Legal Corner

Presented by:

• Leasing Space for Your Small Business Q & A
• Litigation Basics Q & A
• Business Contracts Q & A
• Business Entity Choice Q & A
• Employment Law Q & A
• Intellectual Property Q & A

Q:  I’ve been given a proposed lease to review that’s 20 pages long.  How much room do I have to negotiate its terms?

A:  Most leases are drafted to protect the landlord, not the tenant.  As a result, they may contain boilerplate that is completely irrelevant to your situation, or even worse, may prohibit you from conducting the business you plan on running.  Prohibited uses; tenant mix; mandated hours of operation; noise limitations; access limitations; parking.  These are just examples of lease terms that may be critical to you.  It is extremely important to read the lease carefully, and make sure you understand exactly what you are leasing, what you are responsible for, what the landlord is responsible for, and what happens when one of you doesn’t live up to your end of the deal.  Many landlords (or leasing agents) are willing to negotiate terms to get to a lease that works for both sides.  If the one you’re working with refuses to budge, you may be better off looking for different space.

Q:  How much will it really cost me to rent my space?

A:  You know you will be paying rent (but watch for rent escalators and percentage rent provisions).  Typically, the tenant is also responsible for utilities, trash removal, and other similar charges.  What else might you be responsible for?  Many leases are so-called “triple net” leases – meaning that the tenant is responsible for rent, plus maintenance, insurance, and taxes.  If there is more than one tenant, the lease will define a methodology for allocating these charges among the tenants, and will provide for an annual true-up of actual expenses to estimated ones.  Be sure you know what your lease provides.

Q:  My lease has terminated, I’ve moved out, and my landlord refuses to give me my security deposit back.  What are my rights?

A:  Colorado has laws that deal with security deposits, but unfortunately they only apply to residential leases, not commercial ones.  Thus, your rights are governed by the terms of your lease.  If the lease fails to state when the landlord must return the deposit, or what type of accounting of claimed offsets he must give, then the law will imply a standard of “commercial reasonableness.”  Normally, that would suggest the landlord must give you an accounting of any damages within a reasonable period of time (likely 30 to 60 days), and to refund the difference immediately.  If you disagree with the landlord’s accounting, unfortunately, your only choice (absent a settlement with the landlord) will be to sue for the difference.

Q:  My business can no longer afford the rent required by my lease.  How can I get out of the lease?

A:  Your options depend on the terms of your lease.  If the lease allows you to sublet your space, or assign your lease, you can try to find a new tenant for the space.  Normally, you cannot take these actions with the landlord’s approval and, unless the landlord specifically agrees to release you, you will remain liable if the new tenant defaults.  You can also attempt to negotiate with the landlord to terminate the lease.  If the landlord believes that it can re-rent the space to another tenant, at the same rent you’re paying, or more, the landlord may be cooperative.  If not, you may have to buy your way out of the remaining lease term for the rent differential.  At a minimum, be prepared to pay the landlord’s expenses in doing new tenant finish, and the few months the space will be vacant while the landlord finds a new tenant.

Q&A for Litigation Basics: Protecting Your Business by Susan F. Fisher Fairfield and Woods, P.C.

Q:  I haven’t been paid for work that I’ve done or for products that I’ve delivered to a customer.  Should I sue him?

A:  Maybe.  It is always a good business decision to try to resolve conflicts before taking legal action.  Before filing a lawsuit, you should communicate with your customer to find out if there is a reason that he has not paid your bill.  The explanation may be simple—for example, he hasn’t received the bill or has misplaced it.  If the customer has no complaints about your services or products but he still refuses to pay you, put your demand for payment in writing.  If he continues to ignore your requests for payment, you may want to file a lawsuit.

Q:  Does filing a complaint prevent me from trying to negotiate a deal with the customer?

A:  No.  In fact, in Colorado plaintiffs and defendants must try to negotiate a settlement before trial.  Once you have filed and served your complaint, you may find that the defendant is quite eager to negotiate a settlement with you in order to avoid going to court. 

Q:  How do I file a lawsuit?

A:  A lawsuit is started by filing a complaint in the court and serving the person you are suing with a summons and the complaint.  If your damages do not exceed $7,500, you may file a complaint in Small Claims Court, which is designed for non-lawyers to represent themselves.  If the amount of money at issue does not exceed $15,000, you may file your complaint in County Court.  If the amount of money at issue exceeds $15,000, you must file your complaint in the District Court.  It is a good idea to hire a lawyer for County Court and District Court cases.  In fact, some business entities must be represented by an attorney in County Court and in District Court.

