Category Archives: Business

Massachusetts Proceeds with Proposal to Impose Tax on Short-Term Rentals like Airbnb

By on June 19, 2017

As discussed in one of our previous posts , Massachusetts legislators have continued to discuss imposing a tax on short-term rental companies like Airbnb. Recently, the Massachusetts Senate decided to proceed with Governor Charlie Baker’s proposal to expand the room occupancy tax to include short-term rentals, but not without a few modifications. Back in January, Governor Baker proposed to expand hotel taxes to include users of services like Airbnb who rent out private rooms for more than five months (150 days) per year. The proposal stated that the 5.7% state tax – and up to 6% local tax – should apply to all providers of “transient accommodations.”

The Senate’s proposal, which was published in late May, adopts and expands upon Governor Baker’s initial proposal. Instead of only applying the room occupancy tax to private rooms that are rented out for more than five months per year, the Senate proposes imposing the tax on all “transient accommodations.” In contrast to Governor Baker’s proposal, which suggested encompassing long-term Airbnb providers under the definition of “hotels,” the Senate’s proposal introduces an entirely new category of housing that would be subjected to the room occupancy tax. “Transient accommodation” would encompass all “owner-occupied, tenant-occupied or non-owner occupied property . . . that is not a hotel, motel, lodging house or bed and breakfast establishment” where at least one room is rented to an occupant and all accommodations are reserved in advance. This new category of accommodation would expand the application of the room occupancy tax to all Airbnb-type services, regardless of their frequency. As a result of this proposed expansion, the state Senate’s proposal is projected to raise $18 million in 2018.

In a television ad Airbnb declared its support for the proposed rental tax in Massachusetts. Although similar ads ran last summer, the new ad reaffirms the company’s “commit[ment] to working with Massachusetts on new, common-sense home sharing rules. We want to collect and pay taxes for our hosts and protect affordable housing. Together, we can make sure all of Massachusetts benefits.” At this point it appears that at least some tax will be levied on companies like Airbnb in the very near future. The effect on hosts and customers remains unknown.  Strang Scott will continue to follow the progress of the proposed tax.

New Hampshire Supreme Court Denies Consumer Protection Act Claim in Real Estate Transaction Gone Bad

By on June 15, 2017

     In the recent case of Fat Bullies Farm, LLC, v. Lori Devenport et al., the New Hampshire Supreme Court had occasion to consider whether a series of less than truthful representations made by a prospective purchaser in the course of negotiating a real estate transaction gave rise to liability under NH RSA 358-A, New Hampshire Consumer Protection Act (the “Act”).

     After a trial in the matter, the Superior Court determined that the plaintiff and counterclaim defendants, Fat Bullies Farm and its principals, were liable for an award of enhanced damages – double attorney’s fees and double costs – pursuant to the Act.  On appeal, Fat Bullies Farm and its principals argued that the trial court erred in determining that the conduct underlying the award was sufficient to support liability under the applicable legal standard – that is, that the conduct was sufficiently unfair and deceptive to meet the “rascality test” for determining liability under the Act.

     The Act proscribes unfair and deceptive practices in commerce generally, and provides an inexhaustive list of specific types of conduct that give rise to liability under the Act.  For conduct not specifically listed, courts in New Hampshire consider the conduct complained of under the Act’s general proscription against unfair and deceptive conduct.  When considering whether any particular conduct not proscribed in the Act nevertheless supports liability, New Hampshire courts consider the conduct against the so-called “rascality test.”  Under the “rascality test” the conduct complained of must “attain a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.”  As a practical matter the court seeks guidance from the Federal Trade Commission Act (the “FTCA”) to determine whether such conduct runs contrary to the “rascality test” and offends the Act.

     The FTCA test considers whether the complained of activity offends public policy as embodied in other statutes, the common law or otherwise offends established norms of fairness, whether the conduct is immoral, unscrupulous, oppressive or unethical or whether it causes substantial harm to consumers.

      In the instant matter, the trial court found that Fat Bullies Farm’s conduct, which consisted of a course of unscrupulous behavior including misrepresenting their intentions for the future of the real property included in the proposed transaction, along with certain other selfish bargaining and business dealing tactics, was sufficient to establish liability under the Act. 

