Archive for the ‘Contracts’ Category

PRIMER ON CONTRACTS UNDER RENEWABLE ENERGY FARMING LAW

Written by PisauroLawAdmin on August 9th, 2011 in Contracts, Leases, Sustainability | No Comments »

Just before leaving office in 2010, Governor Corzine signed into law P.L. 2009 c. 213, also known as the “Renewable Energy Farming Law”.  This law would allow farmers to use part of their farm for solar, biomass, or wind electricity generation without forfeiting their farmland assessment.  The law applies to both commercial farms and to farms that have been preserved, but each group must meet a different set of requirements in order to keep their assessment and the protections under the Right to Farm Act.

The Renewable Energy Farming Law has helped promote entrepreneurs seeking leases for solar farms.  These entrepreneurs are locking up properties with options and proposed leases and it would appear that many farmers are signing these documents without adequately reviewing them.  Developers seek to lock-in the property while they do the necessary planning and obtain the necessary approvals and permits but before signing any of such documents there are some basic contract provisions that you should consider.

solar panelsFirst an “option” is a legally binding contract that a property owner gives to another person or company which ties up the land or object of the option.  This option gives the option holder the right to tie-up the property for a period of time during which the developer conducts the engineering for the project.  The developer also uses this time to obtain the appropriate permits from local land use boards, approvals from Pennsylvania Jersey Maryland Interconnect (PJM) or local utility to connect to the grid and a power purchase agreement to sell the power.

Under basic contract law for there to be a binding contract there has to be consideration.  The asker for the option has to give something of value in exchange for the option.  Obviously, this consideration is usually money.  The developer pays a fee to the landowner so that the owner does not lease the property out to other people or sell it while the developer is doing what is necessary.

The option should also spell out how long the developer can tie up the property.  This period of time should be used by the developer to conduct their due diligence which should include identifying how big of a system can be put on the property and whether or not they can get the interconnections with a local utility and/or PJM.  During this time they should also determine whether there are any environmental issues including wetlands or c1 streams that would limit or impact the system.  Other environmental issues could include whether the property is contaminated by past activities.

The option also sets out the proposed lease agreement.  Therefore, the time to negotiate the terms of the lease is before you sign the option not afterwards. Once you have signed the option agreement the chances are that you have bound yourself to the terms of the lease agreement – whether you like it or not.

Some of the basic terms that should be outlined in the lease include: how long the lease is for and how much “consideration” you are going to receive from the developer.  The lease should also state how payments should be made – monthly, quarterly, or yearly – and whether those payments escalate over the years or remain static, if there will be a commission or percentage earned from the generation and whether you will receive some of the energy for your own use (this is required by the law).

It is very important that both the option and the proposed lease clearly delineate what the developer plans on doing and that there is an explicit recognition that the developer must comply with the renewable energy farming requirements.  The lease should also provide that if, for any reason, the development runs afoul of this law and the property loses its farmland assessment the developer – and not the farmer – will be responsible for paying the rollback taxes.  As we all know farmland pays a reduced property tax but, if the farmland status is ever lost, the property owner is required to pay the full amount of the property tax for the current year and the two prior years – which could be a very substantial amount of money.

You should also consider whether the developer has insurance that will cover any injuries that may occur on the property due to the renewable energy systems or from any environmental damages. While the renewable energy system itself may not cause pollution, the support systems for capturing that energy might.  For example a transformer might leak and those discharges will still need to be cleaned up.

Other things that should be dealt with up front also include how big the system will need to be.    In order to comply with the solar farming law, a system on a commercial form cannot be any bigger than two megawatts.  Additional restrictions apply to farmland that has been preserved.

And there are many other issues to consider. What happens to the lease, the system and your payments if the developer is in default of the lease agreement?  What happens to these things if the developer goes bankrupt?

As you can see, the terms outlined in a proposed option agreement are very important. They can set the parameters of the relationship between the farmer and the solar company for twenty, thirty or more years.  This is a very long time and requires careful consideration before entering.

Can you prove your independent contractor is not an employee?

Written by Mike Pisauro on April 22nd, 2010 in Basics, Contracts, Employee/Employer | No Comments »

In 2005 there was estimated to be over 10 million people operating as independent contractors.  Small, medium and large companies all use independent contractors to remain competitive and to grow their businesses but understanding the differences between an “independent contractor” and a regular “employee” is neither easy nor trival to the business. It is an area that is riddled with traps for the unwary. According to a Department of Labor study, approximately 38% of small businesses misclassify employees as independent contractors.  The problem is not limited to small businesses. Even large, more “sophisticated” companies, such as Microsoft, Federal Express and Wal-Mart, for example, are not immune to this error.   Given the current market conditions, it may be even more important for a business to get the classification correct.  Tax revenues for all levels of government are down while budget deficits are up.  In an attempt to bridge this gap, the Federal government and state governments are going to be taking a closer look at how companies classify their human resources.

