Top 10 Lease Negotiation and Site Selection Mistakes

The following “Top 10” list of common mistakes (1-5 will be re-produced today; 6-10 will appear shortly thereafter) is the result of a survey taken among members of the prestigious International Tenant Representative Alliance. Alliance participants drew from double digit years of Tenant Representation experience, advising commercial tenants with hundreds of leases totaling millions of square feet in most major U.S. markets. We thank Gregory P. Schenk, SIOR; CCIM of the Schenk Company in Columbus, Ohio (Central Ohio’s only commercial real estate firm specializing exclusively in Tenant/Buyer representation), for lending us his 22 years of experience and this insightful and valuable “Top Ten List".

#1
Most Common Mistake


NOT ALLOWING ENOUGH TIME

Facility research, property inspections and comparison analysis can usually be completed in a week or so by motivated companies already familiar with the local market. However, those tasks are only the tip of the “time drain” iceberg, and several commonly overlooked complications needing to be factored into the relocation timeline:*

1) Negotiations with the Landlord and preparation of the lease can take months.
2) Once the Lease is signed the interior usually needs to be finished or renovated, which can take several months.
3) Before renovations can begin, building permits need to be obtained which can take up to two months, and
4) Before permits can be obtained, architectural plans must be completed, and may take one to two months.

If existing facilities cannot be found which are acceptable, new construction can easily take 12 months or longer.

Bottom line: 6 - 12 months is a good time frame to use when looking for new facilities, even longer if experienced professionals are not used to guide the process.

* This assumes the space is not going to be taken as-is, which is possible, but unlikely.

2nd
Most Common Mistake

NEGLECTING LONG-TERM PRIORITIES

Owners who think only about solving immediate needs face expansion problems very soon again! In addition to evaluating short term needs relative to square footage requirements (number and size of rooms), type of floor plan (open, private, or a mixture), communications needs, parking needs, access and security needs, etc., be sure to factor in long term needs. By obtaining facilities and lease terms which will allow the company to expand, downsize or relocate as circumstances dictate, business owners can avoid the unnecessary headaches, loss of business and costs associated with relocating. Examples of such important lease clauses include:

· Expansion right obligates the Landlord to provide Tenant with more space should it become necessary.

· Cancellation right (commonly referred to as a “kick-out” clause) allows the Tenant to break the lease under certain conditions such as when the Tenant needs to expand and the Landlord cannot provide them additional space on the premises.

· Extension right is similar to an option, and allows the Tenant to remain in the premises (a right of first refusal is a type of extension right).

· Sublet right gives the Tenant flexibility in that if it must relocate, it may sublease the space and mitigate the economic pressure.

Suggestion: After discussing the company’s immediate needs and long terms goals with senior management in all departments, meet with leasing experts and space planners/architects to determine a) the most productive combination of office size and layouts (modular furniture, hoteling, size, amenity requirements, etc.), b) facilities which are flexible enough to service future needs, and c) certain lease clauses which will be negotiated into the lease document..

3rd
Most Common Mistake

INADEQUATE REPRESENTATION

Unless someone in the company is already an expert in commercial real estate, most business owners cannot afford the time necessary to learn this complicated industry. Lack of knowledge combined with time pressures can cause unrepresented owners to a) make location decisions without being aware of ALL the choices, and b) make costly errors that cut into their profits and increase their financial exposure leaving valuable dollars on the table during negotiations to renew a lease or relocate to lease, purchase or build...
An experienced and specialized Tenant Rep can counterbalance the Landlord’s/Sellers professionals, and will work to insure that the Tenant receives the best possible rates, terms, incentives and lease clause protections. This valuable service may cost the business owner nothing, since Tenant Reps split the Leasing fees paid by the Landlord or Seller.
Using the wrong broker may lead to incomplete information or conflicting loyalties because of possible hidden agendas or Landlord relationships.

