Whether starting a new business or operating a long-standing company, one of a LLC’s most important steps will be to formulate a meaningful and complete operating agreement. An Operating Agreement will determine various components of the company’s operation and define and detail the relationship among the members of the company. The following represent several key considerations and provisions in an LLC’s Operating Agreement:
1. Membership Interests. In order to clarify ownership matters, an LLC Operating Agreement should specify the percentage ownership interest of each member of the company, together with the amount of their initial capital contribution. Furthermore, the agreement should contain specific rights and restrictions with respect to the redemption of members’ interest by the company, the admission of new members to the LLC and the voluntary withdrawal of members from the company. Many of these matters can are critical to the company’s long-term growth and are best negotiated and determined from the outset.
2. Restrictions of Transferability of Membership Interests. A well-drafted Operating Agreement will place some clear restrictions on the transfer of members’ ownership interests. Similarly, certain types of transfers may be specifically permitted without requiring any type of member vote or approval (transfers among existing members, transfers to the company, transfer’s to a member’s trust, etc.) Transfer restrictions or absolute prohibitions often include restrictions on transfers to outside parties without majority approval and prohibitions on transfers to creditors. Furthermore, certain provisions can be included to protect the company in the event of a member’s bankruptcy, divorce or death.
3. Manager-Managed vs. Member-Managed. In conjunction with the LLC’s Articles of Organization the Operating Agreement, should indicate who is authorized to make the day-to-day decisions of the company. Typically, this would be either a designated “Manager” or one or more of the members of the LLC, called a “Managing Member.” Additionally, the duties and obligations of the manager or managing member(s) should be clearly described in the Operating Agreement, including such matters as their potential liability, the company’s indemnification of such member/manager and whether they are compensated for their work.
4. Additional Capital Contributions. As mentioned above, the Operating Agreement should delineate the specific capital contribution of each of the members. Additionally, an operating agreement should clarify if and when additional contributions will be required and whether majority or unanimous consent will necessary to require such additional capital contributions.
5. Membership Voting. An Operating Agreement should clearly define how membership votes are calculated, who has voting rights and what sort of approval (majority, super-majority, unanimous) is required for certain decision or actions of the company.
Commercial Landlords: 5 Key Considerations in Commercial Leases
Commercial property owners must be careful in preparing and signing leases with tenants. Beyond the dollars and cents of the agreement and the income or financial statement analyses, an owner must consider how to protect themselves before, during and after the term of the lease. This overview of commercial leaseshighlights several common mistakes made by property owners when leasing to a tenant.
1. Use Limitations: While the intended use of the property has undoubtedly been considered well in advance of the signing of the lease agreement, it is essential that an owner include detailed limitations on the tenant’s rights to use the premises. Due to assumptions, prior informal conversations and failure to consider potential ramifications, an owner may overlook this important portion of any lease. A commercial lease should accomplish 4 things with respect to use of the property:
(1) Spell out the sole permitted use of the property by tenant. The lease should state simply what the property is to be used for (ex: retail clothing and apparel store, fast-food restaurant, general non-retail office space). Regardless of oral understandings, prior use or anticipated current use, the lease should bind the tenant to the designated use.
(2) Detail specific limitations to the use. The lease should spell out specific disallowed uses, which the owner wants to avoid on the property, that may typically arise in connection with the intended use (ex: no retail activity, limitations on signage or window usage, limitation on number of employees in office, prohibition on style of restaurant service, specifications regarding delivery hours, procedure and location, etc.)
(3) List Specific Prohibited Uses. The lease should explicitly prohibit any business or activity that is illegal or not permitted by zoning ordinances, any use of hazardous materials, any use not permitted due to an exclusive use of another tenant and other desired limitations such as prohibiting adult-oriented services and retail.
(4) Require Certain Obligations of Tenant. Tenant should be required to maintain the property in good and clean condition, operate during desired business hours, operate without substantial periods of closure and should be obligated to notify landlord in writing in the event of any changed or additional use of the premises.
2. Required Insurance Provision: A well-drafted lease should spell out the insurance requirements of both the owner and the tenant. A property owner must be diligent in being sure that its property (and pocketbook) are protected upon the occurrence of events ranging from a fire or a slip-and-fall accident to a disgruntled tenant or negligent (or malicious) acts of a tenant or other party.
