September/October 2002 Current legal trends affecting you and your business WHAT MAKES A CONTRACT ENFORCEABLE? N ick offers to sell Natalia a used photo- She says, “I definitely want to buy it but copier for $4,000 and gives her a week to I need my boss’s OK.” Bob says, “Good.” think it over. Five days later, Joe offers Nick $4,400 for the copier. Not having heard from Natalia, Nick immediately accepts Joe’s offer, takes his check and gives him the copier. While Nicole is calling her boss, Patty comes in and offers to pay Bob $4,000 for it. Bob accepts on the spot. Patty writes Bob a check and takes the copier. Natalia hangs up and says, “My boss says The next day Natalia accepts Nick’s I can pay you $4,000 for the copier.” offer. When told he sold it to Joe, she Ralph says he just sold the copier to says, “But you gave me a week to think Patty. “But I said I definitely want to buy about it and the week’s not up yet.” it, and you said OK,” complains Natalia. Natalia might shrug it off or she might “We had a deal.” sue Nick for breach of contract. And chances are she’d have a good case, because Nick never withdrew his offer before selling to Joe. If Nicole were to sue Bob for breach of contract, a court would probably find that she had no contract with Bob, and he was free to sell the copier to anyone Here’s another scenario. Bob wants to else. When Nicole attached a condition, sell his copier and shows it to Nicole. her acceptance became a counteroffer. THE LAW OFFICES OF DAVID J. SUTTON, PLLC GARDEN CITY OFFICE 1205 Franklin Ave. Suite 320 Garden City, NY 11530 516.294.8797 NEW YORK CITY OFFICE 100 Park Avenue New York, NY 10016 888.294.8797 Fax: 516.294.2758 E-mail: [email protected] Website: www.dsuttonlaw.com PROMISES, PROMISES These scenarios show the difficulty in sometimes determining whether a promise, pledge or stated intention is enforceable. A legal contract or binding agreement can be written or merely spoken. It can be typed in triplicate — using terms such as “whereas” and “hereinafter” — or it can be hand-written on a cocktail napkin in everyday language. It can be a single attorney-composed document, or a series of informal correspondence between the parties — sent in envelopes or by e-mail. MATERIAL TERMS To make an enforceable deal, you must What makes a contract binding and include some essential contract terms. You enforceable? Not whether it’s in writing, must put them in the agreement and make not the kind of paper it’s written on, not them specific and unambiguous. Essential how it’s conveyed between the parties, not terms include: the vernacular it employs and not the writer’s background. What makes it bind- Identification of the parties, including ing is whether it meets these three criteria: names, of course — either persons or 2 businesses — as well as addresses and 1. It contains all the material terms — or any other information that would promises — each party makes to distinguish one John Doe or Acme the other, Corp. from another. 2. The parties exchange — or promise to exchange — something of value, and Description of the goods or services one party provides, and the compensation the other party pays. 3. It represents an offer by one party and an acceptance by the other. Dates, periods or conditions under which those goods, services and pay- If one of the parties fails to perform ments must be provided — possibly or deliver on its promises, a breach of including a formal delivery or payment contract occurs. And the law provides schedule or both. remedies for the injured party. Agreement date and both parties’ We’ll take a closer look at each of the signatures. three criteria that make a contract Contracts involving large sums of money enforceable, and then briefly discuss or long-term relationships between the what an injured party can do when faced parties usually contain many other with a contract breach. provisions, such as: Conditions for terminating the contract, Merger clauses that extinguish previous offer. A mansion and a $10 bill both qualify as valuable consideration. agreements between the parties, But a one-sided promise is not enforceable. Choice-of-law clauses that identify the If your neighbor promises to water your law (if a statute applies) or the state (or rare prize-winning bonsai trees while you country) whose law governs the transac- vacation in Tahiti, you have no recourse if tion, and in which either party would you return to find they’ve dried up and litigate a dispute, died. If you had pledged to bring your Alternative dispute resolution clauses that can specify how the parties will resolve disputes over contract terms — typically mediation or arbitration, neighbor a souvenir key chain from Tahiti for his watering services — valuable consideration — you then might be able to recover damages for your loss. Limits on damages in case of a lawsuit or liquidated damages (that is, a dollar amount agreed to in advance and spelled out in the contract that a violating party must pay the other party for violating the agreement), and Names of successors who would be 3 responsible for contractual obligations if the original parties die or go bankrupt. OFFER AND ACCEPTANCE To enforce a contract, you must be able to You may include many other provisions prove that one party made an offer that in a contract, depending on jurisdiction, contained all the material terms and the the transaction’s nature and your line other party accepted the entire offer. At of business. some