1. Intro to Contracts Laurie Hauber Nathan Gusdorf
Legal Services of Eastern Missouri
Community Economic Development Program
7/13/11

2. Contents Why Use Written Contracts? What is a Contract?
Writing a Contract
Breaches of Contract & Remedies
Commercial Matters: Lease Agreements

3. Why Make A Contract? Written Agreement: Less room for misunderstanding
Clearly articulate business terms
Legally enforceable: Protect yourself from unfair business practices
Provides a mechanism for settling disputes

4. What Is A Contract? Agreement: an exchange of promises
To do or not do something
Three components:
Offer
Acceptance
Consideration
Mutual assent:
Brings about a meeting of the minds

5. Meeting of the Minds? Sort out language confusion, ambiguities
I spilled the coffee, bring me a mop
I spilled the coffee, bring me a broom

6. The Offer Expression of interest in forming an agreement
Can be oral or written
Consider:
Who is making the offer?
Is it the contracting party or an authorized agent?
What is being offered?
How long is the offer open?

7. The Offer (cont’d) Conditions:
Offers must state specific quantities and prices when goods are in question, specific delivery times
Must be written for sales over $500
Specify mode of acceptance
Fax/ /Telephone/Writing

8. Acceptance Must be voluntary and communicated Oral acceptance
Handshake counts, but…
Unreliable
Written acceptance
Acceptance conditions (fax/telephone/etc.)
Articulates what the parties agree upon
Interpretation questions?

9. Consideration The exchange of items of value (goods, services, money):
Mark promises Julie that he will fix her car if she will give him legal advice
No consideration:
Jones promises Terry a car one year from now, but is to receive nothing in return.
No consideration means no contract

10. Drafting Contracts Specify subject matter
Under what conditions is the contractual duty satisfied?
Specify price and quantity
Start/End Dates
Deadlines
Mode of payment

11. Drafting Contracts- Danger!
Boilerplate Provisions (often time savers):
Indemnification
Provides legal protection for one party
Renewal Terms
Dispute Resolution:
“The undersigned agrees to have any dispute heard by a mediator provided by drafters” (not a court of law)

12. Dangers (cont’d) Jurisdictional Provision:
“The undersigned agrees to resolve any dispute in a location chosen by drafter”
Attorney’s Fees:
“The undersigned agrees to pay any attorney’s fees incurred by the drafter”

13. When It’s Not a Contract
If language indicates negotiation or preliminary phase
Indefinite terms
Offer is revoked
Offer is rejected
Death/Incapacity/Age
Consent Conditions

14. Breaching the Contract
Ways to breach a contract
Complete or substantial failure to perform
Substantial but not complete performance
Repudiation
Words or conduct that would be reasonably interpreted as refusal to perform
Anticipatory Breach
Repudiation of the contract by either party prior to the time of performance
Changed Circumstance (Depends)
When it becomes impossible to fulfill the conditions of the contract
Under modern contract law, each party has an obligation to perform the contract in good faith.  When this doesn’t happen, one party breaches the contract..      Substantial performance - does the performance meet the essential purpose of the contract?
       Repudiation – words or conduct by a party that a reasonable person would interpret as an expression of refusal to perform; an act considered to be a minor breach will be treated as a material breach if accompanied by an express repudiation
     Anticipatory Breach: if either party to a contract repudiates the contract prior to the time set for performance, the other party may treat the anticipatory repudiation as a present, material breach of contract and bring and immediate action for the entire value of the promised performance.
       Changed circumstances
                     Impossibility
                      frustration

15. Remedies for Breach $ Compensation Specific Performance Restitution
Get benefit that other party received from contract
Liquidated Damages Clause
Fixed amount of money written into contract in the event of a breach
Restraining Order
Right to have goods repaired or replaced
Small Claims Court:
-Only for claims less than $2000
Advantage:
-Procedures are simple and do not require a lawyer
Disadvantage:
-Waiver of right to appeal as Plaintiff. Defendants reserve right to appeal
Mediation:
-Parties agree to have an impartial facilitator bring them together to help resolve their dispute
Advantages:
-Not confrontational and does not remove any other legal options. Useful if you want to continue the business relationship
-Private Process that is cheaper and quicker than filing a lawsuit
Arbitration:
-Parties agree to have an impartial decision maker resolve the dispute
-Quicker and more cost effective method of resolving dispute compared to lawsuit
-Flexibility in determining procedures and who will be the arbiter
Disadvantages:
-Decision of arbiter appealable only in rare instances
-Can be expensive since parties pay for the expenses of the arbitral panel