     The Supreme Court disagreed with the trial court’s decision, however, and held as a matter of law that misrepresentations concerning future uses of real property to be purchased could not give rise to liability under the Act if not contained in writing, because oral promises concerning real property are unenforceable under the Statute of Frauds.  The Supreme Court noted that even though Fat Bullies Farm’s misrepresentations encouraged property owner to sell the property to them, a course of misrepresentations of intent were not enough to support liability under the general proscription of the Act and the “rascality test” absent more.

     Each decision concerning liability under the general proscription of the Act and the related “rascality test” is inherently fact based, and therefore may not serve as strong precedent for future decisions of the Court.  Nonetheless, the Fat Bullies Farm decision further underscores the larger body of New Hampshire Supreme Court jurisprudence that demonstrates a pattern of restraint in its application of the Act to business dealings.  While other states with similar statutes apply the remedies offered by the Act liberally, the New Hampshire Supreme Court applies the remedy sparingly, and potential litigants should not be confident that, absent extraordinary circumstances, the Act provides redress for unscrupulous conduct in business dealings.  To consider whether the circumstances of your dispute merit consideration of a claim under the Act, litigants are well-advised to contact a New Hampshire litigator.       

Property Owners and Landlords Beware: New Ruling Clarifies Restriction on Claims to Remove Holdover Owners and Tenants After Foreclosure

By on June 5, 2017

Every eviction action centers on one or both of the following issues: which party is entitled to possession and what amount of damages are appropriate. Recently, the Massachusetts Appeals Court faced a unique set of facts with regard to the right of possession in Fed. Nat. Mortgage Ass’n v. Heather Gordon, et al., 2015-P-0441, and reaffirmed the requirement for post-foreclosure owners to resort to summary process to remove holdover owners and tenants.

In Nat. Mortgage Ass’n, the occupants of a property in Roxbury appealed from a judgment in favor of Fannie Mae, the party obtaining title to the property after foreclosure, from the Boston Housing Court. The occupants argued Fannie Mae’s common-law trespass claim against them was barred by statute and that Fannie Mae failed to obtain actual possession of the property before filing its claim. The occupants previously entered into a 3-year residential lease with one of the former owners of the property who lost title at foreclosure. Interestingly, the lease was executed after the date of foreclosure and after Fannie Mae filed a summary process action against the former owner. The former owner moved out of the property several months after signing the lease and the occupants moved in. Once Fannie Mae learned the occupants had taken possession, it brought a separate action for common-law trespass against them. The Boston Housing Court entered judgment awarding possession to Fannie Mae.

The occupants argued on appeal that Section 18 of Massachusetts General Laws Chapter 186 prohibits property owners from bringing common-law trespass actions against holdover former owners or tenants and requires resort to summary process to lawfully regain possession. The Appeals Court agreed with the occupants, reaffirming the Supreme Judicial Court’s holding in A.G. v. Dime Sav. Bank of N.Y., 413 Mass. 284 (1992). The Appeals Court held that the former owner occupied the property at the time of foreclosure and that the occupants became holdover tenants. The Court went on to hold that the occupants’ status in relation to the property could not be treated as different or lesser than that of a holdover tenant without attributing actual or constructive knowledge that the occupants knew the former owner did not have title when signing the lease or when they moved into the property. The Court declined to create an expectation that residential tenants would need to take steps to make sure their landlord has title to a property before entering into a tenancy. Under the ruling set forth in Fed. Nat. Mortgage Ass’n, post-foreclosure owners may not bring a trespass action against holdover tenants who remain in possession, even where that holdover tenant’s leasehold rights arose after the date of foreclosure, but before final judgment for possession in favor of the foreclosure purchaser.

