• NEW! - Leasing Space - Make the Perfect Space Work for Your Business
• Incorporation - Setting Up Your Businesses Legal Plan

Leasing Space - Make the Perfect Space Work for Your Business
Posted July 18, 2007 by Dale R. Doan

Businesses have a number of choices of where to set up their business operations in today’s business environment. You may choose to use a conventional office, try out a virtual office or to conduct business out of designated space in your home. However, many businesses still need a physical location; the choice then becomes whether to buy or to lease. This quick guide focuses on the leasing option and highlights the most important issues for your attention. This is really an area of the law where you can ensure that you get the best out of your legal advice by having a solid base of understanding. There are two stages in obtaining a lease: negotiating the terms with your prospective landlord to come up with an “Offer to Lease”; and formalizing those terms in a “Formal Lease”.

A. Offer to Lease:

The Offer to Lease document is a written offer from the tenant to the landlord that sets out the proposed terms for the lease. This document is negotiable and may go back and forth between the tenant and the landlord several times but eventually its terms are settled.

You may decide you need an experienced leasing agent to help you at this stage; it will depend on how comfortable you are with the negotiation process. Your goal is to end up with an “Offer to Lease” that contains the essential business points from your perspective. It is important to get it right at this stage as it will be difficult to get any new business points added in at the Formal Lease stage.

Here are some valuable points to consider in the Offer to Lease negotiations:

1. Term: You need to strike a balance between the amount of time the landlord wants to rent the premises for and the amount of time you think your business will be able to stay. This is so important because business is dynamic; you really don’t know how your business will be doing in 6 months, 1 year, or 3 years. It may have grown beyond expectation so you may need more space or it may not have grown as expected so you might need to downsize and control costs. Along with labor, your rent payments will likely take up the largest proportion of your overall expenditures. You really need to think your way through the options. For example, a starter term, say 2 years, with options to renew, might give you the most flexibility (an ‘option to renew’ is a term that extends the duration of the lease for a further set period). With more institutionalized landlords, it is sometimes more difficult to negotiate the flexible terms that would best suit your business needs as the landlord may have a grander leasing strategy of which your premises are only a very small part.

2. Price: It is almost trite to stress price as a crucial lease term, but make sure you spend enough time on this issue. A perfect location is only perfect if you can afford to be there. Make sure you have an idea of the market rate in the area you’re looking; this is also where a leasing agent can be very helpful in understanding the market value. However, beware of getting caught up in the concrete comparables like cost and size; the expression “location, location, location” came about for a real reason and location is a much more indistinct idea that is hard to quantify. The price must also make sense from a budgeting standpoint. Make sure you have run pro forma statements and even get some accounting help at this stage if you need it. The leasing industry usually expresses price in dollars/ft2. This is multiplied by the number of square feet in the premises to get an aggregate annual rent which in turn becomes payable in equal monthly amounts. You want to be precise in the way the price is expressed in your Offer to Lease. Is your arrangement to pay a certain amount per sq. ft. or is it your arrangement to pay a certain amount each month? What happens if the square footage turns out to be different in reality than projected? Is there a commitment from the landlord that the square footage will be as projected? These are not complicated issues, but make sure you understand the deal you are entering. If you don’t understand the wording, get some quick legal advice on this issue. If it is a tenant-friendly market, you might even be able to negotiate some rent free months as a sort of signing bonus.

3. Hidden Lease Costs: The above section deals with the aspect of rent most commonly referred to as “base rent”; there will almost certainly be other payments to make to the landlord. These other payments are generally found under the heading “operating costs”. Almost all leases require you to reimburse the landlord for the operating costs attributable to your premises. From a business perspective, it is useful to understand the landlord’s historical operating costs for your unit and whether your needs will differ significantly from those of past renters. In the end, though, your legal obligations will be determined by your Offer to Lease so look carefully for the types of costs you will be paying. It is normal to pay for property taxes, maintenance cost, and utilities.

