Lease Rights Beyond the Property Line

Lease Rights Beyond the Property Line

Commercial Lease

A lease is an agreement between one party which owns real estate, (landlord or lessor), and another party who seeks to gain use rights to some or all of that real estate for a set period of time (tenant or lessee). The landlord remains the owner of the property, but gives up their right to use and control the space during the time it is being rented in exchange for the rental payment. A good lease should clearly describe the area being rented. This is especially important when the landlord continues to own area near or around the rented area that is not part of the agreement. The tenant’s right to use and control the rented area should be obvious, but in more complex leases the tenants may require additional limited rights and assurances relating to land outside of the rented area. These rights broadly take two forms: (1) agreement that the tenant will be able to do certain things on the outside land, and (2) agreement that the landlord will refrain from doing certain things on the outside land. Before signing such leases, tenants should ensure any special rights they need to areas outside of the confines of the rented space are clearly defined and landlords should clearly understand what rights they are giving up to areas outside the rented premises.

For residential leases (homes or apartments), when the tenant is renting less than a whole house or only a portion of the parcel the residence is located on, the lease should clarify any open questions about uses of parking spaces, common facilities and drive-ways/access rights. For example, if a tenant is renting the upper unit of a two story duplex, can they store items in the shared basement? How many cars can they and their guests park behind the house before it starts interfering with their downstairs neighbors’ rights? If the rented area is a unit in a condominium association, the parties should make sure they understand whether the rights to the common area amenities of the Association are assigned to the tenant as part of the lease or retained by the Landlord as the owner of the Unit.

In the commercial context (leases for business locations), leases in multi-site developments sometime contain “exclusive use” clauses, restricting the landlord from renting to any other provider of the same of similar service within some set amount of area. It is most common for larger “anchor” stores in such developments to secure the best protective provisions for themselves because they have the most bargaining power, but any party is free to negotiate for them. For example, when negotiating a lease for one of six spaces in a strip mall, a pizza restaurant might (wisely) add a clause to the lease that the landlord guarantees no other tenant in the strip will sell pizza. This ensures the location the restaurant carefully chose will not be spoiled by new competition during the term of the lease.

Landlords who grant these exclusive use clauses need to be very careful in reviewing both their current and future leases to ensure compliance. In the prior example, it will be simple enough for the landlord to reject future pizza parlors from the development, but what happens when another tenant, an arcade, who was leasing from the landlord prior to the pizza restaurant, starts selling pizza to their customers? If the arcade’s lease does not prohibit such activity, the landlord has no grounds to stop the arcade from using the space as they see fit. The pizza restaurant would, rightfully, consider the landlord to be in breach of their contract as they were promised the exclusive use for that line of activity. Here, the landlord inadvertently made promises in the lease they were unable to fulfill and put themselves into a Catch-22 scenario. The same example could also get complicated if, for example, a new restaurant comes in and signs a lease that prohibits “pizza” from their menu but then sells Wisconsin-style cheese fries or calzones. Hopefully both leases defined the restricted use more specifically than just the word “pizza” to avoid any dispute about whether the new menu items qualify.

Beyond blocking specific types of competition, use restrictions can be more general in order to develop a certain type of aesthetic to the area surrounding a tenant. For example, a fine clothing retailer may wish to see a protection against their neighbor being a government office such as a unemployment or welfare office. A religious entity likewise may object to bars or adult content being sold next to their rented place of worship.

Increasingly common in Wisconsin, and across the country, are “solar leases,” in which development companies lease large swaths of cleared land, typically farm fields, to install solar panels. These leases rarely cover the entire property of the landlord and therefore contain extensive and detailed terms about what the landlord can and cannot do on the remaining land which is not being rented. In addition to common use provisions, solar leases more uniquely include prohibitions against building or planting anything which will cast a shadow over the panels. Landowners need to be very careful when entering into this agreement to ensure they can either continue to make use of the non-rented area, or, that they are at least adequately compensated for the loss of options over it.

The specifics of the agreement need to be set in writing with careful and detailed drafting. Rights and restrictions should be clearly defined to avoid unnecessary grey areas that can cause litigation. Tenants should also make sure that their hard bargained for use rights cannot be easily disposed of with manipulative corporate structuring, especially when the restricted area is not part of the same building or parcel as their rented space. If, for example, a landlord owns two commercial buildings next to each other but as separate parcels, transferring one of the properties to a separate limited liability company may allow the landlord to dodge any promises made to not permit certain activities on “all properties owned by landlord adjacent to the rented space.” Finally, the understanding of the parties needs to be executed in a legally binding way. When a signed written agreement exists, separate verbal or informal written agreements can be difficult to enforce. The terms should be incorporated into the lease itself or added as a formal amendment.