Q:  I have been sued, what do I do?

A:  The first step is to call an attorney who can advise you about your options in responding to the complaint.  There are a number of questions that you must consider before you respond or file your answer with the court.  For example, you will need to think about your defenses to the claims in the complaint and whether you want to bring any claims of your own against the plaintiff.  You have a very short period of time in which to act, however.  As a rule, in Colorado you must respond to the complaint within twenty days from the date on which you were served with a summons and complaint.  Don’t delay in getting some advice!

Q&A for Contract Basics by Timothy E. Reilly Fairfield and Woods, P.C.

Q:  What is a contract?

A:  A contract is an agreement between two or more persons or entities.  A contract consists of an offer and an acceptance of that offer.  In addition, a contract must be supported by consideration between the parties where some benefit is received or something is given up as agreed between the parties.

Q:  Does a contract have to be in writing to be enforceable?

A:   No, but in any business transaction it is a good idea.  Contracts can be orally agreed to between two parties, but there are limitations to your ability to enforce those agreements.  There are Statutes of Frauds which bar or limit a party’s ability to bring legal action based upon an alleged contract that is not in writing.  Some examples include: credit agreements involving a principal amount of $25,000 or more; contracts for the sale of goods for the price of $500 or more; the conveyance real property; or agreements that by their terms are not to be performed within one year.  The overriding purpose of the Statute of Frauds is to prevent the perpetration of fraud by devices such as perjury.

Q:  What are my damages if the other party breaches the contract?

A:  If the other party has breached the contract then you would be entitled to your actual damages due to the breach, as well as, other special damages such as your lost profits.  Of course, the damages available to you would depend on the kind of contract involved, and the provisions in the contract itself.  As an example, if your contract was to buy goods from a party, and that party failed to deliver those goods as agreed, then you obviously would be entitled to what you paid for those goods.  You may also be able to recover any lost profits if you intended to later sell or incorporate those goods in your products.   There are other types of damages that may also be available to you.  

Q:  The other party breached the contract and asserts that the contract limits their damages to a fixed amount, is that type of contract provision enforceable?

A:  Generally, yes.  You would certainly need to review your contract to see if there was an agreed provision that if one party breaches the contract then the other party will be entitled to a fixed amount of damages.  This type of contractual provision is called a liquidated damages provision.  Liquidated damages provisions are typically enforceable, but only if the stated amount is reasonable in light of the expected or actual harm from a breach, the difficulty of proving actual loss, as well as, the inadequacy of any other remedy.  If the damages are fixed unreasonably high then the provision may be construed as a penalty provision and could be deemed void.

Q&A for Business Entity Choice by Debra  A. Conroy Fairfield and Woods, P.C.

A:  There are several potential benefits which may or may not be available depending on the circumstances.  Generally speaking, some of the benefits include limiting exposure to liability, certain tax advantages, and clarifying the roles and duties of individuals involved in a business.

Q:  Are there any tax advantages that should be considered when forming a new entity?

A:  Possibly!  The tax advantages that may be available depend on various factors such as the number of owners and what the entity does to earn income, and other factors.

Q:  What regulatory agencies are involved when forming a new entity?

A:  Generally, in order to form a new entity, documents need to be filed with the Colorado Secretary of State, the IRS and the Colorado Department of Revenue, subject to some exceptions.  In addition, the services or products the new entity provides may require additional agencies, licensing, etc.

Q:  Is there a way to check if the proposed name of the new entity is already used?

A:  Yes – the Colorado Secretary of State business website, http://www.sos.state.co.us/pubs/business/main.htm offers the ability to search what other entities in Colorado may use the proposed name or a similar name.

Q:  Once an entity is formed, are there any required annual filings?

A:  Yes, a report is filed each year with the Secretary of State.  Tax returns or similar reports may also be required by the IRS and/or the Colorado Department of Revenue.

Q&A for Employment Law by Colin Walker Fairfield and Woods, P.C.

Q:  Are non-compete agreements enforceable?