The Appeals Court also held in favor of the occupants’ argument that Fannie Mae never took actual possession of the property. Actual possession is one of the elements claimants must prove in order to succeed on a common-law trespass claim. In holding for the occupants, the Court reaffirmed the ruling in Dime Savings that actual or constructive possession by an owner asserting a trespass action cannot be maintained when the property is actually possessed by another. The Appeals Court clarified that “actual” possession does not terminate the minute the former owner vacates the property and that the facts presented in Nat. Mortgage Ass’n showed that the execution of the lease and surrender of possession to the occupants did not “indicate [the former owner]’s surrender of possession in relation to others [namely, Fannie Mae] who might claim title.” To the contrary, the facts suggest the opposite and that a gap in time between when the former owner vacated and the occupants took possession cannot signify surrender of actual possession by the former owner. The Court determined that surrender of possession is a factual dispute “to be determined by the intent as expressed by words and acts of all the parties in the light of the circumstances” and the facts presented suggested that the former owner intended to remain in possession after she moved out, regardless of the pending summary process action against her by Fannie Mae. 

The outcome of Fed. Nat. Mortgage Ass’n further emphasizes the strict conformity Massachusetts require in connection within regaining possession and the necessity for landlords and residential property owners to undertake summary process to protect and enforce those rights. Evicting holdover tenants and former owners can be a complicated and fact-specific process.  As such, you should contact an experienced attorney to ensure the proper timelines and steps are taken to evict a tenant.

Purchasing At Foreclosure? Foreclosed owners may remain in possession longer under new Housing Court ruling

By on April 10, 2017

By Jennifer Lynn, Esq.,

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     The required timeline for notice of eviction to holdover former homeowners was recently altered by the Southeastern Division of the Massachusetts Housing Court in Lenders Comm. Finance LLC v. Pestilli, et al., docket no. 16H83SP03779BR.  After obtaining title, Lenders Commercial Finance brought a summary process action against the former-mortgagor who refused to vacate after receiving a 30-day notice to quit.  The bank moved for summary judgment, requesting the court to enter judgment in its favor because no facts were disputed between the parties and it brought a valid action to evict. In a departure from long-standing practice, the court ruled that Section 12 of Massachusetts General Laws Chapter 186 requires service of a 90-day notice to quit in order to regain possession from the holdover former-mortgagor properly.  The court based the ruling on the fact that no agreement existed between the purchasing mortgagee and the former mortgagor to pay rent for any definite rental period. This ruling is a marked departure from the longstanding principle that a former-mortgagor, as tenant-at-sufferance, is only entitled to “reasonable” notice prior to eviction, and customary practice provided 30 days’ notice to the holdover occupant.

     The court’s ruling in Pestilli is an unpublished district court decision and stands only as persuasive authority for future summary process decisions. The ruling, however, may signal a shift in Massachusetts housing courts toward statutory interpretations that provide foreclosure occupants a longer period of notice before the mortgagee regains possession of foreclosed property. Should the standards set forth in this ruling be adopted widely, the timeline for eviction will be extended, creating additional burdens for the foreclosure purchaser and increased overall costs. In addition, the change will likely create an increase in “cash for keys” deals, under which the purchaser offers a deal to the former-mortgagor to vacate voluntarily and to forego challenging the right to possession. Evicting holdover tenants and former homeowners can be a complicated and fact-specific process. As such, you should contact an experienced attorney to ensure the proper timelines and grounds for eviction are present.

Show Me the Money: When Payment is Due on Massachusetts Public Construction Projects

By on April 5, 2017

Traditionally, general contractors on Massachusetts state-level public construction projects employed one of two types of risk allocation provisions in payment clauses in their subcontracts with subcontractors:  a “pay-if-paid” or a “paid-when-paid” clause.  This changed, however, due to a 2004 Massachusetts court decision that largely did away with condition precedent payment clauses commonly referred to as “pay-if-paid” clauses.  While the differences between the two clauses may not jump off the page, the use of one rather than the other had a significant impact on a subcontractor’s right to collect payment from the general contractor.

“Pay-if-paid” clauses create a condition precedent to payment.  That is, a subcontractor has no right to be paid for completed work until or unless the general contractor received payment from the owner.  “Pay-when-paid” clauses create no such condition precedent to subcontractor payment.  Rather, a “pay-when-paid” clause is a timing provision; that is, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within a ‘reasonable time’ the subcontractor retains the right to collect payment from the general contractor for its work.  Ambiguous contract language often complicated the subtle, yet substantial, difference between the two types of clauses, leading to high stakes contract interpretation disputes.