The examples and considerations provided here are just a few of the more common terms and issues related to this topic. Almost always such rights/restrictions are highly unique and customized to the situation and the needs of the Tenant. Leases need to be reviewed carefully and the impacts of any such terms fully considered prior to execution. If you need assistance with a lease, please reach out to one of our experienced business attorneys.

Family Cabin LLCs

Family Cabin LLCs

We all know someone who has a family cabin “up north.” Family cottages, cabins, and hunting land are a common estate planning concern in Wisconsin. The current owners want to preserve a place full of fun and memories for future generations.

Unfortunately, the way these properties naturally pass under the law does not fit the needs of every family and that can lead to trouble. For example, picture the current owners of a cottage have four children, if the cottage were to pass to their children without any planning, the children would then co-own it as tenants in common. Each co-owner would own an equal share of the property. It sounds simple, but what if one child wants to sell the property immediately and another wants to keep it in the family for future generations?

Under a tenancy in common, each owner can transfer their interest in the property independently of the other co-owners. This can lead to complications when one co-owner dies, goes through a divorce or has a collection action brought against them by creditors. Additionally, a co-tenant may ask the court to partition the property. A partition action could result in the property being split into separate parcels or a forced sale. Even if all co-owners wish to continue to own the property together, the statutory framework for sharing property and its expenses leaves much to be desired.

Common planning tools for co-ownership of property include Trusts and Limited Liability Companies (LLCs). Both Trusts and LLCs can alleviate common ownership problems but, between these options, an LLC is more flexible and often better suited for long-term planning.

What is an LLC?
An LLC is a business entity with one or more owners, known as members. When an LLC is set up for a shared family property, the LLC holds the property rather than the individual owners. The LLC operates according to an Operating Agreement, which outlines the rights and obligations of the members, how the LLC will be managed, and how decisions will be made.

Benefits of an LLC for Shared Family Properties:

Management of the Property
The Operating Agreement may lay out a framework for scheduling the use of the property, how the property will be maintained and decorated, and how shared expenses will be allocated and paid. The agreement may also determine who has a vote in these decisions. An LLC may also appoint a manager to be responsible for making sure that financial matters are managed, for example, they may propose a budget to the members and ensure that bills are paid.

 Provisions for Exit Strategies and Nonpayment
Sometimes a person inheriting a property would rather sell their interest. The Operating Agreement can provide these members the option to sell their interest back to the LLC according to an affordable structure. Additionally, the agreement may also address those members who do not contribute to shared bills or assessments. Provisions may include restricting the use of the property until payments are made.

 Restrictions on Transfer of Ownership
As discussed above, under a tenancy in common, an owner may transfer their interest in the property to another person or file a mortgage against their interest. The Operating Agreement may restrict owners from encumbering the property. It can also dictate permitted transferees. This means that an owner can be kept from transferring their property to someone outside the family as may otherwise happen at their death or divorce.

Tax Planning and Gifting
Family cottage LLCs may be used as a vehicle for gifting to avoid gift and estate taxes. LLCs allow for the gifting of units of ownership over several years. This can provide an opportunity to transfer interest in a way that avoids gift and estate tax.

 Liability Shield
As the name suggests, a limited liability company also can provide owners with a certain degree of liability protection from certain occurrences.

 Overall, LLCs can be individually tailored to suit unique scenarios for shared family properties. They can provide a great deal of flexibility for change as the need arises and offer many different protections for the owners of a property. If you are intersted in setting up an LLC for your family cabin please contact one of our experienced business attorneys.

Comparing Commercial and Residential Leases

Comparing Commercial and Residential Leases

Most individuals must navigate a residential lease at some point in their lives – typically for an apartment to live in before potentially purchasing a home later in life. In contrast, the majority of people will never need to negotiate or enter into a commercial lease – used for renting space to run a business. For those who do, it is important to understand the differences between the types of leases to avoid inadvertently making a bad deal. On the other hand, a business owner who has become familiar with commercial leases and then decides to invest in and rent out residential property should bear in mind the special rules for residential leases to avoid a costly mistake.