point, one party (let’s call him George) must say, “OK, here are the terms I will VALUABLE CONSIDERATION agree to — will you also agree to them?” For a contract to be legally binding, the parties must exchange goods, services, If the other party — Elena — writes back assets, money or items of value — what and says, “Yes, George, I agree to the lawyers call valuable consideration. But the terms in your letter of March 1, 2002,” quid needn’t have the same value as the then the contract is final and legally quo. If you agree to sell your Beverly Hills binding, even if no single document mansion to a friend for $10, you can’t later contains both parties’ signatures. claim the deal is void because the price was inadequate — unless you were incapacitated, defrauded, coerced or a minor without parental consent when you made the If Elena takes too long to respond, George can revoke the offer at any time before Elena accepts it, unless the offer specifies a period in which it will remain open. WHEN CONTRACTS SHOULD BE IN WRITING Although an oral contract is just as enforceable as a written one, proving an oral contract’s terms can be difficult if a dispute arises. So as a rule, you should either insist on a written contract or at least confirm in writing an important oral agreement. Some contracts must be written to be enforceable. Most states require a written contract in these transaction types: full, without any other communication? Is that an acceptance? In some cases, a judge or jury may have to decide. After an offer is accepted, the contract binds both parties with some exceptions. For example, some states allow consumers a cooling-off period — typically 24 to 72 hours — to reconsider and nullify a contract that involves a major purchase or home Any contract that involves a real estate purchase, sale, long-term lease or transfer, repairs or a contract signed in one’s home. Any agreement involving the sale of goods exceeding a specified dollar amount, BREACH Any contract whose terms can’t be complied with or completed in less than one year, An agreement to lend a large sum of money, 4 Elena mails George a check for payment in A promise to pay someone’s debts, and A contractual obligation that is likely to extend beyond either party’s lifetime. OF CONTRACT Any party failing to live up to the bargain breaches the contract. Besides failing to perform as promised, a breach occurs if either party makes it impossible for the other party to perform. If the contract doesn’t spell out remedies, the law provides remedies for the injured party. Here are the two most common: Compensatory damages. The injured On the other hand, George may choose party can recover the money it would to leave it open indefinitely. In that case, have gained or saved had the other it remains open until Elena accepts, party fulfilled the contract, and the rejects or makes a counteroffer. But you court may award the plaintiff legal fees, can’t assume the offer will remain open court costs and punitive damages. forever — just a reasonable time. As you Specific performance. Less common, might expect, what’s reasonable depends on and used mostly in real estate transac- each case’s circumstances and has been the tions, a court may order the breaching subject of countless lawsuits. party to perform as promised. Likewise, the question of what constitutes DON’T TAKE CHANCES a valid offer and clear acceptance can Before signing any contract, read it become quite complex. For example, let’s carefully and ask your attorney to review say Elena tells George, “OK, that sounds it. Because we know the ins and outs of good.” Is that an acceptance? Or what if contract law, we can probably help you negotiate more favorable terms. RENT WITH AN OPTION TO BUY POTENTIAL ADVANTAGES FOR BOTH BUYERS AND SELLERS Y ou find the perfect building in the ideal location, but you lack enough cash for the down payment. A short-term lease with an option to buy might solve your problem. It will let you occupy the building, accumulate cash for a down payment and determine the property’s true condition before you ultimately commit to it. By charging above-market rent, a landlord also can benefit from a lease with an option By offering a tenant an option to buy, a to buy. And the option usually attracts ten- landlord is really doing a tenant a favor, for ants who take good care of a property — two reasons: because they hope to eventually own it. 1. An option gives a tenant first “dibs” on But negotiating a lease with an option to the property, keeping all other potential buy is not as simple as tacking on an extra buyers at bay until the lease expires, and clause. Often you must renegotiate many of the basic lease terms as well. Here are the 2. An option essentially freezes a purchase elements of a solid lease-with-option agree- price for a specified time, during which ment and a few tips on getting a good deal. the property’s value may appreciate. LEASE-OPTION FUNDAMENTALS A lease with an option to buy is also called a lease-option. It comprises all the usual terms of a commercial lease — including a fixed time period, monthly rent payments, permitted tenant uses and landlord obliga- In return for this favor, and the fact that part of the rent applies to the purchase price, a tenant typically must either pay rent that is 10% to 20% above market rate or pay a one-time option fee on signing the lease — or both. tions to maintain the property. In addition, In addition to lease terms, a