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.

For more information on this please follow this link. https://www.americanbar.org/groups/taxation/publications/abataxtimes_home/23win/23win-prp-graff-cta/

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).

 

 

When Your LLC Designation is Not Enough

When Your LLC Designation is Not Enough

A limited liability entity, such as a LLC or Corporation, is an important part of protecting your individual assets from liabilities arising from your business. By operating the business within the limited liability entity, lawsuits stemming from the business – such as contractual claims or damages from personal injuries – generally will be restricted to pursuing claims against the business itself and the assets owned by the business. Your personal assets, held outside the business entity, are typically left untouched. You may need to liquidate the assets held in the business to pay the judgement, or even have the business declare bankruptcy. Obviously paying any claim, even if limited to company assets is not ideal, but the losses at least stop there and you personally will be spared from needing to pay.

This legal separation between you and your business for purposes of liability is known as the “corporate veil.” Over the years, courts have developed rules around the limits and exceptions to the protection of the corporate veil, sometimes to remedy an otherwise unequitable situation and sometimes to prevent individuals who sought to take advantage of the rule. When courts decide to override the limited liability status of an entity and allow a claimant to pursue the owners individually, it is known as “piercing” the corporate veil. This can be particularly disastrous to an owner of multiple businesses, as once a debt has reached them personally, the assets of their other entities are also at risk through a “reverse pierce.” The individual cases where judges have ruled for a piercing of the corporate veil have developed into a few broad categories which now form the precedent judges consider when deciding whether to uphold or pierce the veil in any given case. If you wish to rely on the corporate veil to protect you in the event of a large lawsuit, you should be aware of the triggers for veil piercing listed below and work to ensure that business operations are conducted in a way that will not trigger them.