Note: Business owners who do not use a Broker will likely not be aware of all the possible facility choices. This is because an experienced broker has developed a databank of every property on the market, an extensive network, and commonly finds facility choices which are not yet vacant or on the market.
Suggestion: Tenants should also keep their broker involved in the expansions, contractions, renewals and extensions that occur during the lease to prevent uninformed decisions that lead to lost opportunities.

4th
Most Common Mistake

LEASE COMMENCEMENT DATE
IS NOT TIED TO BUILDING COMPLETION

This has been a disaster for many inexperienced Tenants who found that unexpected delays in the planning, permitting and construction stages ate into their rent-free build-out period and caused budget nightmares.
Suggestion: Tenants should always propose a clause to the lease which provides for an extension of the lease commencement date if pre-opening delays are encountered which are beyond the control of the Tenant. Your broker and a good real estate attorney can suggest some good lease language.

5th
Most Common Mistake

UNDERESTIMATING THE CONDITION
OF THE PREMISES

Tenants who take a property “as-is” put themselves at great risk. Even when the space looks fine and has been previously occupied, building codes may have changed or the unit’s infrastructure may be broken or inadequate.

Suggestion: It is best to have the Landlord guaranty the space is up to current building, fire, safety, environmental laws and zoning and ADA codes. It is also good to have the Landlord guaranty the condition of the electrical, plumbing, heating and air-conditioning systems for the first 90 days (if not the entire term of the lease). Often, a dollar threshold for repairs/replacements to older systems can be negotiated.

CLE- Update- Land Use and Zoning Law Litigation

On June 9th and June 10th, 2008, the National Business Institute is sponsoring a seminar titled "Land Use and Zoning Law Litigation." The seminar on June 9th is being held at the Sheraton Suites in Cuyahoga Falls, 1989 Front Street, and on June 10th at the Holiday Inn Independence in Cleveland, 6001 Rockside. The seminar at both locations will run from 9:00 a.m. - 4:30 p.m. Registration begins at 8:30 a.m. Continuing education credits will be provided for CLE (6.0), State Bar College (6.0) and IACET (0.6). Contact NBI at 1-800-930-6182 or http://www.nbi-sems.com/ for more details.
Labels: CLE Update, Construction and Development

How a Cost Segregation Study Can Benefit Building Owners

The article below first appeared in the November 2003 Issue of the CPA Advisor, the Ohio Society of CPA’s Cleveland Chapter Newsletter, and is being re-published on our blog with permission of the authors:


How a Cost Segregation Study Can Benefit Building Owners
by Dennis Duffy and Randy Vesco

The concept of cost segregation, and its benefit to building owners, has been receiving increased attention from accounting and tax professionals and their clients since the Hospital Corporation of America case in 1997 and the IRS acquiescence in 1998. These events established a philosophy and direction for cost segregation studies.

A Cost Segregation Study is a strategic tax tool that allows building owners to allocate building costs between real estate and personal property based on case law and IRS guidance using qualified construction engineers and estimators to perform the study. The result is to accelerate depreciation in the early years of a project’s life, producing deferred taxes and increasing cash flow during that period. Costs are legitimately moved from longer real estate lives (39-years for commercial and 27.5-years for nonresidential real estate) to shorter class lives of 5, 7 and 15-years, respectively. Savings are measured in the net present value of the deferred taxes over the project’s life.

IRS Legal Memorandum 199921045 established that it is the “ultimate use” of the item that dictates its classification as an item for tax purposes. Take for example, a facility’s electrical distribution system. The cost of the system necessary for the operation of the building would be 39-year property, while the costs related to the operation of a press or a computer could be 7 and 5-year property. The portion of the system that provides lighting to the parking lot may qualify for a 15-year life.

How does it work? Using the example of a $2 million building we see that in the absence of a Cost Segregation Study, there is no basis for a taxpayer to depreciate a commercial building over less than the 39-year MACRS period.