There are many reasons why this classification is often hard to get right.  Realize that just because you, the employer, think of the person you hired as an independent contractor,  the contract itself might state that he or she is  an independent contractor and even the person thinks of themselves as an independent contractor but that doesn’t necessarily mean that they really are  an independent contractor. Furthermore, a person may be an independent contractor under one set of laws but will be considered as an employee under another set of laws. The tests to determine whether a person is an employee or an independent contractor may be different depending on whether it is for taxes, compliance with discrimination laws or the operation of respondeat superior or some other law.  At least for the purposes of determining whether the right taxes have been withheld it is up to the company to prove that the person was properly classified as an independent contractors and should not have been considered an employee.

New Jersey uses the “ABC” test for unemployment responsibility and hour and wage requirements.  NJSA 43:21-19.  Under this test it is up to you, as the employer, to prove that the relationship is that of an independent contract and not that of an employee.  Specifically the state would look at the following:

A.  Is the person now and continues to be free from the control and direction over the performance of the job?  This condition not only has to be in a contract but must be what occurs in fact.  If the actual practice is different than what is set forth in the contract, the contract will have little weight.

B.  Are the services either outside the usual course of the business or performed outside your physical location?  Does the independent contractor work in your office space or do they work from their own location?

C.  Is the individual customarily engaged in an independent established profession or business?  Are you the independent contractor’s only job or does the indepenent contractor perform work for several other companies?

The business must be able to prove that independent contractor meets all three prongs of the ABC test and it is important that a business gets the decision right. Failure to meet all requirements could result in the payment of all back taxes, penalties and interest.  Such ramifications could transform a company from a success to barley surviving or worse.  It may even open the business owner to personal liability for the back taxes.

As a business owner, it is crucial that you fully understand the differences between a true independent contractor and an employee.  You must fully understand what need you are trying to fill by the proposed relationship and then structure it to adequately meet your proposed business need so in order to avoid possible issues in the future.

Legis Update: 3 day review for rental properties

Written by Mike Pisauro on February 23rd, 2010 in Contracts, Rental Property | No Comments »

A new bill has been introduced in the Senate that will impact how landlords do business.  S1448 if enacted would require all residential leases to contain a three day attorney review provision similar to the one contained in the realtor real estate contracts for the sale of properties.  The bill would require on the top of the first page of a lease the following:

THIS IS A LEGALLY BINDING LEASE THAT WILL BECOME FINAL AFTER THREE BUSINESS DAYS OR ON THE DATE THAT THE TENANT FIRST OCCUPIES THE DWELLING, WHICHEVER IS EARLIER. PRIOR TO THAT TIME YOU MAY CHOOSE TO CONSULT AN ATTORNEY WHO CAN REVIEW AND CANCEL THE LEASE. SEE SECTION ON ATTORNEY REVIEW FOR DETAILS.

The attorney review provisions of the law would not apply to units that are already rented but are up for renewal.  It would also not apply to leases drawn up by realtors because they already contained the required language.

The bill would also require a clause that sets forth the three day attorney review provision.  Given all of the protections that NJ’s landlord tenant laws provide to a tenant I am not sure what more can be negotiated for.  From a landlord’s prospective, it can create havoc.  For example, if a landlord as has 10 unit apartment building, the negotiations under the attorney review provisions, could lead to 10 very different leases.  It would be very difficult to maintain track of all of the differences in the leases and to enforce them.  If the landlord is not careful the negotiated changes in one lease could conflict with the negotiated terms in a neighbor’s lease.  It will be far simpler for a landlord to not negotiate different terms for a lease.  And that is probably what is going to happen.

We will see if this bill moves along in the legislative process.

Legis Update: Bill to benefit contractors, sort of . . .

Written by Mike Pisauro on February 22nd, 2010 in Contracts, Courts, Home Improvement | No Comments »

S1032 sponsored by Connors would allow a contractor or a homeowner to bring a lawsuit in the county where the property is located if the lawsuit is under the Contractor’s Registration Act.  While I am not sure why a contractor would be suing under the act, the act changes the where a plaintiff can file a lawsuit.

Normally, lawsuits over $15,000 are filed in the Law Division of the Superior Court of NJ.  In the Law Division a plaintiff can file suit where they live, where a defendant lives, or where the action occurred.  That would mean a contractor could file suit in Law Division in the county where their business is located.  S1032 does not change this.  S1032 is meant for cases under $15,000.  For cases under $15,000 a lawsuit can be filed in the Special Civil Part.  In the Special Civil Part a lawsuit can only be venued where at least one of the defendants residences.  S1032 is meant to cover these kinds of cases.  The bill statement provides that its intent is for:

Home improvement contractors who are located in the State’s beach communities have found it difficult to pursue lawsuits against homeowners who have defaulted on payments for services rendered because these homeowners do not live in the same counties as their vacation homes.