lease-option it gives a tenant the exclusive right — but agreement should include all material no obligation — to buy the property at a purchase terms, including: fixed price at any time during the lease term. And it usually specifies that a tenant Purchase price. This should reflect can apply a percentage of rent paid to the current fair market value. purchase price. The option period needn’t Rent credits. This defines how much last for the full lease term. of a tenant’s aggregate rent payments applies to the purchase price. (It’s 5 typically between 10% and 100%, with 33% being fairly common.) The higher the credit, the more likely the option will be exercised. A tenant usually forfeits rent credits when an unexercised option expires. Option consideration. This is a nonrefundable fee or deposit that a tenant pays for the privilege of inserting an option into a lease agreement. Most lease-option agreements provide that deposits apply to the purchase price if tenants exercise options but is forfeited if they don’t. items (such as earnest money, closing costs and inspections) before the lease term starts. You can attach a sales-agreement form to the lease-option agreement. Term length. Of course, a tenant wants a long lease so that property value has a chance to rise (while the purchase price 6 LENDER APPROVAL Before you sign a lease-option agreement, is fixed). Conversely, a landlord may get your lender’s assurance that the agree- want to limit the term to one or two ment’s terms are acceptable, and try to get years. But agreements can be reached. preapproved financing to exercise the For example, a tenant may negotiate a option. Keep in mind that interest rates longer term in return for accepting can move up or down before the option smaller rent credits. expires — so don’t bank on the property’s Exercise period. In some cases, a land- value appreciating. lord may want to restrict the time during which a tenant may exercise an option to buy. Usually a tenant’s best interest is to lengthen the exercise period as much as possible. Remember, real estate agents’ full commissions normally aren’t paid until an option is exercised. Thus agents tend to be biased toward shorter terms and earlier exercise periods. A lease-option agreement should also specify the sales agreement form to be used, so FLEXIBILITY that the parties agree on all other sale With so many variables, a lease-option agreement can get complicated. But the Negotiating a lease with an option to buy is not as simple as tacking on an extra clause. upside is that it gives you the flexibility to structure a deal that lets you buy property tomorrow that you may not be able or willing to buy today. Be sure to meet with legal and financial advisors before you begin the negotiating process. IN BRIEF . . . ¿SE HABLA ESPAÑOL? All general across-the-board pay raises If you have Spanish-speaking workers, the granted while they were gone, IRS has just the thing for you: a notice in Spanish you can post in your workplace to inform Spanish speakers of the new saver’s credit available this year. (The credit is for retirement-plan contributions by lowerincome workers.) The notice, Announcement 2001-106, is on the IRS’s Web site: www.irs.gov. An English version, Announcement 2001-106 (IRB 2001-44), is also available there. If health benefits would otherwise terminate when they left, the opportunity to elect continuing health benefits for up to 18 months after their absences began (or for the period of service, whichever is shorter) for premiums not exceeding 102% of full premiums, and reinstatement of coverage without waiting periods or preexisting-conditions exclusions on their return, other than any that would have applied without the TARDY EXEMPTS’ PAY Employers can’t dock the pay of exempt employees who come to work late or leave absence, and Some pension benefits. early. To preserve the exemption from But you don’t have to reemploy a worker if overtime, employers must pay exempt you can prove that: employees a predetermined salary not subject to reduction based on the quality Under your company’s current situa- or quantity of work performed. Partial- tion, re-employment now is impossible day docking is forbidden under all circum- or unreasonable, such as you have stances. For more on how to comply closed a plant where an employee with the Fair Labor Standards Act, formerly worked, consult your attorney. The initial employment was for a brief, nonrecurring period not reasonably WHEN WORKERS RETURN FROM ACTIVE DUTY expected to continue indefinitely or Have some of your employees been called to active military service, inactive duty training or full-time National Guard duty? If so, do you know what your obligations are under the Uniformed Services Employment & Re-employment Rights Act? In a nutshell, if honorably discharged service members, reservists and National Guard members notify you of service and apply for re-employment, you are required to give them their old jobs back, plus: example, if you hired extra workers for a significant period, such as, for only for the holiday shopping rush, or The employee was disabled during service and is no longer qualified to resume his or her previous job even with reasonable accommodation, and additional training or effort would impose undue hardship on your company. For more specific information, call us. This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting, or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. 