All states have some differences between laws governing residential and commercial leases based on the public policy position. While commercial tenants are presumed to be savvy parties operating a business and capable of negotiating and bargaining on an even playing field with their landlord, the average residential renter is unsophisticated and vulnerable to being taken advantage of by better positioned landlords. After all, renters tend to be younger and in a worse position financially than someone who needs to rent a space to operate their privately owned business. A commercial tenant is viewed as another equal player in the economic marketplace who is capable of, and therefore responsible for, the consequences of any contract they choose to enter into.

Wisconsin state law (primarily Wisconsin Statute Chapter 704) is a set of general rules that apply to all leases but that can be altered by contract (i.e. the lease), and then special rules for leases creating residential tenancies. Residential tenancy is further governed by state regulatory code (ATCP Chapter 134) providing more specific rules for residential landlords to follow. The list below highlights some of the major rules applying to residential leases in Wisconsin:

  • Requirement to provide a check-in sheet at the start of a lease which the tenant can make notes of any conditions existing on the premises (Wis. Stat. 704.08).
  • Requirement that leases must contain specific language notifying tenants of certain rights of domestic abuse victims (Wis. Stat. 704.14).
  • Required special notice procedures to remind tenants of deadlines related to automatic lease renewals (Wis. Stat. 704.15).
  • Minimum habitability standards that are generally waivable for commercial leases but required in residential leases (Wis. Stat. 704.07).
  • Certain provisions, when included in residential leases, make the lease void and unenforceable (Wis. Stat. 704.44). The ten provisions listed act as a sort of “guard rail” on the terms of residential leases keeping certain one-sided terms from being imposed on any renters in the state. The prohibition on such terms are not universal, and it is important to review any form leases obtained that are not Wisconsin specific for inclusion of these terms.
  • Strict rules on the receipt of, accounting for, and return of security deposits. (ATCP 134.06).
  • The requirement to highlight and separate out certain terms as “NONSTANDARD” making them easier for tenants to see (ATCP 134, throughout).

In addition to these special rules contained in the Wisconsin state statutes and regulations, certain municipalities also have local ordinances imposing additional requirements. It is important to review any local laws that may provide further restrictions on residential leases.

For Example: Outside of strictly defined differences in legal rights and requirements, residential and commercial leases tend to vary in other ways. The following are typical differences:

  • Commercial leases are generally longer. Typical residential leases are either month-to-month or annual. Such short terms are certainly possible for commercial leases, but three to five years with options to review for longer is more standard. Generally, commercial tenants will want short terms with many options to review, while commercial landlords will want the opposite.
  • Commercial leases more commonly involve the tenant making significant alterations to the property. It is rare for residential tenants to take out walls, install new equipment, etc., but commercial leases often allow tenants to modify the space to suit their business needs. The responsibility for and ownership of these changes should be defined in the lease.
  • Commercial leases tend to have the tenant take on more responsibility for maintaining the property and paying ancillary costs, like property taxes. A common subset of commercial lease is the “triple-net” lease, where, in addition to rent, the commercial tenant pays all of the property taxes, insurance and maintenance costs. Residential tenants pay rent and often pay the cost of utilities, but rarely are asked to directly pay for property taxes, maintenance or insurance costs.

For renters entering into a commercial lease for the first time, understanding the protections they may have benefited from without knowing about it in the course of their residential tenancies is important to fully review and potentially negotiate their commercial leases, where such protections do not apply. No one should ever sign a contract, like a lease, without carefully reading it first. Commercial tenants are exposed to the possibility of terms so burdensome the legislature banned them in the residential setting and thus need to review the lease carefully. For first-time landlords of residential properties, keeping these special rules in mind may be helpful in avoiding a costly mistake. Terms they may have grown accustomed to as “typical” in the commercial setting cannot just be inserted into a residential lease without first ensuring compliance with applicable laws.

In conclusion, whether you are entering into a commercial or residential lease for the first time you should be aware of the laws and rules in your state and local municipality. Please contact one of our experienced real estate attorneys if you have questions.


The Coporate Transparency Act Implications for Small Businesses

The Coporate Transparency Act Implications for Small Businesses

Do you own a small business? Are you a member of an LLC or a shareholder in a closely held company? (A closely held company has a limited number of shareholders and is often a private company that does not trade publicly). If so, you should be aware of the Corporate Transparency Act (CTA). This law was passed by Congress on January 1, 2021, because, according to the legislative history, “malign actors seek to conceal their ownership of corporations, limited liability companies, or other similar entities in the United States to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States.”

