September 2015

Mary Cushing Doherty | September 30, 2015

How Will Divorce Affect My Business? Will I Lose My Livelihood as Well as My Marriage?

Successfully launching and running a business requires commitment and passion. It can be an exhilarating ride; the pride that comes from building something long lasting is hard to top. However, too often the journey never ends, and it can be all-consuming.

business-divorce — How Will Divorce Affect My Business?

Sometimes, despite the best efforts and intentions, the commitment and passion for one’s business can contribute to strains in other aspects of one’s life, leading to a struggling marriage.

When a person who is facing divorce owns a business, or is a co-owner, the question comes up whether the divorce will force the liquidation of the business. In most cases, the simple answer is “no.” That said, a business will likely be considered a marital asset that will be valued as part of the financial analysis in the divorce.

Assets (less liabilities) owned by both or either spouse during the marriage are generally considered part of the marital estate. This includes savings, real estate, debts and business ventures.

Four exceptions to what is considered marital are:

Gifts, Bequests and Inheritances: Any gifts/bequests/inheritances one party receives from a third party, which are kept in separate title, are not considered marital assets and are valued as of receipt. The increase in value is marital.
Acquired pre-marriage: An asset owned prior to the marriage which is kept in separate title is not considered marital. The increase in value during marriage is marital.
Acquired post-separation: Any asset acquired after separation with non-marital funds is not marital.
Protected by a prenuptial agreement: All assets acquired before and in some cases during a marriage can be protected by a well-drafted prenuptial agreements.

When looking at a business, if it was started and built during the marriage the business is considered a marital asset. Businesses began before the marriage, have a non-marital value at date of marriage. If the business grows during the marriage, the increase in value is marital.

If a business is identified as a marital asset, or with some marital component, the marital value of the business will need to be determined if a divorce is initiated. The non-owner spouse has the right to know if it is marketable, if the business has significant assets, if it successfully generates excess income to the owner. In some circumstances, however, a business succeeds due to almost entirely upon the personal goodwill of the owner; in such cases, it may have modest value to distribute. In most cases, the courts want the business to survive the divorce as an asset of the owner spouse, especially where the family has been relying on the business to produce income.

It’s unusual for a court to expect marital partners to become partners in a business interest. While the non-business-owner may have a claim to the value of the business, most judges and masters recognize that making an ex-spouse a partner in a business is a recipe for disaster. Instead, the courts will often accommodate a buyout over time of the non-owner’s economic interest in the business rather than trigger financial hardship for the business owner. The court should seek to mitigate financial strain on both parties and any children of the marriage.

If the non-owner spouse works in the business, the owner should be wary of the spouse/former spouse actively hurting the business. A spouse who calls customers or comes to the office and misbehaves may be found at fault for trying to retaliate against the business owner for personal reasons. This could hurt the value of the asset and the source of future income. If the spouse is employed and engaging in this type of behavior, he/she will be terminated.

Compensation generated from the businesses which is in savings is also considered marital property. Investments and retirement savings accumulated through date of separation will be equitably divided. Future child support and alimony will be based on the owner-spouse’s income. Beware: if the business is valued based on excess earnings, the business owner will argue the non-owner spouse cannot double-dip. If the non-owner is getting the value of the excess earnings in equitable distribution, those excess earnings arguably should be removed from income available for support.

The end of a marriage is stressful enough; the fear of potentially losing one’s livelihood at the same time can be frightening. Additionally, an important consideration is the toll of divorce litigation on one’s ability to keep up the same pace of work. The ability of the business to survive the divorce needs to be evaluated by the owner.

The owner will want to have an advocate who is in tune with the range of possible litigation. If the litigation becomes brutal, the non-owner spouse may doom the business, and the goose that lays the golden eggs.

For more information, please contact Mary Cushing Doherty at (610) 275-0700 or by email at mdoherty@highswartz.com. Visit her attorney profile here.

Visit the Family Law page here.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Kevin Cornish | September 24, 2015

Commercial Lease Agreements: Why You Need A Lawyer

September 24, 2015

By Kevin Cornish, Esq.