So under the bill when a contractor does work on a shore house where the owner does not live, they can do not have to go to the county where the owner lives, but can file suit in the county where they did work.  The contractor could have always filed in law division no matter what the amount of damages, but the down side would be that a lawsuit in the law division can take several years before there is trial.  In Special Civil Part the cases move much faster.

Since the bill only applies to non-commercial property, hopefully the courts will not consider purely rental properties as commercial.  If so the bill would not apply and the contractor would be back to either filing in Law Division or filing the lawsuit in the county where the property owner lives.  Another work around would be for the contractor’s contract to provide where a lawsuit may be filed.

Do you know when your contracts end? It may not be when you think.

Written by Mike Pisauro on November 4th, 2009 in Basics, Contracts | No Comments »

We are rapidly reaching the end of the year.  It is probably as good of a time as any to take some time aside from running your business to take a look at your future by taking a look at your past.  What do I mean by that?  Well over the last year or so, you have probably signed many contracts for your business.  You may have signed a contract for janitorial services, a lease on your office space or office equipment.  You may have signed a contract to supply you with widgets to be incorporated in the products you sell to your customers.

You should review these contracts and look at when the contracts will end.  Are you close to the end of the contract?  Even if your contract says it will end on December 31st, that does not mean it will has to or will end on that date.   Many of these contracts will have a renewal clause in them.  These clauses allow the contract to be extended under certain circumstances.  There are at least two different kinds of renewal clause.

One type of renewal clause provides that you can extend the contract.  The clause will likely provide for the length of the additional term of the contract as well as the price increase of for the new term.  In order to be effective you must take an affirmative action to renew the contract.  You must notify the vendor in writing that you wish to extend the contract.  For these types of contracts you have to decide at some point prior to the expiration of the contract whether the price increase built into the renewal clause is more or less than what you could get a new contract with a different vendor.  Obviously if the renewal clause is less than what a new contract would cost you, you would renew the contract.   If the renewable price is greater it is either time for a new vendor or at least a discussion with your current vendor to renegotiate a contract.

The second type of renewal clause is the automatic renewal.  This type of clause provides that the contract will automatically renew if you do not take affirmative steps to inform your vendor that you do not want the contract to renew.  Again you must send a letter to your vendor and notify them that you do not want to renew the contract.

Both kinds of renewal clauses usually have a deadline by which you need to act.  This deadline can be days before the end of the contract or it can be several months before the end of the contract.  You need to know this date.  There is nothing worse to find out that your contract renewed and you are stuck paying more for something than have to because your contract automatically renewed.  Taking a few minutes today can save you lots of the money in the future.

Appellate Division Restricts Company's Computer Usage Policy

Written by Mike Pisauro on July 6th, 2009 in Contracts, Courts, Employee/Employer, Privacy | 1 Comment »

The Appellate Division recently overturned the Trial Court’s decision in Stengart v. Loving Care Agency, Inc. I wrote about this case back in March in “Why it’s important to establish a computer usage/electronic communication policy.” Stengart, the Plaintiff had sent her attorney emails using her own personal web based email account, but used the employer’s computer. After the filing the lawsuit against her employer, the employer was able to forensically recover the emails to the attorney. The Ms. Stengart sought to force the employer to return the emails and disqualify the employer’s law firm based upon violating the attorney client privilege. The Trial Court held that emails sent by an employee to her attorney using her employer’s computer and network was the “property” of the employer and could be used by the employer in the litigation against it by the former employer.

The Appellate Division reversed this decision and held that an employer’s right to the content of an employee’s communications was not unfettered and would not be upheld when it had “no bearing on the employer’s legitimate interests.” The Court also discussed the competing interests between the expectation of privacy between client and attorney versus a company’s interest in monitoring its computer usage.

While not controlling the Court’s decision, the Appellate Division was not clear that the computer usage policy, relied on by the Trial Court, was in place during the time frame the Plaintiff emailed her attorney. Further the Court found the policy, assuming it was in place, was confusing. For example the company acknowledged that employees could use computers for occasional personal use, but never defined or explained the boundaries of personal usage. Then the company provided that all computer usage would be not be private and was the property of the company. Overall the Court found the policy, assuming it was in effect, to be unclear, confusing and conflicting.

