guaranty document itself. The document may fail to properly identify the parties; capacities in which the parties have signed; failure of consideration; the guaranty could be a payment guaranty or a collection guaranty;  or some other type of technical issue with the personal guaranty. However, it is highly likely that lenders have learned from mistakes of their own, mistakes of others, and/or have hired skilled lawyers to draft the personal guaranty.  In this instance, the best hope for some type of technical issue is that the lender obtained the guaranty from an unqualified attorney or used downloadable form obtain from an Internet legal form retailer. 

Finally, there is reorganization and/or liquidation in a bankruptcy proceeding.  This is typically the final option for most business owners, and is not desirable for those wishing to keep their financial affairs out of public view, and out of the hands of a bankruptcy trustee. 

As outlined above, there are narrow circumstances that permit a Massachusetts business owner to avoid personal liability for a business debt and/or personal guaranty.  If you or any business owner or a group of business partners have questions about liability under a personal guaranty, Attorney Stefan Cencarik, a business lawyer serving the Boston area, is available for consultation at 617-669-9780. 

Letter of Intent – What Benefits Can This Agreement Provide My Business?

A carefully drafted letter of intent is typically the “agreement in principal” entered into between two parties entering into a business transaction.  A letter of intent (“LOI”), or sometimes referred to as a Memorandum of Understanding (MOU”) or Term Sheet, is a document used to memorialize some of the basic terms of a prospective transaction, as well as express the parties’ commitment to entering into a formal purchase and sales agreement.  A letter of intent is typically used for asset and business purchases, stock or membership interest purchase and sales, equipment purchase and sales, as well as company mergers. The letter of intent is an effective tool of making a seller more comfortable in dealing with the buyer, and will encourage the seller to discontinue any efforts to market and sell the asset.

The most traditional feature of a letter of intent is that the agreement is non-binding. In other words, the parties are not yet entering into a valid and enforceable contract that commits both sides to the deal.  Typically, a letter of intent will outline certain conditions and contingencies that will allow the parties to walk away from a potential deal without any liability.  These conditions and contingencies can range from financing to inspection of the books and records to other due diligence issues.  The letter of intent should have a firm deadline, with conditions for extensions, for entering into a formal purchase and sale agreement.

If the letter of intent, or memorandum of understanding, is non-binding for both parties, then what benefits does this document provide to your business? 

A letter of intent can assist a Buyer by agreeing to an exclusivity period that will preclude the Seller from negotiating another deal with third party buyer or competitor.  The longer and more restrictive the exclusivity covenant, the Seller is more likely to demand more refined deal terms, and resolve some significant issues early on in the negotiation process.  The Buyer and Sellers can both obtain the benefits of setting the essential deal terms, such as: the deal structure, payment or consideration, non-disclosure/confidentiality, exclusivity period, indemnification, hold backs and adjustments, retention of management or key employees, as well as the timeframe for signing the purchase and sale agreement, due diligence and closing. The letter of intent provides both parties the opportunity to resolve substantial deal issues and obtain an ethical commitment from each party to those terms. So, the Letter of Intent will serve as the framework for the ultimate transaction. 

The Law Office of Stefan Cencarik, PLLC specializes in assisting business owners with all aspects of business and asset purchase and sales, or often termed buy-sell agreements. If you are in the negotiation stage, and have questions about a Letter of Intent, please contact Attorneys Stefan Cencarik at 617-669-9780.