Small business owners spend significant time and money preparing to open and operate their businesses. From market research to obtaining necessary equipment to securing inventory, the tasks are endless. Small business owners must also secure facilities from which to operate. Often, this means renting commercial space from a landlord. Unfortunately, this aspect of operating a small business frequently is not given the appropriate amount of attention.

Here is how the process typically goes: the small business owner spends time researching appropriate locations in which to operate. When the owner finds a suitable location, the owner inquires with the landlord about availability. Understandably, owners focus their negotiations around the monthly rental amount and length of the lease agreement. If the parties agree on these issues, the landlord will often present the business owner with a lease agreement that contains numerous provisions and legal issues over many single spaced pages. Not wanting to incur additional costs, business owners often spend little time reviewing, negotiating, and understanding all of the terms of the lease agreement that the landlord has provided.

Landlord lease agreements often contain terms that are very favorable to the landlord and not as favorable to the tenant. Commercial lease agreements also contain provisions that small business owners without legal training may not fully understand. These issues can include confession of judgment, common area maintenance and how such charges are calculated, which party is responsible for repairs and improvements, legal options for the landlord and tenant in the event of a breach, legal requirements of the parties to act upon a breach, insurance requirements, indemnity and releases, subletting and assignment, acceleration of rent, and many more.

Many issues within a commercial lease agreement may not seem important at the outset of the lease, but could prove costly in the long term. Frequently, the first time small business owners have an attorney review a lease is after an issue arises. By that time, with the lease agreement signed, nothing can be done to change the lease terms. After consulting with an attorney, business owners are surprised at what the lease means or the terms that are included.

While small business owners may not view legal review and negotiation of the lease agreement as an important investment, it can often prove indispensable in the future. Small businesses can often secure more favorable terms with negotiations prior to signing of the lease. At a minimum, having an attorney review and explain the lease terms greatly assists the business owner in understanding options and ramifications.

It is true that legal review of a lease agreement is another startup cost for a small business. However, the benefits of reviewing the lease agreement before signing it are significant and can prevent headaches in the future. And that’s usually money well spent.

For more information feel free to contact Kevin Cornish at (610) 275-0700 or by email at kcornish@highswartz.com. Visit his attorney profile here.

Arnold Heller | September 9, 2015

Right of First Refusal – Don’t Take It Lightly

Post modified 9.6.22, Arnold Heller, Esq.

What is a Right of First Refusal?

It's not unusual for a landlord to grant a tenant a right of first refusal (ROFR) to purchase the landlord’s property if they decide to sell. Typically, a RORF is used for these purposes:

As an incentive for lease tenants in a buyer's market
For buyers with a contingency in a seller's market
To prevent issues among family members over an inheritance

In any of these cases, the right of first refusal obligates the seller to give the holder the first chance at the property before accepting any alternative offers from third parties. The right's holder can elect to proceed with the purchase. However, if they decline, the seller can entertain other offers.

As a lessee, a ROFR can provide a preference for the property they occupy. So, it's regarded favorably. But from an owner's standpoint, it may represent an encumbrance as they cannot entertain offers from competing parties.

Whether a buyer or seller, it pays to discuss a right of first refusal agreement with a real estate lawyer.

How a Right of First Refusal Works

Rights of first refusal allow individuals or businesses to assess the landscape before committing. As a result, they don't have to make a purchase decision immediately but can elect to see how things pan out. The ROFR lets them do that without risking losing the property.

You can customize the right of first refusal clauses. For example, the parties can specify the length of the ROFR. Indeed, most rights of first refusal agreements include a time limit. So when that limit expires, the owner is free to sell to other interested buyers.

Most right of first refusal ingredients includes these items:

Time Limit: The buyer receives a pre-determined amount of time without having to compete for the property.
Sale Price: The sale price is included if a seller decides to list the property.
Breach Remedies: The buyer is given their option if the ROFR is rejected.
Exceptions: Special situations altering the terms of ROFR. For example, how a cash offer impacts the sale.