After a Cost Segregation Study has been performed by qualified engineers/estimators, $350,000 of the cost has been moved to 15-year property and $250,000 to 7-year property. As a result, $425,000 of depreciation has been accelerated (note that the total amount of depreciation is still $2,000,000 over the life of the project in both cases) and additional cash flow of $200,000 has been generated from the tax savings from accelerating the depreciation. The net present value of these cash flows at 6% over the life of the building is $132,000. If the after-tax cost to do the study was $6,600, the taxpayer would have received a 20 to 1 return on investment.

Under what circumstances can the costs be reclassified to shorter depreciable lives? The IRS Legal Memorandum says, “As a practical matter, it should be noted that the use of cost segregation studies must be specifically applied by the taxpayer…An accurate Cost Segregation Study may not be based on non-contemporaneous records, reconstructed data, or taxpayer’s estimates or assumptions that have no supporting records.” That means a Cost Segregation Study is necessary to segregate the costs, and that it must be based on documented records, not percentages or estimates. Using qualified professionals to perform the study will satisfy this requirement and maximize the savings, while providing the independent documentation that the IRS will look for if the classifications come under scrutiny.

Identifying items to be segregated is just the beginning. Actually determining the costs legitimately associated with each item is the hardest part. Again, using the example of the electrical distribution system, it’s one thing to know that portions of the wiring and electrical load can be depreciated over shorter lives, it’s another to “unbundle” those costs from one contract amount or invoice into the shorter depreciable lives. It’s not only the direct costs that can be segregated, but also a portion of any indirect costs such as architect fees, legal and engineering fees, contractor’s general conditions, permits, bonds, capitalized interest, appraisal, design and construction management to name a few. A Cost Segregation Study does not create additional personal property tax for Ohio but instead, the costs remain nontaxable as real estate.
What properties can benefit? In general, properties constructed, purchased or have had substantial leasehold improvements made since 1987, such as manufacturing, distribution, retail, auto dealerships, health care, office buildings, golf courses, hotels & motels, apartments, restaurants, funeral homes, banks, airports, and so on can benefit. In actual practice we have found that those buildings constructed or purchased since 1994 seem to have the best potential for net present value savings. However, all buildings purchased or constructed since 1987 should be evaluated on a cost/benefit basis.

What are typical costs that can be reclassified? Portion of site preparation, site utilities, asphalt paving, concrete walks and curbing, exterior lighting, fencing, landscaping, railings, flagpoles, retention basins, decorative flooring, wallpaper, observation windows, interior fencing, decorative millwork, dock equipment, fire extinguishers, cabinets, electrical distribution systems, and plumbing, among others.

What happens with buildings built or purchased prior to the current year? Can you go back? Yes! You may claim “catch-up” depreciation since the building was placed in service by filing a Form 3115 for a change in accounting method in the current year. This is now an automatic consent by the IRS (Rev. Proc. 99-49). The adjustment created by the increased depreciation is taken against taxable income in the year of change. If it can’t all be used in the current year, it can be carried back or forward depending on the taxpayers situation, and possibly generate tax refunds.

Is CSS for everyone? No! The expected benefit from the net present value savings from the study must exceed the cost of the study. There are several points to investigate. First, the client must be able to use the additional depreciation deductions currently or in the foreseeable future. Second, the benefit can be significantly reduced if the client is in an AMT position. Third, if the client contemplates the sale of the building, depreciation recapture and 1031 exchange issues need to be explored

To recap: Whether your client has constructed, purchased or rehabilitated a building, a Cost Segregation Study provides the opportunity to move items of cost from longer to shorter depreciable lives, thereby accelerating depreciation deductions and improving cash flow through tax deferrals. The benefits can be significant. On studies that we’ve performed, the net present value of the deferred taxes has exceeded $100,000 and can be substantially more depending upon the circumstances.


Dennis Duffy is the president of Duffy + Duffy Cost Segregation Services, Inc. located in Westlake, Ohio. He can be contacted by phone: (440) 899-9560, email: dduffy@costsegexperts.com or through the website: www.costsegexperts.com

CLE Update: Davis-Bacon Fundamentals & Construction Compliance

On July 24, 2008, the National Business Institute is sponsoring a seminar titled "Davis-Bacon Fundamentals and Compliance During Construction Projects." The seminar is being held at the Holiday Inn in Independence, 6001 Rockside Road from 9:00 a.m. - 4:30 p.m. Registration begins at 8:30 a.m. Continuing education credits will be provided for CLE (6.0), State Bar College (6.0) and IACET (0.6). Contain NBI at 1-800-930-6182 or http://www.nbi-sems.com/ for more details.