A commercial lease should explicitly require the tenant to obtain multiple types of insurance. In order to be sure these protections are in place, the owner will want to insert a contract provision specifically requiring tenant to provide proof of insurance. Furthermore, the landlord should retain the right to purchase the insurance policies on tenant’s behalf (and charge tenant the cost) if tenant fails to provide this proof within a designated timeframe. It is important that the relevant insurance policies become effective immediately upon tenants occupancy/use of the property. An owner of a commercial property will typically want to consider requiring the lessee to obtain the following types of coverage*:
(a) Commercial General Liability
(b) Commercial Property
(c) Workers Compensation
(d) Business Auto Liability
(e) Business Interruption and Extra Expense Insurance
*Insurance limit amounts should be determined in consultation with a qualified professional.
3. Protections in the Event of Tenant’s Default: No matter how well-drafted a lease is or how well-situated a tenant might be, there will unfortunately be instances where a tenant defaults on its obligations under the lease. Whether due to cash flow shortfalls, misunderstandings regarding lease terms or simply a negligent (or malicious) tenant, every owner faces the very real risk of a tenant not living up to their contractual obligations. It should be noted that defaulting on a lease encompasses much more than late (or unpaid) rent—it also includes such events as misuse of the property, failure to obtain required insurance or violating other specific terms of the lease agreement.
A commercial lease should broadly define what constitutes default, including the following events/actions: (i) failure to make timely rental payments, (ii) failure to perform any covenants under the lease after a period of written notice from landlord, (iii) failure to perform any covenants under the lease which creates a hazardous condition which tenant fails to immediately cure upon notice from landlord, (iv) an event indicating tenant bankruptcy or other financial insecurity, including a writ of execution against the premises, and (v) tenant vacating the property for more than a designated period of days (usually 10 days). A properly-drafted lease should also detail the rights that the owner has against the property and the tenant, including the following:
(a) Owner has right to declare the lease terminated and repossess the property.
(b) Owner has the right to recover all amounts due under the lease and those that will become due.
(c) Owner has the right to recover the cost of any construction allowance or other costs associated with tenant entry into the lease.
(d) Tenant shall be responsible for all costs (including attorneys fees) expended by owner in the termination of the lease and vacation of the property.
(e) Owner may re-enter the premises and lease them to a new tenant.
(f) Tenant shall be responsible for all costs associated with re-leasing the property.
4. Necessity of a Personal Guaranty: An owner must seriously consider a personal guaranty for both commercial and residential leases. A guaranty provides an owner with added security regarding payment of rent and other expenses (and liability) while also committing the tenant to further responsibility and investment in the use of the property. There are no practical downsides of a guaranty for an owner. A commercial lease should be guaranteed by an individual with adequate financial security. This will often be the owner of the company, a major investor in the business or a person with a close personal relationship to the operator of the business. The traditional theory is that the closer the guarantor is to the operation of the business the better, as they will have a vested interest in the success of the business, which always benefits the landlord. An owner may consider waiving the necessity of a personal guaranty in the event the tenant company has sufficient cash flow and credit history, or in the event of a renewal with a trustworthy long-time tenant. The contents of a personal guaranty requires the advice of an experienced attorney.
5. Sale of the Property During the Lease Term: Any owner of property knows that the day will come when they will want to sell the property. With respect to the lease, the owner needs to be sure to protect its right to transfer (i.e. sell, give away, or transfer to a related business entity) the property while not terminating the lease. Four predominate issues arise in the event a landlord wishes to sell leased property: (i) the continuation of the lease, (ii) continued liability of the landlord, (iii) the obligations of the tenant with respect to the new owner and (iv) the providing of relevant lease information to prospective purchasers. Each of these matters needs to be addressed directly.
1. Use Limitations: While the intended use of the property has undoubtedly been considered well in advance of the signing of the lease agreement, it is essential that an owner include detailed limitations on the tenant’s rights to use the premises. Due to assumptions, prior informal conversations and failure to consider potential ramifications, an owner may overlook this important portion of any lease. A commercial lease should accomplish 4 things with respect to use of the property:
(1) Spell out the sole permitted use of the property by tenant. The lease should state simply what the property is to be used for (ex: retail clothing and apparel store, fast-food restaurant, general non-retail office space). Regardless of oral understandings, prior use or anticipated current use, the lease should bind the tenant to the designated use.