16. Key Issues in Commercial Contracts
Time period of contract
Independent Contractor Status
Representations / Warranties
Price and Delivery
Termination rights for breach or default
Indemnification
Impracticability
Assignment
Notice

17. Lease Agreements Essential terms (required by MO law):
Identification of the parties
Description of the property
Rent
Term of lease
Include name and address. Remember to use corporate name for liability shield. LL must include his/her name and address as well as manager’s if there is one
Don’t just use address. Spell out what T has exclusive control over, parts of common area T can use, and parking (e.g., nonexclusive use to use halls, stairs, elevators, restrooms, other common areas and access points)
Term of lease means duration – start and end date. Lease may be effective before term of lease begins. Date of termination must be clear or could become tenancy at will or year to year.
If property is unfinished and/or needs substantial improvement lease should state that term begins when property is ready for occupancy rather than specifying a date.

18. Lease Agreements: Economic Factors
Space—confirm sq. footage, delivery date
Security deposit
Rent

19. Lease Agreements: Rent
Base Rent (Formula? $/sq. foot; % gross sales)
Additional Rent
Other costs (e.g., utilities, property taxes, insurance, maintenance)
Look out for vague language -- “costs of managing and operating the building . . .”
Annual increases in multi-year leases (specify how increases are calculated)
Re: additional rent. Often see an “escalation clause” allowing for increased rent in correlation with LL’s increased operating costs. TIP: try to get as much specificity as possible with additional rent.
Could ask for estimated range of cost increases and propose a cap

20. Rent (cont’d) Specify when rent due Late fees, if any
When first and last payments are due
Place of payment
When rent due – custom in MO is one mo in advance

21. Economic Factors (cont’d)
Insurance often required
General liability
Casualty to protect personal property
Improvements
Often requires LL approval
Who pays?
Removable fixtures
Maintenance/repairs
Pre-existing environmental problems
T has no obligation to insure the property and LL has no obligation to rebuild after a fire, flood or other casualty. Leases often contain these clauses. Want a clause allowing for rent abatement while LL rebuilds.
RE: repairs. Typically LL responsible for structural repairs and Tenant for non-structural. Who responsible for snow and ice removal?
Re: environmental problems, if have question about property want LL to include a representation that t here are no problems (e.g., asbestos, hazardous substances)

22. Lease Agreements: Flexibility
Change in use
Assignment -- right to sell business
Sublease
Extend term
Agree on rent or formula to calculate rent for extended terms
Notice to LL often required
Expand space
Option to purchase
Assignments and subleases --- need LL written consent if lease term is less than 2 yrs. If longer, freely assignable. HOWEVER, often lease will still require written consent
If sublease LL may want any profit T collects
Extend term—may require notice to LL by certain time. Could be automatic renewal unless T gives notice or onus on T to provide notice to renew

23. Lease Agreements: Other Important Terms
Right to refuse to lease other space
--e.g., no competing businesses
Termination
Events of Default
Subordination (to mortgage or other lien)
Personal Guaranty
Default – notice not required by law. Try to negotiate notice so T has chance to cure default. Spell out what constitutes default (e.g., failure pay rent or make repairs, use property illegal way or use not specified in lease, LL mortgaging or selling property, T fail comply with other promises in lease. LL fail to provide services stipulated in lease
Personal guaranty often required unless can show corp’s financials can perform tenant’s obligations during lease term

24. Lease Agreement: Default by Tenant
LL can ignore default
Give Tenant notice, take possession and relet
Terminate lease

25. Lease Agreement: Termination
If tenant stays after end of lease, terms of lease apply
Who keeps fixtures?
Unless lease states otherwise
Fixtures left for LL or T must remove. Depending on business, if large amount invested in fixtures could be costly for T if LL keeps. Best to spell out what T gets to take, what must leave for LL

26. Lease Agreements -- Tips
Consult an attorney
If LL has an attorney, do not rely on him/her
If business is a legal entity, sign with corporate name
Put lease in writing
Law requires it if longer than 1 year or
if term is other than month to month
If legal entity, sign as follows: ABC Corp, Inc., a MO corporation. Then name and title e.g., John Smith, President
If lease is just oral, will be deemed month to month. Also, if circumstances change (e.g., landlord sells to new person), that person might not follow understood agreement you have had with original LL)