How to Defuse the Legal Time Bomb in Your Small Business5 min read
Unlike a typical time bomb, this one will not be ticking. There won’t be any warning signs. No specially trained dogs will sniff it out. No swat teams will swoop in and prevent its detonation, and as luck would have it, it will probably go off at the worst time.
Fortunately, you can find this time bomb quite easily before it detonates. You can begin your search by checking your filing cabinets, file boxes, desks and drawers for any documents with “agreement” written on it. If they’re still active agreements, slowly pull ’em out.
Agreements form the foundation of many small business transactions. Transactions between customers, landlords, vendors and government agencies are frequently governed by written agreements. What’s interesting about agreements is that they govern future activities to be performed under known and unknown circumstances – an inherently risky proposition, unless you can predict the future.
So let’s think back to when you first started your small business. How many actual “knowns” did you have? Would you say a lot has changed since you first entered into agreements necessary to get your small business going? If your small business is like most small businesses, a lot of things have changed, good and bad. As a result of these changes, you may be in breach of an agreement without even knowing it. We’re going to take care of this though.
On a nice slow morning or afternoon, grab a hot cup of coffee, tea or booze (if it has been one of those weeks) and take a few hours to flip through those agreements you pulled out to determine if you might be in breach of any of them. Boring? You bet, but it’s one of those necessary boring things, like filing a tax return or waiting in a doctor’s office. So with your agreements in hand, you may use this non-exhaustive list of clauses that might need to be reviewed:
- Restrictions on permitted use of leased equipment
- Restrictions on who is permitted to use leased equipment
- Restrictions on use of leased property
- Insurance, license and certificate requirements
- Restrictions on items stored on leased property
- Written consent requirements
- Restrictions on leasehold improvements
- Restrictions on modifications of equipment
- Lessee obligations
- Lessor obligations
Now, if you find something, I don’t expect you to wake that sleeping giant (I probably wouldn’t), BUT you may be able to start putting a plan together to help soften the blow in case the other party starts looking for a reason to terminate the agreement for a more lucrative opportunity. You can start planning a defense, perhaps a worthwhile explanation for your breach, or looking for substitutions, such as new suppliers, a new location or whatever it may be. Once you collect information for Plan B, just keep it on file in case you have to move quickly. You may even want to keep a cash reserve on hand in case the issue might result in litigation. Who knows, but you’ll be following the Boy Scout motto (i.e. Be Prepared), and your small business will thank you.
I appreciate your reading this post, but we both know you’re probably not going to rush to your files at this minute and start going through all your legal documents (unless you know you’re in breach and this post has reminded you of the possible financial time bomb that’s seriously near going off), but I highly recommend you pull out your lease agreement, if you have one, and this can be for equipment or real property, and just flip through some of the pages to see if you’re a beneficiary to a very favorable lease agreement on account of a change relating to the property you’re leasing. (I say favorable lease agreement because that would most likely mean it’s unfavorable to the other party.)
For example, if you entered into a lease for retail space in an underdeveloped community when property values were still low, but because of several revitalization initiatives in the same community, the value of your leasehold has quadrupled over the past few years, you should be especially weary of your landlord looking to replace your leasehold with a higher paying tenant. Handshakes and smiles are great, but at the end of the day, it’s business, and if there’s a lot of demand for your space, and you’ve opened the door with an inadvertent breach, you will want to be ready for a breach of contract claim by your landlord.
All isn’t bad with agreements, however, so don’t fret yet! Agreements can also swing the other way. You may find that the counterparty is in breach of something, or because of a certain event, such as a substantial change in prices, breach by other party or change in control of the other party’s company, you may have an out of a contract that’s not particularly in your favor. So in just reviewing your agreements, you may be able to get out of the unfavorable arrangement and stop a leak of money you weren’t even aware you had.
PLUS, by reviewing your agreements, you may even find you have more wiggle room to do things related to your agreement that you thought were restricted or limited. Perhaps on second look, you have 11 parking spaces instead of 10, or that your landlord is obligated to reimburse you for some of your capital improvements. Instead of a time bomb, a jackpot might be sitting around your office too!
So to just summarize the above, periodically review your agreements. You don’t have to read the all of the boring documents. Most will have headings that make finding relevant clauses really easy. Agreements should be reviewed frequently to ensure your small business is not breaching any existing contracts and to determine which clauses may no longer be applicable, and they’re primed for negotiations with the other party for their removal. Without a thorough and periodic review of its existing contractual obligations, you may be (i) subjecting your small business to additional and unnecessary expenses, (ii) limiting your small business without reason or (iii) unknowingly positioning your small business for a breach of contract claim by the counterparty. So don’t let that time bomb sneak up on you, be proactive and defuse it ahead of time.