4. Getting the Premises Ready for You: Often the premises are not ready for you to immediately move in but require renovations to fit your business needs. These pre-move-in renovations are known as “tenant improvements” or “leasehold improvements”. You might negotiate a “tenant’s allowance” to pay for some or all of the renovation. You will need to get estimates or quotes for the work and will also need to make sure your contractor is acceptable to the landlord. It may be that the landlord wants to take responsibility for getting the improvements done, in which case you will want to make sure that the plans for the improved premises, as well as the finished product, accurately reflect the improvements you wanted. A related point for negotiation will be the date by which you start to pay rent; you may be able to negotiate a rent start date for after the “tenant fixturing period” because only then are you able to move in to the premises. This is also a good time to mention that, in the absence of a specific agreement between you and the landlord, what becomes attached to the building (e.g. carpeting, built-in fridges, fixed secretarial stations, light fixtures, etc) becomes the property of the landlord and moveable items (e.g. chairs, tables, modular secretarial stations,, lamps, etc), if purchased by you, remain your property after the termination of the lease.

5. Personal Guarantees: In the “Incorporation Quick Guide”, we talk about the limited liability benefits of incorporating. Parties who deal with you usually understand this concept well so, to counter your incorporation benefit of limited liability, they will often ask for a personal guarantee. Whether or not you agree to provide them with such a guarantee is a negotiation point. The longer your company has been in existence and the better its creditworthiness, the more likely you will be successful in fending off this request. You can always suggest a hybrid solution whereby you might look to limit the amount of your guarantee or the time period for which it is effective. As an example, you might suggest that your guarantee obligation be limited to 3 months of rent payment, with the guarantee expiring halfway through the lease term or upon the first renewal of the lease.

6. Insurance: You will want to look at the insurance requirements carefully because often you will be able to negotiate with the landlord to reduce the coverage requested, thereby reducing the rates you would be paying to an insurance company. As well, you will want to examine the types of insurance being requested; some landlords try to cover a large territory, for example, by asking for vehicle coverage. Make sure you have read through the insurance provisions carefully and don’t skip them because they are very dry or because the landlord tells you they are “standard”. On a side note, you will also want to speak to an insurance company to make sure the premises are insurable (e.g. they aren’t too old) and that it won’t be too difficult to purchase insurance for your business when it is situated on the premises (e.g. you run a welding business and the building has a wood frame). Keep in mind that you will also have insurance issues independent of your lease, such as insuring the contents for replacement and your business for business interruption. You may also need insurance to cover potential liability arising from your work product.

7. Other: The only limit to this category is your imagination. This is why it is important for you to independently brainstorm the lease issues, asking yourself, “What can the landlord do for me that would provide added value?” It may be providing reserved parking spaces, signage, access to conference rooms, storage or upgrades to better space if it becomes available.

B. Formal Lease

This is the stage engaging a lawyer is more likely to provide you with added value. If you have done a good job with the Offer to Lease stage, this stage will go very smoothly. The lawyer will help you ensure that the business terms you ironed out in the Offer to Lease are encapsulated in the Formal Lease that will contain the terms of your legally binding arrangement.

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Incorporation - Setting Up Your Businesses Legal Plan
Posted March 7, 2007 by Digby Leigh

Deciding whether to incorporate is one important decisions which faces almost every business owner or entrepreneur at some time. There are other options; such as proprietorships, partnerships and joint-ventures. This quick guide specifically focuses on incorporation.

The 1 thru 6, point by point summary below on 'What You Can Do' will guide you through getting started on your own, empowering you with knowledge to put you in control of your legal/business plan and ready to effectively hire a lawyer.

1. Understand what you need to do
A corporation is a separate legal entity, independent of its shareholders and its directors. It has the capacity of a legal person and can thus enter into contracts, sue or be sued in its own name, hold property and bank accounts, and generally function in business like a person. These actions, though, must be 'guided' by actual individuals and the knowledge they hold. These individuals are the directors, officers and senior management of the corporation.

2. How it works
A corporation is owned by its shareholders. The shareholders are entitled to decide who manages their business and who is entitled to receive the profits. Shareholders elect directors (individuals) and directors appoint officers. The directors are responsible to the shareholders for the overall management of the corporation. Directors appoint or hire officers and sometimes managers for the ‘day to day’ management of the business. In closely held family businesses, the shareholders, directors, and officers are often the same people. A company distributes its profits to the shareholders through a variety of means often including dividends, salaries and bonuses.

3. Balancing your decisions with compliance requirements
It is important that the decisions you make about the organization of your company, such as the appointment of directors and the determination as to who should receive dividends, are made in appreciation of applicable laws and regulations.