7 September/October 2002 In this issue . . . What Makes A Contract Enforceable? Rent With an Option To Buy Potential Advantages for Both Buyers and Sellers Current legal trends affecting you and your business In Brief . . . THE LAW OFFICES OF DAVID J. SUTTON, PLLC EXCELLENCE IN THE PURSUIT OF JUSTICE™ David J. Sutton has been representing clients in business and personal matters for more than 20 years. He is admitted to practice law in New York federal and state courts. He holds a BA magna cum laude from the University of Massachusetts, a JD from Hofstra Law School, and a diploma in Advance Trial Advocacy from the National Institute of Trial Advocacy. David’s areas of concentration are commercial litigation, construction law, personal injury law, insurance law, environmental law and white-collar criminal law. Our Commitment to All Clients 1. You will be treated with courtesy and consideration at all times by our lawyers and staff. David A. Blansky (Associate) David received his Bachelor’s Degree in Communications, Legal Institutions, Economics and Government from The American University in Washington, D.C., in 1994 and his Juris doctorate Degree from the Northeastern University School of Law in Boston, Massachusetts in 1997. David has extensive litigation experience having served in the Office of the Nassau County District Attorney for nearly four years where he prosecuted both petty and felony crimes during his distinguished career. Before becoming a prosecutor, David served as a senior law clerk at the Department of Justice and worked at National Public Radio - Office of General Counsel. David is admitted to practice before all New York State Courts as well as the Federal Courts for the Southern and Eastern Districts of New York. 2. You will have an attorney capable of handling your legal matter competently and diligently, in accordance with the highest standards of the profession. 3. You will have your lawyer’s independent professional judgment and undivided loyalty uncompromised by conflicts of interest. 4. You will be charged a reasonable fee, and your lawyer will explain at the outset how the fee will be computed and billed. You will receive written itemized bills at reasonable intervals. Larry J. Bonchonsky (Of Counsel) is a seasoned medical malpractice and personal injury trial attorney in high profile litigation. He has successfully tried numerous multimillion dollar cases for some of New York’s most prestigious firms. With 20 years of experience, Larry’s areas of concentration are in representing serious personal injury victims involved in physician and hospital malpractice or in various kinds of accidents. He is a graduate of SUNY at Albany and the Columbus School of Law at the Catholic University of America. He is admitted to practice in New York and Washington, D.C. 5. You will have your calls returned and your questions and concerns addressed promptly. 6. You will be kept informed of the status of your matter and be able to request and receive copies of related papers so you can participate meaningfully in the development of your matter. 7. You will have your legitimate objectives respected by your attorney, including whether or not to settle your matter. 8. You have the right to privacy in your dealings with your lawyer and to have your secrets and confidences preserved. 9. Your attorney will conduct himself or herself ethically in accordance with the Code of Professional Responsibility. David S. Feather (Of Counsel) has extensive experience in employment law, with emphasis on workplace discrimination, and is co-author of Employment Discrimination Law, Third Edition. He is experienced in all phases of drafting and negotiating employment contracts, severance agreements and non-compete agreements. A graduate of SUNY Binghamton and Hofstra Law School, David is a member of the Legal Advisory Committee for the Association of American University Women. Daniel J. Osojnak (Of Counsel) has extensive experience in negotiating business and real estate sales. His practice areas include mergers and acquisitions, commercial leasing transactions, finance transactions, business startups, partnership and shareholder agreements, licensing agreements, joint venture transactions and securities law. He has a BA in accounting from Queens College and a JD with distinction from Hofstra Law School. 10. You may not be refused representation on the basis of race, creed, color, religion, sex, sexual orientation, age, national origin or disability. Our Guarantee: If you are not satisfied with how your matter is being handled, you have the right to withdraw from the attorney-client relationship at any time (court approval may be required in some matters, and your attorney may have a claim against you for the value of services rendered to you up to the point of discharge). Contact us today to learn more about how we can help you with matters pertaining to: ■ ■ ■ ■ Commercial litigation Construction law Copyright/Trademark law Corporate/partnership law ■ ■ ■ ■ Criminal law Employment and labor law Environmental law F.E.L.A ■ ■ ■ ■ First Amendment law Licensing and contracts Medical malpractice Personal injury ■ ■ ■ ■ ■ Fax: 516.294.2758 ■ E-mail: [email protected] GARDEN CITY OFFICE 1205 Franklin Ave. Suite 320 Garden City, NY 11530 516.294.8797 ■ Products liability Financial transactions Insurance law Real estate Toxic Mold & Fungus law Website: www.dsuttonlaw.com NEW YORK CITY OFFICE 100 Park Avenue New York, NY 10016 888.294.8797