In its decision the Court affirmed the right of an employer to unilaterally set the rules and regulations of employee conduct, but noted that this right was not unlimited and had to be reasonable and related to the employee’s duties. Having affirmed employer’s policies in general, the Court had trouble enforcing the alleged computer usage policies of Loving Care because the policies did not seem to have a strong enough relationship to the employer’s legitimate interests. The Court was also concerned that internet access has become so entrenched in our society that people routinely access bank records, file income tax returns, access medical records and other very confidential private activities. And Loving Care’s policy did not account for these realities. The employer had not provided a legitimate interest in ownership over these kinds of personal records.

The Court in reversing the trial court, wrote:

A policy imposed by an employer, purporting to transform all private communications into company property – merely because the company owned the computer used to make private communications or used to access such private information during work hours – furthers no legitimate business interest.

While the Court agreed that companies have an interest to make sure their employers are not engaged in illegal activity using company property, and that the company had a legitimate interest in ensuring that its employees where not distracted from the company business, companies usually did not have an interest in the content of the personal communications.

The difficult thing with this ruling is that the Court did not explain the contours of what an employer could and could not do in monitoring an employee’s computer usage. Instead the Court hinted that this area maybe worthy of legislative direction. Until the legislature acts, the questions for employers are many. Would a Court make a distinction between a company’s claimed ownership over confidential private information versus a company’s monitoring of an employees computer usage. If a company can monitor but not retain, a record of employees’ computer activity, how can a company defend a disciplinary or firing decision if it cannot retain the proof? Also would a court enforce a complete banned on an employee’s use of a company computer system for personal usage?

While the enforceability of any computer/eletronic usage policy will be open for interpretation by the Courts, it is still better to have a well crafted policy in place than not having one at all.

HINDSIGHT AND FORETHOUGHTS ON CONTRACTS

Written by Mike Pisauro on April 20th, 2009 in Basics, Contracts | No Comments »

There is a common misconception that most business owners seem to have regarding the collection of customer owed debts. Many times a business owner has come to me because their business is owed a couple of thousand dollars from a customer or two or more and they want to sue those customers in order to recover the money. The owner either cannot afford or is unwilling to write off the bad debt. Maybe they had to borrow money in order to meet their obligations under the contract; or perhaps, since the debtor has not paid, the business owner had to borrow money to cover expenses that would otherwise have been covered.

Sometimes there is no contract or after reviewing the contract, I have bad news for my client. Yes, the business owner has a good case. But that several thousand dollar debt will likely take several months or longer and may cost several thousand dollars in attorney fees to resolve in court – and that does not even take into account collecting on the judgment. The client is also not entitled to interest on the outstanding debt until a judgment is received. Lastly, the Court will not order the debtor pay the costs associated with the litigation.

Not surprising, we follow the American rule wherein each party pays its own costs associated with the lawsuit. Obviously, no business owner wants to hear that client is also not entitled to interest on the outstanding debt until a judgment is received. Lastly, the Court will not order the debtor pay the costs associated with the litigation.

Not surprising, we follow the American rule wherein each party pays its own costs associated with the lawsuit. Obviously, no business owner wants to hear that pursuing the debt may cost more money and that, in the end, the money collected will be reduced by attorney fees and costs. The delinquent customer may even cost the business owner more money in the form of interest they had to pay to borrow money to keep their own vendors happy and their business afloat. In essence, these interest payments reduce that judgment even more. Even if the business owner did not have to borrow money, at the very least, they would be unable get the use of the money owed until it is paid by the debtor. So while they may have won the case, at the end of the day you must really ask did they really win?

If you knew all of the above before you signed the contract, what could you have done differently? In the ideal world, you would have gotten paid up front but, as we all know, we don’t live in an ideal world, so what is the backup plan? In the real world, we must insist that all business relationships be made and conducted in writing. If you can’t afford not to get paid, make sure that the transaction is committed in writing – i.e., a contract.

Now, how can a contract be prepared that will protect you in case your customer does not fulfill their obligations? Along with the many concepts that need to be addressed in a contract, there are two that should be included to ensure that the scenario described above doesn’t happen. First, the contract should provide that, if the customer does not fulfill their obligations and you have to sue them, they must pay the costs of your attorney as part of your damages. Second, if payment is not received by you on the due date (and maybe any grace period) the outstanding debt will begin to accrue interest.

These are just two very common concepts that you should consider in any contract you enter into. There are many more concepts that should be addressed in your contracts. Which concepts and how they should be addressed are dependent upon what you are selling/buying, relative strength in negotiations between the parties, and the nature of your business. If you are unwilling or unable to write off the bad debt from a transaction, it is a transaction that is important enough to warrant consulting with an attorney so that you will be protected in the event of a disagreement or the other side’s failure to perform. To borrow from the old adage, an ounce of prevention may save you thousands of dollars later.

A little bit of forethought on constructing the appropriate contracts for your business can save you a lot of regret in hindsight.

The article above is a reprint from my first newsletter from July 2006, but a conversation over the weekend made me think it would be useful to post it in the blog.