There are a lot of rules for companies. First, there are ‘statutory’ laws governing all companies that carry on business in a particular state or province; these laws may be found in legislation called something similar to ‘Company Act’, ‘Corporations Act’ or ‘Business Corporations Act’. As well, there is a second level of rules, this time tailored specifically to apply to your company; these are known by such names as ‘by-laws’ or ‘articles’. You may even decide to create a third level of rules to govern the way shareholders interact in your company; this is often called a ‘shareholders agreement’ or a ‘unanimous shareholders agreement’.

It is important to have a basic understanding of all of these rules so that you can ensure that your company is compliant. Don’t be too intimidated by all the provisions since it will be easy to get quick advice on any issue, and the rules basically follow the points we have made in this Quick Guide – all generally common sense when you develop a little comfort with corporate matters.

4. Picking a name
To get started, you need to pick a name for your company. There are rules for selecting the name for the company depending on the function your company is intended to have. The name will generally end with a word or an abbreviation indicating the entity’s corporate status, for example, Inc., Ltd., or Limited. The rules generally require something descriptive in the name, so a typical name if your company provides plumbing services or equipment, might be ‘ABC Plumbing Ltd.’ If there is already a company in existence with a similar name in the state or province in which you are registering, you might have to choose a different name. As a starting point, select a few possible names that would suit your business. Check phone books, the yellow pages and even go online to see if there is already a company registered in your jurisdiction with that name. Remember that you will be using this name all the time, so give it some thought from a ‘business perspective’. If possible consider including your "branding" in your formal corporate name - see Quick Guide on Trade-mark Registration.

5. Two basic reasons to incorporate
Tax Planning – you can usually ‘shelter’ your income in a company, which often will allow you to pay tax at a lower rate with a plan designed by your tax advisors; and

Limiting Personal Liability – your personal assets, such as your family home, will generally not be at risk for the company’s (your business) debts. Planning and proper implementation of the plan is needed to ensure limited liability, but the process is easily handled once you know the plan.

There are numerous websites with detailed information as to the benefits of incorporation, please free to click on these sites (we think they are great!) BUT don’t get lost in all the detail; the basic concepts in this list should always be your guide.

6. Make decisions based on your needs
While incorporating a company used to be a big decision involving complex considerations and significant cost, today incorporating a company to run your business or to hold assets is a relatively easy, cost-effective, and straightforward process for most businesspersons. This is thanks to modern corporate legislation in most U.S. states and Canadian provinces. Furthermore, in many states and provinces government entities responsible for the formal incorporation process have created computer-based systems that allow a businessperson to incorporate a company in a painless online environment.

Incorporation Process:  If you choose, you can incorporate a company yourself; however, we really recommend you do it with the assistance of a lawyer. No matter what you decide to do, it is imperative that you have the basic understanding of the issues in this list. If you are going through the process by yourself, you should be aware of why each step is important and the ramifications of the actions you are taking.

Accounting:  You can get tax advice from either a lawyer or an accountant specializing in this area. However, as you will likely need some accounting help in preparing your company’s financial statements, the most common route is to also rely on your accountant for the tax advice.

Costs:  In assessing the benefits of incorporation, business owners’ usually only account for the ‘start-up’ costs, such as the incorporation and accounting costs. Far too often business owners forget to factor in the recurring annual maintenance costs of incorporation. You will likely have to prepare separate financial statements, tax returns and government filings for your company each year.

Share Structure: Some companies choose a very simple share structure. This could be an error if your company later needs different classes of shares, for example, if you eventually involve shareholders who simply want to be investors but not voting members or if you decide to have the option available to use shares in business operations like asset transfers to the corporation. Why not keep all doors open and allow for varying classes of shares from the start? This is where a lawyer can really help you.

Directors: The directors and officers of a corporation owe a duty of good faith to the corporation. The board should only consist of responsible, resourceful people. Keep in mind that some people may not be appropriate to be included on the board, for example, people who may in future be contracting directly with the corporation.

Hiring A Lawyer: Hire someone who you trust to really help you. It is very good if that person has business experience as they will be able to identify with your day to day issues. Here are some questions you might want to ask when interviewing a prospective lawyer:

How many businesses do you help?
What are all the costs I should anticipate – start-up and annually?
What types of legal services can you help me with that my business might expect to encounter in the next few years?
How do you determine how much I will pay for your services?
Which accountants do you usually work with?
What types of share structure do you usually use for your companies?