  1. Fraud. Unsurprisingly, courts do not look kindly upon parties who actively seek to defraud others. Fraud might be the source of the lawsuit itself or committed in an effort to avoid the consequences of the lawsuit. Both may cause a court to consider piercing the corporate veil to allow the victim of the fraud to better recover their damages. This exception is often applied after “fraudulent conveyances” are made to remove assets from the entity after a legal claim is known of but before the claimant can secure payment. For example, transferring all of the cash in the business account to the owner’s personal account in the middle of a lawsuit and then claiming the business lacks the funds needed to pay the judgement. Here, an owner’s desire to save the money in the business account from the lawsuit may ultimately backfire and lead to all of their assets being subject to the claim.
  2. Lack of Formality of Entity Operations. Maintaining an entity separate from you as owner requires certain formal processes and bookkeeping requirements. Entities can be created fairly simply by filing with the state department of financial institutions, but it is important to fully flesh out the organization with proper agreements, resolutions, etc. Failure to properly keep up these formalities may give grounds for piercing the corporate veil if the record keeping is sufficiently lacking or may tip the scale when paired with other considerations. One of the reasons LLCs are such a popular choice of entity type is that they require substantially less formality than corporations. Bear in mind, even the relatively simple requirements of LLCs still require some formalities to properly form and maintain.
  3. Undisclosed Corporate Principle. In order to effectively claim your limited liability entity is the appropriate party to sue and not you personally, you should be able to show that the plaintiff knew or should have known they were dealing with your limited liability business – not you personally – for the acts that gave rise to the lawsuit. In essence, it is unfair to prevent a plaintiff from suing the owner of a business personally if they thought they were dealing with that person personally. Even if the plaintiff knew they were dealing with a company, if they were not aware that company was a limited liability entity (for example if the contract uses most of the company name but omits the “LLC” or “Inc.”), they could still claim this principle should apply. This is why it is important to properly identify the company’s full name on all signage, advertising and, especially, in contracts. While you, as owner, will be signing your name to most contracts, it should be in your capacity as a representative of the business, not as the party to who the contract binds.
  4. Undercapitalization. There is substantial caselaw of business owners attempting to take advantage of limited liability entities by keeping virtually no assets in the name of the business, so that when they are sued, there is nothing to take. Here again, getting too greedy in protecting assets can lead to jeopardizing additional assets. While keeping company assets relatively trimmed is a good practice, taking this too far can lead to a piercing of the corporate veil. As a general rule, the company should own at least sufficient capital and assets to be able to carry on its regular business. For example, in addition to reasonable operating funds in a business account, a real estate rental business should typically own the real estate it rents, an auto repair business should own the tools needed to complete the repairs. If ownership of physical assets is unclear, bills of sale should be prepared to formally transfer the assets into the name of the company.
  5. Tortious or Professional Misconduct. A limited liability entity will not protect you as owner from personal liability for your personal improper or professionally negligent behavior. Incidents stemming from road rage while driving for business purposes or stealing a client’s property while in their home making repairs may well lead to a court denying you the protections of the limited liability entity as it was really you who did the act the lawsuit is about, not your company. Additionally, if you are a member of a profession that is held personally responsible for malpractice, using a limited liability entity will not prevent malpractice suits against you. For example, if a patient slips and falls in a doctor’s waiting room operated as a LLC, the corporate veil will likely prevent the patient from suing the doctor personally. If however the doctor commits malpractice while providing the patient medical services, the LLC should not hinder the patient’s medical malpractice claim against the doctor.
  6. Lack of Separation Between Owner and Entity. For a court to treat you and your limited liability as separate, you should be able to demonstrate that you treated you and your entity as separate. This includes keeping separate bank accounts and using your personal funds for personal purposes and the company funds for company purposes. It also means keeping a clear record of what is owned by you and the company and respecting that distinction. If a lawsuit secures a judgement against your entity, these steps will be important to identify what belongs to you and what belongs to the company. If that distinction cannot be made, a court may elect to look past it and pierce the veil.
  7. Contractual Agreements to Guarantee Debts of the Company. Banks, landlords and suppliers are aware that limited liability entities may result in their loans going unpaid or contracts unfulfilled and so, it is not unusual for contracts provided by these parties to include a clause having you, as owner, guarantee the debt of the limited liability entity. Most business loans and commercial leases contain such clauses, especially if your limited liability entity is small or has an unproven track record of paying its debts. To risk stating the obvious, if you as owner contractually agree to be personally responsible for a debt, you cannot use your limited liability entity as a shield to block such obligation. Keep track of what debts you have guaranteed and what debts you have not – if your business becomes insolvent, having such information on hand can prove important to properly allocate the remaining funds to creditors. If you have a business partner, you should also ensure the personal guarantees on the debts are spread over the owners equitably to avoid a situation where the business fails, they walk away free, and you are held liable for numerous company debts.

    If you have any questions about your LLC, please contact one of our experienced Business Attorneys.

Shareholder Rights With Corporations

Shareholder Rights With Corporations

As part of my business litigation practice, I regularly represent corporations and shareholders in corporations. On the shareholder side, parties often seek to learn more about what is going on with the corporation they partially own.

Wisconsin law gives shareholders in corporations certain inspection rights depending on the extent or length of their ownership interest in the corporation. Unless you satisfy certain criteria as a shareholder, your inspection rights are generally limited to viewing the corporation’s bylaws and a list of shareholders entitled to notice of a shareholders’ meeting.

If, however, you have owned stock for at least six months or own at least five percent of outstanding shares, your inspection rights as a shareholder are broader. In that case, you may be entitled to access the following:

  1. Excerpts from any minutes or records that the corporation is required to keep as permanent records. These include: (a) Minutes of meetings of its shareholders and board of directors. (b) Records of actions taken by the shareholders or board of directors without a meeting. (c) Records of actions taken by a committee of the board of directors in place of the board of directors and on behalf of the corporation.
  2. Accounting records of the corporation.
  3. The record of shareholders.

While this information could give you a wealth of insight into the workings of a corporation you hold ownership in, you must have a reason to request the information. Specifically, to access the more detailed information described above, you are required to make a written request to the corporation stating a good faith purpose for your inquiry and the records requested must be connected to that purpose.

For more information on these rights please consult the Wisconsin State Legislature.

If you have questions about shareholder rights, please reach out to one of our experienced Business Attorneys.