City Proposes Jail Term for Residents Who Don’t Mow Lawns

Council for the City of Canton, Ohio has proposed jail time for people who don’t mow their lawns. Under Ordinance No. 551.02, Canton’s current high grass and weeds law, more than 8 inches constitutes high grass or weeds. First-time violators are charged with a minor misdemeanor, which is punishable by a fine up to $150. City Council has recently proposed an amendment to the law that would make a second offense a fourth-degree misdemeanor and which would carry a fine up to $250 and up to 30 days in jail. Council passed the second reading of the proposed amendment on Monday.

The City has explained that it is responsible for mowing an estimated 2,000 non-City owned overgrown lots, costing the City an estimated $225,000 to $250,000 per year. Accordingly to the City, an average overgrown lot costs the owner approximately $135 (consisting of $100 for mowing and a $35 administrative fee). Approximately 1,500 of the lots are owned by individuals. In addition, banks and corporations own some of the lots. The City believes that using such measures could draw attention and serve as a deterrent. The City may also consider other punishments such as cutting grass as a form of community service and possibly seeking to garnish wages or issue property liens.

For additional information, see the initial article published by Ed Balint in the Canton Repository.

The proposed law has since gotten a quick national response since the above article was published on Tuesday. The Canton Repository has received numerous email messages and telephone calls and the story has been posted on a number of Web sites. To see reader comments and the City’s response, read Ed Balint’s follow-up article in the Canton Repository.

Tenants' Recovery of Attorney Fees From Landlords

Under Ohio Revised Code 5321.16, a tenant may recover from a landlord the legal fees he/she incur in pursuing recovery of a wrongfully withheld security deposit. The issue in which appellate courts in Ohio have been divided in the past has been whether or not a trial court has the authority to determine and award attorney fees incurred by a tenant at the appellate level. The Supreme Court of Ohio, issued its decision today in 2007-1551 Klein v. Moutz, Slip Opinion No. 2008-Ohio-2329, and held that either the trial court or court of appeals could resolve the issue of appellate attorney fees in order to bring a case to conclusion. An opinion summary of the Supreme Court of Ohio decision can be accessed here.

PCBs in More than Just Transformers, Hydraulic Oil and Ballasts; should we be concerned with PCBs in Caulk, Paint & Sealants?

Throughout the Northeastern US, there has been a lot of buzz about PCBs in caulk, rubberized paint and sealants. The fact of the matter is, from the early 1940s through mid 1970s, PCBs were used as common additives for water and chemical resistance. They were known for their durability and elasticity and commonly used in chlorinated paints on furnaces, industrial machinery and masonry walls. During that period, caulking could contain up to 10-20% of PCBs.

To find out what steps, if any, developers, builders and real estate owners will need to take, and when, click on the following site: http://www.atcassociates.com/eblast/Solutions%20E-letter/SolutionsVol12April2008/Solutions--March2008.html

Chrome Platers and other Manufacturers: Add One More Regulation to the List; OSHA Releases A New Directive for Hexavalent Chromium

To learn more about the new (February, 2008) OSHA directive for Hexavalent Chromium (that follows the 29 CFR 1910.1026 standard promulgated two years ago) and requisite engineering controls required, click on the following site: http://www.atcassociates.com/eblast/Solutions%20E-letter/SolutionsVol12April2008/Solutions--March2008.html

One Cleveland Center Has A New Owner

The One Cleveland Center, that silver chisel-shaped building located on the corner of East 9th Street and St. Clair in downtown Cleveland (and incidentally, where the KJK offices are located), was sold to Optima International LLC for $86.3 million. The building's prior owner, Meridian Realty Investments, had purchased the building three years ago for $65 million. During the past three years however, Meridian Realty did a stellar job of boosting occupancy, which obviously paid off handsomely.

