As a business owner, you're likely going to engage in negotiations with Multiple third parties around contracts. Whether it's vendors, suppliers, your employees, contracts will be an integral part of your business. What is a contract? A contract is a voluntary agreement between two or more parties that's legally enforceable. Now, in this lesson, we're going to talk about some common contracts, leases, contracts around real property, loan agreements. And then we'll spend a few minutes talking about illegal construct called the statute of frauds which has some pretty stringent requirements on certain types of contracts. Now, let's start by talking about the elements of a contract. As you know, contracts have to have a legal purpose, you can't have a contract for engaging in illegal activity. If the contract has a legal purpose, the elements of establishing a valid contract include an offer, acceptance, consideration, which is some bargained for exchange-. Both parties are giving up something of value in exchange for the other party giving up something in value. And then capacity, both parties must have the capacity or the authority to enter into the contract. Leases, now, as an early start up, you may arrive at a point in your business development where you want to get some facilities to conduct your business. You may want to get out of your apartment or out of your garage and have some formal place where you're conducting business. And because most early startups are fairly cash strapped, you're not going to be purchasing a building or purchasing space, so you'll likely are going to be leasing this space. And as part of this idea of leasing a facility will involve a lease agreement. Now, in a lease agreement arrangement, it's basically a contract between a landlord who owns the facilities or who's managing the facilities and the tenant which will be you in this scenario. That oftentimes, lease agreements are pretty standard form contracts, they have pretty standard provisions in them. But as a potential tenant, you have the ability to negotiate these terms. So, what your job should be as a tenant is when the landlord gives you the standard lease agreement, you should review it, understand the provisions and then rank the issues that you want to negotiate. Oftentimes, issues like the rental rate, like how much are you going to be paying and when will you pay? Also, least restrictions, they're too big least restrictions that I think we want to spell out here in this lessons and that's subleasing and assignments. So subleasing is the idea that you as a tenant has the ability to lease your rights in the property or in the facilities to a third party. Now, oftentimes, landlords in the lease agreements will try to restrict your ability to sublease. Now, the idea here as a sub-lessor, as the person who's doing the sublease is this third party will come in and you are essentially the landlord in that context, this third party is your tenant. And so this third party will have obligations to you as the person who sublease it. Now, of course, this third party may pay rent or pay the rental rate directly to the landlord, your landlord, but you're still in the equation, you're still ultimately responsible for the contract that you have with the landlord. Now oftentimes, landlords will try to restrict this. Similarly, assignments, assignments is where you as the tenant gives all of your right, all of your interest in the property to a third Party. Now, this is quite different from subleasing, whereas subleasing, you are essentially in the middle of the equation, you still have ultimate responsibility for the original lease, but your sub-lessee is paying the rent on your behalf. In the case of an assignment, the assignee, the new person, the third party that came in now has all responsibility for paying rent and the landlord will deal directly with this new third party. Landlords similarly are oftentimes, they want to restrict your ability to assign, and here's why. The landlord negotiated this agreement with you, they understand you, they've done their due diligence and their homework on you, they don't have the ability to do that on this third party. And so you have done that with the third party and now the landlord is left dealing with someone who they haven't done their homework on. Oftentimes, landlords will really insist on having no assignment clause. However, with the sublease, you may have the ability to negotiate that. And this is important for you as an early start up because you may get into a lease agreement and during the pendency of that lease agreement, your business may become extremely cash strapped. You may find yourself in a position where you're unable to make the rental obligations under the lease. The ability to be able to pass that burden onto a third party who can do it, who may also need those facilities will be very attractive for you as an early start up. And so to the extent you can heavily negotiate some of these lease restrictions, assignments or subleases, it's to your benefit. Let's talk about the purchase of real property. Real property is where you're actually buying property, not just leasing property. What you want to keep in mind about real property is the fact that it will involve multiple agreements. You'll have an agreement for the actual purchase of the property. You may have agreements with an entity that's helping you finance the purchase. Also, if you are buying property, you will as the owner of the property have exposure. You have liability for any type of hazardous waste that's on the property, any type of dangerous conditions that's on the property that will now be burn by you as the owner of the property. So there's some very important issues to keep in mind when you're thinking about purchasing real property. If you're at that point in your business and you're thinking about being an owner of property, you should consult a lawyer so that lawyer can help you navigate all of the complicated issues around the purchase of real property. Now, let's talk about loans because as an early start up, loans are something that you may want to consider as a way of financing your business or a way of getting some seed money to get your business operations off the ground. Loan agreements are usually standard agreement and unlike leases where you can negotiate, oftentimes, loan agreements aren't heavily negotiated. And this is because the banks or the financial institution essentially has extreme bargaining power. They have the money, you need the money and they're typically not in a position where they negotiate the terms of the loan very heavily. So as a result, your responsibility is to make sure you read the standard loan agreement, you understand the terms and you ask tough questions to make sure that you're comfortable with the terms of the agreement. Now, the key provisions in a loan agreement that you want to be aware of are the repayment terms. Under what conditions are you to repay the loan? Is that you're making monthly payments, annual payments. Are there any penalties for paying the loan off earlier than as described in the loan payment schedule? How will you receive the money and will the bank give you all of the money up front? Is there some distribution schedule for the money? These are important terms that you want to make sure you have an understanding of. And then if there are any conditions on the loan, do you have to meet certain milestones, certain thresholds or their penalties involved? These types of conditions that may be embedded in that loan agreement or things that you want to make sure you keep an eye out for and ask questions before signing a loan agreement. Now, let's talk about the statute of frauds, statute of frauds is a legal construct that essentially requires certain contracts to be in writing. Any contract that requires more than 1 year to perform, any contract that involves interest in real property, contracts that allow someone to assume someone else's debt. Or any contract that involves the sale of goods that exceeds $500. This law, which has been adopted in most states in the US requires that these types of agreements be in writing. So in summary, contracts are good, it's good for your business, it brings predictability, clarity and accountability. When you're involved in a lease agreement, you want to make sure you negotiate the key terms of the agreement. Now, while loan agreements aren't heavily negotiated, you want to make sure you read the agreements carefully and seek clarification or anything that's ambiguous or doesn't make sense to you-. And you want to do that before you signed the loan agreement. And then finally, contracts, they can be written, they can be oral or they can be implied. Under some types of contracts, under the statute of frauds, certain contracts must be in writing, but just to be sure as you're conducting business, you want to ensure that all of your contracts are written. That gives you the best bang for your buck when it comes to contracts, it makes things very clear and it leads you to a sense of clarity and accountability.