(2) Detail specific limitations to the use. The lease should spell out specific disallowed uses, which the owner wants to avoid on the property, that may typically arise in connection with the intended use (ex: no retail activity, limitations on signage or window usage, limitation on number of employees in office, prohibition on style of restaurant service, specifications regarding delivery hours, procedure and location, etc.)
(3) List Specific Prohibited Uses. The lease should explicitly prohibit any business or activity that is illegal or not permitted by zoning ordinances, any use of hazardous materials, any use not permitted due to an exclusive use of another tenant and other desired limitations such as prohibiting adult-oriented services and retail.
(4) Require Certain Obligations of Tenant. Tenant should be required to maintain the property in good and clean condition, operate during desired business hours, operate without substantial periods of closure and should be obligated to notify landlord in writing in the event of any changed or additional use of the premises.
2. Required Insurance Provision: A well-drafted lease should spell out the insurance requirements of both the owner and the tenant. A property owner must be diligent in being sure that its property (and pocketbook) are protected upon the occurrence of events ranging from a fire or a slip-and-fall accident to a disgruntled tenant or negligent (or malicious) acts of a tenant or other party.
A commercial lease should explicitly require the tenant to obtain multiple types of insurance. In order to be sure these protections are in place, the owner will want to insert a contract provision specifically requiring tenant to provide proof of insurance. Furthermore, the landlord should retain the right to purchase the insurance policies on tenant’s behalf (and charge tenant the cost) if tenant fails to provide this proof within a designated timeframe. It is important that the relevant insurance policies become effective immediately upon tenants occupancy/use of the property. An owner of a commercial property will typically want to consider requiring the lessee to obtain the following types of coverage*:
(a) Commercial General Liability
(b) Commercial Property
(c) Workers Compensation
(d) Business Auto Liability
(e) Business Interruption and Extra Expense Insurance
*Insurance limit amounts should be determined in consultation with a qualified professional.
3. Protections in the Event of Tenant’s Default: No matter how well-drafted a lease is or how well-situated a tenant might be, there will unfortunately be instances where a tenant defaults on its obligations under the lease. Whether due to cash flow shortfalls, misunderstandings regarding lease terms or simply a negligent (or malicious) tenant, every owner faces the very real risk of a tenant not living up to their contractual obligations. It should be noted that defaulting on a lease encompasses much more than late (or unpaid) rent—it also includes such events as misuse of the property, failure to obtain required insurance or violating other specific terms of the lease agreement.
A commercial lease should broadly define what constitutes default, including the following events/actions: (i) failure to make timely rental payments, (ii) failure to perform any covenants under the lease after a period of written notice from landlord, (iii) failure to perform any covenants under the lease which creates a hazardous condition which tenant fails to immediately cure upon notice from landlord, (iv) an event indicating tenant bankruptcy or other financial insecurity, including a writ of execution against the premises, and (v) tenant vacating the property for more than a designated period of days (usually 10 days). A properly-drafted lease should also detail the rights that the owner has against the property and the tenant, including the following:
(a) Owner has right to declare the lease terminated and repossess the property.
(b) Owner has the right to recover all amounts due under the lease and those that will become due.
(c) Owner has the right to recover the cost of any construction allowance or other costs associated with tenant entry into the lease.
(d) Tenant shall be responsible for all costs (including attorneys fees) expended by owner in the termination of the lease and vacation of the property.
(e) Owner may re-enter the premises and lease them to a new tenant.
(f) Tenant shall be responsible for all costs associated with re-leasing the property.
4. Necessity of a Personal Guaranty: An owner must seriously consider a personal guaranty for both commercial and residential leases. A guaranty provides an owner with added security regarding payment of rent and other expenses (and liability) while also committing the tenant to further responsibility and investment in the use of the property. There are no practical downsides of a guaranty for an owner. A commercial lease should be guaranteed by an individual with adequate financial security. This will often be the owner of the company, a major investor in the business or a person with a close personal relationship to the operator of the business. The traditional theory is that the closer the guarantor is to the operation of the business the better, as they will have a vested interest in the success of the business, which always benefits the landlord. An owner may consider waiving the necessity of a personal guaranty in the event the tenant company has sufficient cash flow and credit history, or in the event of a renewal with a trustworthy long-time tenant. The contents of a personal guaranty requires the advice of an experienced attorney.