CLE Update: Understanding Oil and Gas

The Real Estate Law Section of the Cleveland Metropolitan Bar Association is presenting a seminar on Monday, June 9, 2008 titled, "Texas Tea or Woe is Me? Understanding Oil and Gas." The seminar starts at 1:00 p.m. and ends at 4:45 p.m., and is being held at CMBA's offices, 1301 East Ninth Street, Cleveland, Ohio. For more information you can contact the CMBA at (216) 696-2404 or at their web site, http://www.clemetrobar.org/.

Clean Ohio Assistance Fund Dollars (for Environmental Site Assesments and Clean Up Activities)"Back Up for Grabs"

The Clean Ohio Assistance Fund (COAF) is up and running again. Recently, through House Bill 496, $9.4 million in grant funding is available to be used for brownfield redevelopment in eligible areas of the State. The grant money can fund Phase II Site Assessments, cleanups and “Public Health Projects”. For any one (1) project, up to $300,000 can be obtained for Phase II Site Assessment and up to $750,000 can be obtained for cleanup activities.

Applications are now available and will be accepted by the Ohio Department of Development (ODOD) starting on July 1, 2008. This is a competitive process and there are eligibility criteria for the type of applicant and location of the property for which the funds will be used. In general, the applications are scored based on economic benefit, the probable success of the overall project, positive environmental impact, the overall needs of the community, and other criteria. For more information, visit the Ohio Department of Development, Office of Urban Development website at: http://www.odod.state.oh.us/ud/

This Blog was re-printed with permission from John Garvey, Director of Brownfield Services for Partners Environmental Consulting, Inc. Mr. Garvey notes that "Partner's" has successfully prepared applications for, and implemented many Clean Ohio projects and would be happy to assist those interested in applying for this year's program. John Garveycan be reached at 440-248-6005, or by email at jgarvey@partnersenv.com.”

Lorain County Bar Association - 2008 Real Estate Seminar

The Real Estate Section of the Lorain County Bar Association presents the 2008 Real Estate Seminar on June 12, 2008 from 8:15 am - 11:45 am. The seminar will be held at the Spitzer Conference Center of the Lorain County Community College, 1005 Abbe Road, Elyria, Ohio 44035.

Topics include the following:

• Strategies for Cities and Neighborhoods in the Face of the Foreclosure Explosion. The speaker is Professor Carole O. Heyward, Esq., of the Urban Development Law Clinic at Cleveland-Marshall College of Law. She will cover local government strategies for abandoned, neglected and foreclosed homes; statistics regarding property values, vacant homes & number of foreclosures; how communities can make a difference; available statutory remedies; single family homes rehab programs; and much more.

• Commercial Real Estate Finance. Speakers are Martin D. Rodriguez, Senior Vice President, Commercial Real Estate Division of National City Bank; and Mark D. Schildhouse, Esq., General Counsel for The K&D Group, Inc. in Willoughby, Ohio. Mr. Rodriguez and Mr. Schildhouse will cover real estate lendng in today's environment and what to do in financing your project when traditional bank loans come up short.

• Public Financing Options. Speakers are William Sheehan, Credit Analyst for the Financial Incentives Office of the Ohio Department of Development; and Kristopher L. Wahlers, Esq., Partner, Calfee Halter & Griswold LLC. Mr. Sheehan and Mr. Wahlers will cover the various finance programs available through ODOD, and other public financing options through the local governments and port authorities.

Jack Kilroy, Attorney and Deputy Auditor, Real Estate Section of the Lorain County Auditor's Office and myself will be the moderators of this program. Pricing: $70 for new attorneys; $90 for LCBA member attorneys; and $130 for non-member attorneys. For more information you can contact the LCBA's office (Jeannie Motylewski) at (440) 323-8416.