The CTA requires the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Department of the Treasury, to establish and maintain a database of beneficial owners of entities in the United States. Final regulations were issued on September 30, 2022, and the law will take effect on January 1, 2024. The law provides 23 exemptions from the new reporting requirements, mostly for already heavily regulated companies such as banks, insurance companies, publicly traded companies and credit unions. Typical charitable organizations that qualify under 501(c) of the Internal Revenue Code are also exempt. Most other entities, whether foreign or domestic, will need to report certain information about the beneficial owners and applicants of the entity unless they have at least 20 full-time employees, filed a United States income tax return in the previous year demonstrating $5 million in gross receipts or sales, and has an operating presence with a physical office within the United States.

For those entities that are not exempt, they will need to file applicable reports that include information about the person who formed the entity (known as the “applicant”) and each “beneficial owner” of the entity. A beneficial owner is someone who exercises substantial control over the entity or owns or controls not less than 25 percent of the ownership interest of the entity. By statute, minors, nominees (e.g. custodians), employees acting on behalf of a company, future owners through inheritance, and creditors are exempt from being listed as beneficial owners. The reporting company must report the full legal name, date of birth, current residential or business street address, and a unique identifying number with a copy of the underlying document (e.g. driver’s license number and copy of the driver’s license) for each beneficial owner and applicant. Alternatively, individuals may submit the required information directly to FinCEN and be issued a unique FinCEN identifier that can be used by the reporting company to identify the person.

Reporting requirements start January 1, 2024. Please make an appointment with one of our experienced business attorneys for any questions you have about whether your closely held business entity must report under the CTA.

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Landlord Lag Time in Wisconsin

Landlord Lag Time in Wisconsin

The benefit to renting over owning is avoiding unexpected repair costs, in contrast, it can mean having to wait for the landlord to make repairs. Who is responsible for making repairs and how long a landlord can take to make a repair depends on the issue. While a landlord is required to “promptly” make repairs for issues that affect the habitability of a living space, Wisconsin law does not provide a set amount of time in which a landlord must make repairs.

Of course, it is best if you never have to deal with a leaky faucet or a glitchy thermostat. If you tour a space and find things in need of maintenance or repair, you should make note of any problems and request that the landlord fix them. Any promises made by the landlord to a prospective tenant regarding cleaning, repairing, or improving the unit should be made in writing and specify a date or time-period in which the fixes are to be completed. Apart from being legally binding, having a set date for the fixes can create a sense of urgency for the landlord and peace of mind for the tenant.

A Landlord’s Responsibilities

It can be difficult to spot defects in a unit before living in it. Fortunately, landlords do have a responsibility to disclose to tenants any documented or uncorrected building code violations that pose a threat to a tenant’s health or safety if the landlord is aware of them. This requirement of disclosure only covers the following habitability conditions:

  • If the unit lacks hot or cold running water;
  • If the heating system is not in safe operating condition or is incapable of maintaining at least 67 degrees in living areas;
  • If the unit is not served by electricity or components of the electrical system are not in safe operating condition;
  • If there are structural or other conditions on the premises that could pose a substantial health or safety hazard; and
  • If the plumbing or sewage disposal facilities are not in good operating condition.

All of the above listed systems (heating, plumbing, electrical, and structure) are within the landlord’s sphere of responsibility. Additionally, the landlord must maintain common areas like hallways and laundry rooms in good condition. While a tenant is usually responsible for unreasonable damages the tenant themselves caused, a landlord still has a duty to innocent tenants in these situations to maintain the common areas. A landlord must also provide and maintain carbon monoxide and smoke detectors.

A Tenant’s Responsibilities

As mentioned above, a tenant is responsible for repairing or paying for the repair of damages caused by the themselves or their guests. To prevent damages to the unit, the tenant must keep the thermostat set at a reasonable temperature that will prevent freezing of pipes and keep the unit in a safe and sanitary condition. Part of keeping the unit in sanitary conditions includes maintaining a level of cleanliness that prevents infestations. If pest infestations are caused by the actions or inactions of the tenant, the tenant may have the duty to remediate the problem or pay for the remediation and repairs.

A tenant is also responsible for minor repairs to keep the unit in good working order, like changing lightbulbs or replacing batteries in smoke detectors.