5. Sale of the Property During the Lease Term: Any owner of property knows that the day will come when they will want to sell the property. With respect to the lease, the owner needs to be sure to protect its right to transfer (i.e. sell, give away, or transfer to a related business entity) the property while not terminating the lease. Four predominate issues arise in the event a landlord wishes to sell leased property: (i) the continuation of the lease, (ii) continued liability of the landlord, (iii) the obligations of the tenant with respect to the new owner and (iv) the providing of relevant lease information to prospective purchasers. Each of these matters needs to be addressed directly.
Residential Landlords: 5 Key Considerations in Residential Leases
Owners of residential property must be careful in preparing and signing leases with tenants. Beyond the dollars and cents of the agreement and the income or financial statement analyses, an owner must consider how to protect themselves before, during and after the term of the lease. The following represent key considerations in any residential lease agreement:
1. Use Limitations: While the intended use of the property has undoubtedly been considered well in advance of the signing of the lease agreement, it is essential that an owner include detailed limitations on the tenant’s rights to use the premises. Due to assumptions, prior informal conversations and failure to consider potential ramifications, an owner may overlook this important portion of any lease.
(1) Specify Residential Use. A residential lease should indicate that the property is to be used solely for residential purposes and for no business, retail or other commercial uses.
(2) Limit the Number / Type of Occupants. An owner should consider what limitations should be placed on the number of occupants, the relationship between occupants and the permissibility of overnight and/or long-term guests. Limitations on group gatherings may also be desirable depending on circumstances.
(3) Require Certain Obligations of Tenant. A residential lease should obligate the tenant to maintain the property in good and clean condition and may limit period in which the property can be left vacant during the term of the tenancy.
2. Required Insurance Provisions: A well-drafted lease should spell out the insurance requirements of both the owner and the tenant. A property owner must be diligent in being sure that its property (and pocketbook) are protected upon the occurrence of events ranging from a fire or a slip-and-fall accident to a disgruntled tenant or negligent (or malicious) acts of a tenant or other party. An owner must consider requiring a residential tenant to obtain certain basic types of insurance policies. If these policies are required, the landlord should require that proof of insurance be provided to the landlord. The following basic coverage* should be considered in a residential setting:
(a) General Liability
(b) Real Property Insurance
(c) Renters Insurance
*Insurance limit amounts should be determined in consultation with a qualified professional.
3. Protections in the Event of Tenant’s Default: No matter how well-drafted a lease is or how well-situated a tenant might be, there will unfortunately be instances where a tenant defaults on its obligations under the lease. Whether due to cash flow shortfalls, misunderstandings regarding lease terms or simply a negligent (or malicious) tenant, every owner faces the very real risk of a tenant not living up to their contractual obligations. It should be noted that defaulting on a lease encompasses much more than late (or unpaid) rent—it also includes such events as misuse of the property, failure to obtain required insurance or violating other specific terms of the lease agreement.
A residential lease should broadly define what constitutes default, including the following: (i) failure to make timely rent payments, (ii) failure to perform any covenants under the lease after a period of written notice from landlord, (iii) an event indicating tenant bankruptcy, and (iv) the existence of a writ of execution against the premises or the tenant’s leasehold interest. A properly-drafted lease should also detail the rights that the owner has against the property and the tenant, including the following:
(a) Owner has right to declare the lease terminated and repossess the property.
(b) Owner has the right to recover all amount s due under the lease and those that will become due.
(c) Tenant shall be responsible for all costs (including attorneys fees) expended by owner in the termination of the lease and vacation of the property.
(d) Owner may re-enter the premises and lease them to a new tenant .
(e) Tenant shall be responsible for all costs associated with re-leasing the property.
Landlord’s Default: It is not typically necessary to include specific provisions regarding landlord default. In the event that tenant insists on such provisions, they should be narrowly defined with limited potential remedies granted to tenant. An attorney should be consulted.