In 2004, Massachusetts did away with the distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects.  In,  Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004), the court reasoned, that absent express contract language, if “payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner,” then the default interpretation of subcontract payment provisions, “should be viewed ‘only as postponing payment by the general contractor for a reasonable time after requisition … so as to afford the general contractor an opportunity to obtain funds from the owner.’”  This decision virtually eliminated “pay-if-paid” in favor of “paid-when-paid” clauses on Massachusetts state-level construction projects.         

While the holding in Framingham is generally good news for payment-seeking subcontractors, the issue remains, however, as to what a “reasonable time,” is to afford general contractors before general contractors must make payment to subcontractors should the owner not pay.  In Framingham, the court determined that where the payment issues originated in December 1998 and continued through March 1999, that by the end of April 1999, “the general contractor had exceeded any reasonable period of time,” and thus the subcontractor’s claim for payment for completed work could not be defeated even though the owner had yet to pay the general contractor for the subcontractor’s work.

There has been no subsequent case in Massachusetts that further defines the “reasonable time” standard to determine when general contractors must pay subcontractors when the general contractor objects to making payment as a result of a “pay-when-paid” clause.  Thus, subcontractors should be keenly aware of any developments in the law regarding what constitutes “reasonable time” for payment in connection with these provisions.  If you have questions regarding payment issues on state-level public construction projects you should contact a Massachusetts construction lawyer.   

Keeping up Formalities: Protecting Assets Across Commonly Owned Companies

By on February 2, 2017

A recent Massachusetts Bankruptcy Court decision should serve as a clear reminder to business owners that, in order to enjoy the benefits that limited liability entities afford, one must respect established corporate formalities and comport business accordingly. Briefly, in In Re: Cameron Construction & Roofing Co., Inc. the  Bankruptcy Court held that the assets of a Massachusetts limited liability company, closely related to a Massachusetts construction business subject to Chapter 7 bankruptcy proceedings, could be reached to satisfy the claims of the creditors of the construction business. 

The two separate entities shared a common owner yet were formed as distinct enterprises. In this case, however, the Court determined that the owner controlled both the non-debtor LLC and debtor construction business and had allowed for the intermingling of assets. Further, the Court noted that the common owner “was thinly capitalized, and the two entities observed only minimal corporate formalities by filing separate tax returns and Annual Reports.” Thus, the Court held that ‘substantive consolidation’ was the appropriate remedy- effectively disregarding the sovereignty of the separate entities and combining their assets as a means to satisfy the liabilities of one.  Had the owner resected the separate corporate forms of his commonly owned entities in his everyday operations he likely would have been in a better position to shield assets held by the  non-debtor LLC from creditor access.

Sports Bar Liable for Wrongful Death in Patron’s Fall Down Stairs

By on November 3, 2016

The Massachusetts Court of Appeals recently affirmed a lower court ruling that held a sports bar liable for the death of a patron who entered a door marked “Employees Only” and was subsequently killed falling down a flight of stairs, in Bernier, et al. v. Smitty’s Sports Pub, Inc. (MA Appeals Court 14-P-1967). The bar, Smitty’s Sports Pub, Inc. (“Smitty’s”), argued that the deceased, Roger Leger, was a trespasser and thus not subject to a negligence claim. The trial court disagreed.

On the night of the incident, Mr. Leger went to find the bar’s restroom. Three adjacent doors, marked “Gentlemen,” “Ladies,” and “Employees Only” were the same color and similarly marked. The “Employees Only” door opened into an unlit stairwell, with an over two-foot drop to the stairs, and while it was normally locked during business hours, the door was not locked on this particular night. Mr. Leger accidentally used the “Employees Only” door, fell down the stairs, and succumbed to injuries two weeks later.

Mr. Leger’s estate filed a wrongful death lawsuit against Smitty’s. Smitty’s argued that because Mr. Leger had no right to open a door marked “Employee’s Only” and enter the basement area, he was a trespasser and thus not entitled to a duty of reasonable care. The jury ultimately found that Smitty’s was negligent in maintaining the property, and that negligence caused Mr. Leger’s injuries (although the ultimate damage award was reduced by 20%, the amount of negligence the jury attached to Mr. Leger).