ROFR versus ROFO

As mentioned, a right of first refusal requires a property owner to allow the right holder to purchase the property. They may only proceed to sell the property when the holder of the ROFR doesn't exercise that right or do so promptly.

A right of first offer (ROFO) triggers when a property owner elects to sell or lease their property. However, the property owner must first offer to sell or lease the property to the holder of the ROFO based on its terms and conditions. If the holder of the ROFO fails to exercise that right to purchase, the property owner may proceed to offer the property for sale or lease to third parties.

What are the Pros and Cons of a ROFR for Buyers?

A right of first refusal agreement has its up and downs for buyers and sellers alike. Here's a look from a buyer's perspective:

Pros

1. You have no worries about a bidding war for the property.
2. The agreement often includes pricing terms, so you know what you'll pay. That's especially beneficial in a market that continues to escalate.
3. You have time to work toward the purchase.

Cons

1. A right of first refusal includes a specific timeframe, so you must be ready to move. That could mean coming up with a payment in short order.
2. If the ROFR includes a predetermined selling price, you could overpay in a market where property costs are declining.

What are the Seller's Pros and Cons?

Pros

1. You can sell the property without listing it, saving you those costs.
2. If you include a purchase price in the right of first refusal. You'll have no surprises. And you could enjoy a windfall depending on market conditions.
3. There's safety in knowing you have a potential buyer on the hook.

Cons

1. The buyer isn't obligated to purchase the property.
2. If you receive a better offer, you could lose money if the ROFR holder has a lower offer.
3. You limit your market for the property. The more buyers, the better chance you'll get a better offer.
4. Lenders typically prohibit loans with properties, including a right of first refusal clause.

Right of First Refusal and Corporate Mergers

Can property burdened by a right of first refusal be included in the sale or merger of the owner?

n one Pennsylvania case (Seven Springs Farm, Inc. v. Croker), the Superior Court decided that shareholders in a cash-out merger were not bound by first refusal rights held by other shareholders. The Court determined the merger was a corporate act. In contrast, the right of first refusal is only a shareholders’ act.

The Pennsylvania Supreme Court affirmed this decision but drew sharp criticism from both courts' justices. It points out the importance of specifically addressing this potential scenario.

Multiple Properties Including a Right to First Refusal

Sometimes an owner with a right of first refusal decides to sell multiple properties at once, including the burdened property. Often, ROFR agreements don’t address this situation, even though it is not particularly unusual.

The Pennsylvania Superior Court ruled (in Boyd & Mahoney v. Chevron) that as long as the tenant meets the conditions provided in the ROFR, an owner cannot nullify the right by packaging the property for sale with other assets.

In this case, for example, Chevron purchased a gas station and gave the seller a right of first refusal as part of the deal. Subsequently, Chevron sold the gas station to Cumberland Farms as part of a more significant transaction that included real estate across the country.

The court ruled that the right of first refusal was a valuable property right that Chevron had to honor by offering the property to the original owner at the market value of $158,000. However, the Court went even further, upholding the trial court’s award of damages against Chevron of more than $500,000!

In a more recent case (Hahalyak v. A. Frost, Inc.), the Superior Court applied the same reasoning to prevent a landlord from circumventing the tenant’s right of first refusal. Here, the landlord offered a package deal that included the ROFR premises to another tenant, conditioned upon the other tenant’s surrender of its existing space.

Our Real Estate Lawyers Can Offer Guidance

For property owners, bestowing a right of first refusal often seems harmless to close a deal and provide a potential exit strategy. But property owners must never forget that giving your tenant a right of first refusal may come back and bite you without proper attention. So, talk with an experienced real estate lawyer at our local law firm with offices in Doylestown and Norristown, PA. They can provide appropriate guidance to help you determine whether a ROFR is a solid option for your property;

For more information, contact Arnold Heller at (610) 275-0700 or email at aheller@highswartz.com. Visit his attorney profile here.

The information above is general: we recommend you consult an attorney regarding your circumstances. The content of this information is not meant to be considered legal advice or a substitute for legal representation.