4. Necessity of a Personal Guaranty: An owner must seriously consider a personal guaranty for both commercial and residential leases. A guaranty provides an owner with added security regarding payment of rent and other expenses (and liability) while also committing the tenant to further responsibility and investment in the use of the property. There are no practical downsides of a guaranty for an owner. If a residential tenant does not have adequate income and/or personal credit history, an owner should seriously consider requiring a personal guaranty from a separate individual with more a more secure financial position. The content of a personal guaranty requires the advice of an experienced attorney.
5. Sale of the Property During the Lease Term: Any owner of property knows that the day will come when they will want to sell the property. With respect to the lease, the owner needs to be sure to protect its right to transfer (i.e. sell, give away, or transfer to a related business entity) the property while not terminating the lease.
Four predominate issues arise in the event a landlord wishes to sell leased property: (i) the continuation of the lease, (ii) continued liability of the landlord, (iii) the obligations of the tenant with respect to the new owner and (iv) the providing of relevant lease information to prospective purchasers. Each of these issues need to be addressed directly.
1. Use Limitations: While the intended use of the property has undoubtedly been considered well in advance of the signing of the lease agreement, it is essential that an owner include detailed limitations on the tenant’s rights to use the premises. Due to assumptions, prior informal conversations and failure to consider potential ramifications, an owner may overlook this important portion of any lease.
(1) Specify Residential Use. A residential lease should indicate that the property is to be used solely for residential purposes and for no business, retail or other commercial uses.
(2) Limit the Number / Type of Occupants. An owner should consider what limitations should be placed on the number of occupants, the relationship between occupants and the permissibility of overnight and/or long-term guests. Limitations on group gatherings may also be desirable depending on circumstances.
(3) Require Certain Obligations of Tenant. A residential lease should obligate the tenant to maintain the property in good and clean condition and may limit period in which the property can be left vacant during the term of the tenancy.
2. Required Insurance Provisions: A well-drafted lease should spell out the insurance requirements of both the owner and the tenant. A property owner must be diligent in being sure that its property (and pocketbook) are protected upon the occurrence of events ranging from a fire or a slip-and-fall accident to a disgruntled tenant or negligent (or malicious) acts of a tenant or other party. An owner must consider requiring a residential tenant to obtain certain basic types of insurance policies. If these policies are required, the landlord should require that proof of insurance be provided to the landlord. The following basic coverage* should be considered in a residential setting:
(a) General Liability
(b) Real Property Insurance
(c) Renters Insurance
*Insurance limit amounts should be determined in consultation with a qualified professional.
3. Protections in the Event of Tenant’s Default: No matter how well-drafted a lease is or how well-situated a tenant might be, there will unfortunately be instances where a tenant defaults on its obligations under the lease. Whether due to cash flow shortfalls, misunderstandings regarding lease terms or simply a negligent (or malicious) tenant, every owner faces the very real risk of a tenant not living up to their contractual obligations. It should be noted that defaulting on a lease encompasses much more than late (or unpaid) rent—it also includes such events as misuse of the property, failure to obtain required insurance or violating other specific terms of the lease agreement.
A residential lease should broadly define what constitutes default, including the following: (i) failure to make timely rent payments, (ii) failure to perform any covenants under the lease after a period of written notice from landlord, (iii) an event indicating tenant bankruptcy, and (iv) the existence of a writ of execution against the premises or the tenant’s leasehold interest. A properly-drafted lease should also detail the rights that the owner has against the property and the tenant, including the following:
(a) Owner has right to declare the lease terminated and repossess the property.
(b) Owner has the right to recover all amount s due under the lease and those that will become due.
(c) Tenant shall be responsible for all costs (including attorneys fees) expended by owner in the termination of the lease and vacation of the property.
(d) Owner may re-enter the premises and lease them to a new tenant .
(e) Tenant shall be responsible for all costs associated with re-leasing the property.
Landlord’s Default: It is not typically necessary to include specific provisions regarding landlord default. In the event that tenant insists on such provisions, they should be narrowly defined with limited potential remedies granted to tenant. An attorney should be consulted.
4. Necessity of a Personal Guaranty: An owner must seriously consider a personal guaranty for both commercial and residential leases. A guaranty provides an owner with added security regarding payment of rent and other expenses (and liability) while also committing the tenant to further responsibility and investment in the use of the property. There are no practical downsides of a guaranty for an owner. If a residential tenant does not have adequate income and/or personal credit history, an owner should seriously consider requiring a personal guaranty from a separate individual with more a more secure financial position. The content of a personal guaranty requires the advice of an experienced attorney.