The crux of the matter here is that Mr. Luger was lawfully on the premises, and that he accidentally went through a door marked “Employees Only” does not make him a trespasser. Because he was lawfully on the premises, Smitty’s, like any landowner (especially those open to the general public), owed Mr. Luger a duty of care to act reasonably and maintain the property in a reasonably safe condition. At trial, Smitty’s had testified that the unlocked “Employee’s Only” door created a dangerous condition for anybody not knowing what lay on the other side, and that it was foreseeable that a patron may accidentally open that door, given its proximity and similarity in appearance to the restroom doors.

This case contains some important lessons for bar and restaurant owners, and the hospitality industry generally. All patrons are owed a duty of care that the establishment be reasonably free of hazards. Especially where alcohol is served, owners should expect that customers may wander around the premises and may not read every posted sign. Areas that are off-limits to customers should be very clearly noted, if not locked or otherwise physically inaccessible. Smitty’s ran into problems here because a door that should have been locked was not, and that door’s proximity to the restrooms, areas patrons are expected to go, was not reasonable given the hazard behind the door. All business owners should review the layout of their establishments and ensure that patrons may only access areas they are permitted to enter.

Strang Scott Prevails on Summary Judgment in Case Involving Falsified Payroll Reports on Federal Construction Project

By on October 13, 2016

     In the case of United States for the Use and Benefit of Metric Electric, Inc. v. CCB, Inc. and the Hanover Insurance Company, Civil Action No. 15-11934, in the United States District Court in Massachusetts, the court ruled in favor of Strang Scott’s motion for summary judgment, dismissing all of the plaintiff’s claims.

     The case arose over construction work in the John F. Kennedy Federal Building in Boston. The electrical subcontractor submitted periodic certifications that it paid its employees for work performed on the project. These statements turned out to be false. Six of the subcontractor’s employees brought suit against it for failure to pay wages over several months.

     The general contractor terminated the subcontract shortly thereafter. The electrical subcontractor brought suit against the general contractor and its payment bond surety, claiming an unpaid subcontract balance was due. The claims were brought under the Miller Act, as well as for breach of contract, quantum meruit, and violations of M.G.L. c. 93A (the Massachusetts law governing unfair or deceptive business practices).

     Attorney Christopher Strang argued that intentionally submitting false certified payroll documents constitutes a material breach of contract, justifying termination and also extinguishing any right to further payment. The judge agreed, finding “[i]ts failure to pay its employees in a timely fashion as required by state and federal law (as well as by the terms of the Subcontract), compounded by Sampson’s filing of perjured certifications of payment, bars Metric from entering any chamber of equity.”

     Contractors should use caution when submitting certifications on public, or any, construction projects. Making false statements on these documents can preclude any future recovery of contract payments. Concerned contractors should contact an experienced Massachusetts construction attorney.

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Massachusetts Commercial Lease: Additions and Alterations to a Leased Premises 

By on October 5, 2016

Tenants will often want to make alterations to the premises they have leased to fit their specific business needs. Before entering into a lease, the landlord and tenant must determine what kind of consent is needed for different types of alterations, how alterations or additions will be paid for and completed, and who retains the benefit of those improvements after the lease ends.

Prerequisite for Landlord Consent

Sometimes commercial leases prohibit any change to the premises without the landlord’s express consent. A strict restriction may be desirable where the term of the lease is relatively short, the space has been recently renovated at the landlord’s expense, or the premises already contains specialized fixtures. However, landlords will often agree to a more relaxed level of oversight for changes to the premises. It can be burdensome for a landlord to strictly monitor any change to the premises and therefore practical for the tenant to be allowed to make minor changes (e.g., repainting the walls) without receiving the landlord’s express consent, while still requiring written consent for more robust changes (e.g., moving interior walls or relocating stairwells). For major additions or alterations, commercial leases often contain a provision requiring the parties to enter negotiations regarding the specific addition at the time the tenant desires to make the change.