A:  In Colorado, non-compete agreements are void except under four circumstances: (1) when applied to executive and management personnel, (2) to protect trade secrets, (3) to recoup the costs of educating or training an employee who has worked for the employer for less than two years, and (4) non-competes that relate to the sale of a business.  They must also be reasonable in scope, geography, and duration.  (States vary on this, so if the employee is located in another state or the agreement says that another state’s law applies, that state’s law should be considered.)

Q:  Can an employer terminate or refuse to hire someone because his/her spouse works for the employer?

A:  Under Colorado law, it is unlawful for an employer with more than 25 employees to discharge an employee or to refuse to hire a person solely on the basis that he or she is married to or plans to marry another employee.  However, this rule does not apply where: one spouse directly or indirectly would exercise supervisory, appointment, or dismissal authority or disciplinary action over the other spouse; one spouse would audit, verify, receive, or be entrusted with moneys received or handled by the other spouse; or one spouse has access to the employer’s confidential information, including payroll and personnel records.  In addition, a policy like this could be considered sex-based discrimination if it is administered in a way that results in discharge of one sex most of the time.

A:  An employer cannot take action against an employee on account of her pregnancy.  No specific leave rights for pregnant employees are mandated by either federal or Colorado law, BUT an employee who is disabled due to pregnancy or childbirth is entitled to leave to the same extent as other employees for other types of disability.  Therefore, if the employer would normally allow an employee to stay on due to an injury (say, an auto accident) even though he or she could not perform some of his or her duties, then it would be discriminatory and unlawful to fire an employee who could not perform similar duties due to pregnancy.  In a nutshell, an employer thinking about firing a pregnant employee is on thin ice and should have a well-documented reason for the discharge other than the employee’s pregnancy.

Q:  Can an employee enforce statements in an employee handbook against his or her employer?

A:  Sometimes.  If the employee handbook contains clear and conspicuous statements that it is not a contract and that the employer does not intend to be bound the polices and statements in the handbook, they are probably not binding.  However, if the handbook makes statements that the employer will or shall or promises to do or not do certain things without any limiting language (such as the above), a court may hold that the employer is bound by such promises or statements.

Q:  Should I hire a lawyer to respond to a Request for Information from the EEOC after one of my employees has filed a charge of discrimination.

A:  Some employers do not use lawyers for responses to EEOC Requests for Information.  However, those employers usually have very experienced HR managers.  Anything you say in an EEOC charge can be used against you if the employee (or the EEOC) files a court case, so you should be very careful what you say and how you say it.    An attorney familiar with the law in this area can help you avoid legal liability.  (Sometimes it is best to “CYA”: Call Your Attorney!)

Q & A for Intellectual Property by John Leonard Fairfield and Woods, P.C

Q:  What is intellectual property?

A:  Intellectual Property, otherwise known as IP, is the creation of ideas that have commercial value.  There are four specific tools a company can use to protect valuable property: copyright, trademark, trade secret, and patent.

Q:  What is a Copyright?

A:  A Copyright protects expressions of ideas, such as print, television and radio advertisements including the music, words and visual aspects.  A copyright gives the owner the exclusive right to duplicate, distribute, make modifications, perform, and display.  Generally, copyrights arise automatically once in tangible form, but there are many reasons to register.

Q:  What is a Patent?

A:  A Patent protects inventions, process, design, and discovery.  Patents should be registered with the U.S. Patent office before making the invention public.

Q:  What is a Trademark?

A:  A Trademark protects names, symbols, and slogans used to differentiate products and services in connection with the sale of goods and services. It costs $325 per class to register a trademark.  Expect the registration process to take approximately 12-18 months.  A Trademark is unlimited in duration, but certain filings are required to keep it registered.

Q:  What is a Trade Secret?

A:  A Trade Secret is a formula, process, device, or other business information that is kept confidential to maintain an advantage over competitors.  The owner of a Trade Secret must take reasonable steps to keep the information secret.  This applies to any information that is not readily accessible in the public domain such as, supply prices, supplier’s customer lists, R & D activities, and financial information.  The owner of a Trade Secret must take reasonable steps to keep the information secret.  A Trade is unlimited, as long as the information continues to be a secret.  Trade Secrets are not registered.

Please contact Fairfield and Woods, P.C. if you have any questions.  The above is provided for general information, not to provide specific legal advice. The application of any matter requires knowledge and analysis of the specific facts involved.  Additional articles prepared by our lawyers can be found by clicking on “Topical Articles” on our Web Site at www.fwlaw.com.

© 2006 Fairfield and Woods, P.C.