5. Sale of the Property During the Lease Term: Any owner of property knows that the day will come when they will want to sell the property. With respect to the lease, the owner needs to be sure to protect its right to transfer (i.e. sell, give away, or transfer to a related business entity) the property while not terminating the lease.
Four predominate issues arise in the event a landlord wishes to sell leased property: (i) the continuation of the lease, (ii) continued liability of the landlord, (iii) the obligations of the tenant with respect to the new owner and (iv) the providing of relevant lease information to prospective purchasers. Each of these issues need to be addressed directly.
Misunderstood Mortgage and Finance Concepts
Deed of Trust vs. Mortgage. The confusing terminology involved in mortgage transactions can present a hurdle for some buyers and private lenders. In short, a “deed of trust” is a substantially similar document to a “mortgage.” Laws vary from state to state, and unique terminology follows unique laws, but in large measure a deed of trust is synonymous with mortgage. Missouri is accurately categorized as a “deed of trust” state, where this document is used in lieu of a mortgage. In practice, a deed of trust is essentially a mortgage, granting a security interest in certain real estate to the lender. A deed of trust is typically executed only by the party granting the mortgage (i.e. the borrower).
Future Advances Provision. Many deeds of trust (i.e. mortgage documents) contain a “future advances” provision. Borrowers and lenders should understand the meaning and applicability of this important language in the deed of trust. When included in a transaction, this contractual provision grants the lender/bank a security interest in the named real estate—as security not only for the loan initially agreed upon, but also with respect to any amounts loaned in the future to the borrower. In short, the lender/bank is given a secured mortgage interest with respect to all amounts that it may loan to the borrower in the future. This provision provides a critical benefit to a lender/bank, providing additional security in the event of borrower default and constitutes a potentially substantial burden to borrowers. Missouri law requires that, in the event that such a provision is contained in a deed of trust, a notice of such be provided at the top of the front page of the deed of trust.
Deed of Release. As discussed above, a deed of trust (i.e. mortgage) represents a security interest in favor of a lender/bank, essentially guaranteeing repayment of a loan made to a borrower. Upon the closing of the initial loan transaction, the deed of trust should be recorded with the local recorder’s office. Once the applicable loan is paid back in full, the deed of trust becomes unneeded and unenforceable. However, the deed of trust remains recorded with the recorder’s office and represents a potential cloud on the owner/borrower’s title. A “deed of release” releases the deed of trust and provides notice that it is no longer applicable to the real estate. Pursuant to Missouri law, the secured party (i.e. lender/bank) must provide the borrower with a deed of release within 15 days of the loan being repaid and the borrower requesting a deed of release (see 443.130 RSMo).
Future Advances Provision. Many deeds of trust (i.e. mortgage documents) contain a “future advances” provision. Borrowers and lenders should understand the meaning and applicability of this important language in the deed of trust. When included in a transaction, this contractual provision grants the lender/bank a security interest in the named real estate—as security not only for the loan initially agreed upon, but also with respect to any amounts loaned in the future to the borrower. In short, the lender/bank is given a secured mortgage interest with respect to all amounts that it may loan to the borrower in the future. This provision provides a critical benefit to a lender/bank, providing additional security in the event of borrower default and constitutes a potentially substantial burden to borrowers. Missouri law requires that, in the event that such a provision is contained in a deed of trust, a notice of such be provided at the top of the front page of the deed of trust.
Deed of Release. As discussed above, a deed of trust (i.e. mortgage) represents a security interest in favor of a lender/bank, essentially guaranteeing repayment of a loan made to a borrower. Upon the closing of the initial loan transaction, the deed of trust should be recorded with the local recorder’s office. Once the applicable loan is paid back in full, the deed of trust becomes unneeded and unenforceable. However, the deed of trust remains recorded with the recorder’s office and represents a potential cloud on the owner/borrower’s title. A “deed of release” releases the deed of trust and provides notice that it is no longer applicable to the real estate. Pursuant to Missouri law, the secured party (i.e. lender/bank) must provide the borrower with a deed of release within 15 days of the loan being repaid and the borrower requesting a deed of release (see 443.130 RSMo).
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