All good contracts avoid ambiguity, and a common way to separate minor alterations from major ones is to list distinguishing characteristics for when the landlord’s express permission is or is not needed. “Minor” alterations often includes changes that (1) do not significantly impact other tenants in the building, (2) do not adversely affect the value of the property or will not affect the landlord’s future ability to rent the premises, (3) do not require permits or variances to complete, (4) do not impact common areas or external portions of the building, (5) do not impact the structural integrity of the building, and (6) do not impact the usable square feet of the premises. Distinguishing between minor and major premises alterations relieves the landlord of some tenant oversight burden while still protecting the landlord’s property, while the tenant enjoys some level of freedom to customize their space without having to obtain the landlord’s consent.

Determining whether a tenant may alter a rental property leads to a fundamentally important question: who is paying for the alteration?

Tenant Improvement Allowance

One method of paying for premises alterations is a “tenant improvement allowance,” a set sum provided by the landlord for this purpose. Under this type of provision, the tenant is only responsible for costs that go beyond the stated limit. Limitations on the allowance are stated as either a cost per-foot or a flat cap for a certain dollar amount. When the tenant requests an improvement, the landlord will then directly pay the costs up to the predetermined limit.

In addition to determining the amount of the allowance, the parties will need to negotiate how the tenant may use the allowance, including what types of work will be covered by the allowance and what happens in the event part of the allowance is left over after alterations are completed. The overall costs for the tenant can vary dramatically if the allowance is limited to use for only direct construction costs, or if it can be applied towards architect’s fees, permits, moving or storage costs, zoning variances, or related legal fees. Likewise, the parties should be aware if the provision calls for any unused portion of the allowance to be credited towards future rent.

Build-Out Allowance

Build-out allowances are another type of incentive whereby the commercial landlord offers “building standard” fixtures or furnishings for the premises with the option for upgrades at the tenant’s expense. Build-out allowances are usually offered only for new buildings, as the landlord has easy access to the necessary materials and construction services at that time. When negotiating this type of provision, the parties should take notice of who is responsible for completing any upgrades, the landlord or the tenant. The tenant should weigh the convenience of having the landlord complete any upgrades against the overall cost of the project, as it may be more cost effective for the tenant to have their own contractor come in to complete the work, or the tenant may require or want upgrades the landlord is not offering. However, if the landlord is the party responsible for the upgraded finishes, the tenant can avoid cost overages and expenses due to time delays because the landlord would be responsible for completion of the work.

Expansion Rights

A less common right that the parties may negotiate is the right of the tenant to expand their operation after entering into the lease. Tenants commonly seek this right in hopes that their business will succeed to the point of needing more space. In order to secure that right, the tenant will need to negotiate the right to build out their space so they have the option to expand when needed. This can be done by reserving other space owned by the landlord for a set period of time, in either the building the tenant is currently in or elsewhere. In order to be effective, expansion options should list an accurate description of the space the tenant wants to reserve a right in, the rental amount for that additional space, and the terms and dates under which the tenant may exercise the option. The option to expand only takes effect when the tenant affirmatively exercises the option; if that need does not arise, the tenant is not obligated to act on it.

Use of this right is understandably limited. In competitive real estate markets, landlords are much less likely to agree to an expansion right because it reserves real estate and restricts the landlord’s ability to rent their buildings without restriction (i.e., being unable to rent reserved space during the time it is set aside under the expansion provision). Landlords must also be aware of inherent logistical concerns. In buildings with multiple units, giving even a few tenants expansion rights would create a confusing and inconsistent situation for the landlord.

Title to Improvements

Landlords will generally want to retain title to all material additions or alterations within the premises. Where changes are made to floor plans, utility lines, equipment, or fixtures, the landlord will insist on retaining them after the tenancy terminates and the tenant vacates because those changes are considered material improvements to the premises that have become part of the premises and removal would be damaging or costly to the landlord. Tenants are often permitted to retain alterations which are more minor in nature, not considered fixtures, and represent the tenant’s personal property. Commercial leases will often specify the categories of alterations that are retained by each party. In addition to addressing the right to retain improvements, this provision will usually contain a clause requiring the tenant to keep all improvements and alterations free from any mortgage, lien, or other encumbrance. These restrictions ensure that construction of additions and alterations do not affect the landlord’s overall rights as the owner of the property.

The above is a simplified summary of different options for improving or altering a commercial premises under a written lease. Each commercial lease negotiation will present a unique situation and often different landlords and tenants will have differing “standards” for how a commercial lease should be structured. As such, it is critical for both landlords and tenants speak with a Massachusetts commercial real estate attorney before executing a commercial lease.