A Timeline for Repairs

Repair or replacement of a non-working smoke detector, with batteries, is one of the few fixes that the law places timeline on. When a landlord is given notice of a faulty smoke detector, they have five days to fix it. Landlords are not given a set amount of time to fix other defects.

Remedies for Tenants

  • Wisconsin Statutes do provide some remedy to tenants if the landlord does not promptly make repairs to defects that affect habitability of a unit. A tenant may break their lease and move out if a unit becomes untenantable. A unit is untenantable if the conditions that exist are so poor as to affect the tenant’s health, safety, or impose an undue hardship on the tenant. If the tenant must move out, the tenant is not responsible for the rent payments after the unit became untenantable. Even if the tenant does not move out, rent abates, meaning it is decreased by an amount proportional to the amount the tenant is deprived of the full, normal use of the premises. As a tenant, the problem with these remedies is that they may not result in the desired repair of the unit. It can also be difficult to quantify when a premises became untenantable or what dollar amount of rent abatement corresponds with an unrepaired defect.
  • It is preferable for a tenant to work with a landlord to have repairs made on a reasonable schedule. Creating a paper trail is an important step. Tenants should request repairs in writing to keep track of what the issue is and how long repairs are taking. If the landlord does not make repairs in a reasonable timeframe, the tenant may consider contacting the local building inspector or the Wisconsin Department of Safety and Professional Services.

If the landlord still refuses to make repairs, please contact one of our experienced attorneys who can help you take the right steps in pursuing remedies like rent abatement. The Tenant Resource Center may also be able to provide information or support.


The Catch With An Account Stated

The Catch With An Account Stated

“An account stated is an agreement between a debtor and a creditor that the items of a transaction between them are correctly stated in a statement rendered, that the balance shown is owed by one party to the other and that the party has promised to pay that balance to the other.”[1] Put simply, this means that if a party claiming to be owed money sends a statement showing a balance owed and the other party does not object, that party may be responsible for the amount stated. Even more simply, this means that if there is a dispute over the amount claimed to be owed in a statement, the party receiving the statement should immediately object. The objection should be in writing and specific. Silence in the face of an account stated is not golden.

Wisconsin law informs us that in an action on an account stated, “the retention of a statement of an account by a party without making an objection within a reasonable time is evidence of acquiescence in or assent to the correctness of the account.”[1]  Said differently, an implied agreement to pay may be presumed from such retention. In addition, an account stated may arise where a debtor makes a partial payment on an account or accompanies partial payment with an agreement to pay the balance.[2]

To illustrate the legal theory of account stated in action, let’s briefly examine the Wisconsin case of Stan’s Lumber v. Fleming. Naturally, Stan’s Lumber sells lumber. Mr. Fleming inquired whether Stan’s Lumber would provide building supplies for a home he was intending to build. Stan’s Lumber provided Fleming with a credit application which he completed and was approved by Stan’s Lumber. Shortly thereafter, Fleming began purchasing the materials from Stan’s Lumber. Stan’s Lumber regularly billed him for the materials. Fleming made some payments, but then stopped. At that time, Stan’s Lumber claimed an account balance of $33,200.99. Stan’s Lumber then continued to bill him for this balance plus the accrued financing charges. Importantly, after payments stopped, Fleming told Stan’s Lumber to be patient regarding payment, but failed to object to the account balance.

The court concluded that the evidence demonstrated a classic account stated scenario. In ruling for Stan’s Lumber, the court reasoned:

(1) Stan’s and Fleming formed an initial agreement for an “open account:”

(2) Fleming ordered materials on the account:

(3) Stan’s delivered the materials:

(4) Stan’s billed for the materials: and

(5) Fleming made payments on the account without objection. This evidence afforded a solid basis for the jury’s answer that, an account stated existed between Stan’s and Fleming.

In conclusion, the essence of an account stated claim is not the presence of a dispute between the parties as to a stated balance, but rather the failure of the debtor to object to the account, disputed or not, within a reasonable time. Ultimately, Fleming’s failure to object to the account balance resulted in his loss at trial. The takeaway is that a timely objection to an account statement with a disputed balance will go a long way to defeat a claim based on the theory of account stated.

[1] Onalaska Elec. Heating, Inc. v. Schaller, 94 Wis. 2d 493, 288 N.W.2d 829 (1980).

[2] Lepp v. Tamer, 1 Wis. 2d 193, 83 N.W.2d 664 (1957).