Due Diligence in Business Transactions

By on September 22, 2016

Business revolves around transactions. Most transactions occur in the ordinary course of business, such as selling products and services to clients. Some transactions are less common, but may fundamentally alter the business itself:  mergers and acquisitions. A merger is a combination of two or more companies, while an acquisition involves one company buying the stock or assets of one or more other companies. These transaction structures, along with related structures like share exchanges, can provide great opportunities for businesses to consolidate operations, shore up weaknesses, and open new lines of business. The businesses themselves, after agreeing to enter some sort of transaction, are usually eager to hit the ground running. However, the process known as “due diligence” is vitally important for the future of all parties.

Due diligence is the process of exchanging information, often non-public information, in order to understand as much of the other company as possible before consummating the transaction. Any competent transaction lawyer will request a variety of information, and businesses should be prepared to work with their attorneys (and often accountants and chief financial officers) to deliver the requested information and review the same. Although the specific diligence requests can vary from deal to deal, many aspects are similar, and preparing for the process can save all parties time and money. What are some common due diligence topics?

Entity Organization. Most businesses involved in a merger or acquisition are corporations or limited liability companies. Each of these companies is supposed to be properly formed and maintained in its home state, and it is necessary for transaction attorneys to verify that the business does in fact exist. While that may seem silly, for how can an operating business not really “exist,” the legal details do matter and can hold up the deal itself or any business financing. Any corporate clean-ups (such as a company not being in good standing with its home state) should be cleaned up before the transaction.

Authority. All entities are governed by a set of documents that list the individuals or businesses that have control over the company: for corporations, that includes the board of directors and the stockholders, and for limited liability companies, that includes the managers and members. It is very important to make sure that a sufficient number (based on the entity’s organizational documents) have formally authorized the transaction. If that does not happen, then the aggrieved owners may be able to unwind the transaction through a costly and complicated lawsuit.

Titles, Liens. A merger or acquisition is often planned because one company wants access to the products or property of another company. Thus, it is necessary to ensure that the company with the goods has complete ownership of the goods, meaning that they are not subject to a lien or something else that could prevent the acquiring company from actually taking possession of the goods it targeted.

Intellectual Property. Intellectual property is increasingly important in today’s world, and many businesses acquisitions occur merely to acquire patents or technology. Does the company fully own its intellectual property? Are there any outstanding licensing agreements that may affect the transaction? Depending on the deal structure, the brand or technologies of the acquired company may be central to the deal and these questions must be answered as early as possible.

Taxes. Everyone is familiar with the truism that there is no escaping basic tax obligations. Depending on the structure of the transaction, a business may be acquiring both the assets and the liabilities of the other business. The last thing anybody wants to see is a surprise tax bill (or worse, tax lien) because the acquired company failed to meet its IRS obligations.

Litigation. Litigation is a part of life for most businesses. However, litigation can be a costly endeavor that lasts for several years. It is necessary for companies to determine their potential litigation exposure: what lawsuits are ongoing, but also what lawsuits are threatened. Litigation may be of particular concern in the technology sector, as a patent infringement suit can bankrupt some companies. Some lawsuits are also employee based, from nonpayment of wages to discrimination cases. Knowing what is out there is vital to managing risk.

Real Estate. Many commercial leases contain a clause that states the lease cannot be assigned without the landlord’s consent. If the acquiring company intends to run the acquired company as-is, maintaining its current office or facility is important. A merger or acquisition often meets the definition of “assignment,” in a lease, and breaching a commercial lease may trigger substantial penalties. Landlords will often provide their consent, especially if the acquiring company will assume the full lease obligations, but none of that can happen if nobody takes the time to find and review the lease.

The foregoing list is by no means exhaustive, and is intended merely to illustrate some of the matters businesses should be prepared to consider when entering into a substantial transaction like a merger or acquisition. Minimizing and controlling risk is essential to business endeavors, and it is impossible to control what you do not know. Any Massachusetts business contemplating a merger or acquisition should consult with a qualified business transaction attorney to ensure that the business is properly protected.