CLE Update: Using a Mechanic's Lien

NBI will be presenting a seminar in Cleveland, Ohio on August 4, 2008 entitled "Using a Mechanic's Lien to Get Your Money." The seminar will be held at the Holiday Inn Independence from 9:00 a.m. to 4:30 p.m., and will be eligible for the following continuing education credits: CLE, AIA, Stare Bar College, Engineer, IACET and NASBA. For further information contact NBI at 1-800-930-6182.

County Auditor Offices in Ohio

In our periodic review of useful resources on the Internet, one site we wanted to bring to everyone’s attention is the web site for the County Auditors’ Association of Ohio (CAAO). The CAAO represents the interests of Ohio’s 88 County Auditors. From their web site you can access a directory of the County Auditor offices for all 88 counties. Select the link for the county you need, and you will find the address, and other contact information, including an email address and web site address, if available. When you need to contact an auditor's office in a county you have never dealt with before then this web site is the perfect starting point to obtain the information you need.

Most of us are familiar with the real estate transfer and tax functions of the Auditor’s Office, but there are many other functions and responsibilities of a County Auditor’s office, some of which you may not realize are handled through it. The CAAO web site takes you on a tour of all the various duties of a County Auditor’s office, such as those involving personal property, real estate, licensing and inspection responsibilities as well as other duties of that office. Also found on this site is an explanation of the fiscal responsibilities handled through County Auditors’ offices, an overview of the Weights and Measures Division, and County Geographical Information Systems (GIS) maps in Ohio.

The CAAO web site is worth checking out and bookmarking for future reference.

Ohio's Apportionment Law and Asbestos Litigation

An Ohio-based environmental law firm, McMahon DeGulis LLP, recently tried an asbestos case to verdict, which was instructive in how a court may apply Ohio's apportionment statute in a trial. Ohio has only been an "apportionment" state since 2003. The law permits a jury to assign a percentage of fault to any entity which contributed to causing a plaintiff's harm and can greatly impact asbestos litigation, where a plaintiff often sues numerous defendants. Under Ohio's apportionment law, in a mass tort lawsuit that results in a verdict favorable to the plaintiff, the defendants are now obligated to pay only their assigned portion of fault. Given how relatively new the law is, it has not been fully tested at trial yet.

An overview of McMahon DeGulis' experience in the Ohio asbestos trial and in a Federal court trial that followed soon afterwards, can be found in their newsletter, foryourconsideration.

CBRE Cleveland - 2008 1st Quarter Newsletter

For those of you who like to stay current on commercial real estate market news, here is a link to the CBRE Cleveland Private Client Group's 2008 1st quarter newsletter.

Arbitration Provision in Home Builder’s Form Contract Not Unconsionable

In March of this year, the Supreme Court of Ohio, in Taylor Bldg. Corp. of Am. v. Benfield, 117 Ohio St. 3d 352 (2008) upheld the validity of an arbitration provision in a construction contract between a married couple and a home builder. The Ohio Supreme Court reversed a decision of the 12th District Court of Appeals that declared the arbitration provision, and the entire contract, unconscionable (legally unfair) and unenforceable.

The builder (“Taylor”) and the married couple (the “Benfields”) entered into a contract whereby Taylor agreed to build a small home in Clermont County, Ohio for the Benfields, for approximately $90,000. The Benfields refused to pay Taylor, claiming building code violations and defective workmanship. Taylor sued, but asked the trial court to send the matter to arbitration, per the contract. The trial court did so, finding nothing wrong with the arbitration provision. Unhappy with that decision, the Benfields then appealed.

The 12th District Court of Appeals reversed the trial court’s decision, “buying” the Benfields’ argument that the contract was a one-sided, form contract, with unconscionable provisions, including an unconscionable arbitration provision. The court of appeals also asserted its right to hear the case “De Novo” (in effect, a re-trial of the case at the appellate level). Taylor then appealed the 12th District Court’s decision to the Ohio Supreme Court.

The Supreme Court of Ohio agreed that the appeals court had the right to hear the case De Novo, however, it disagreed with the 12th District’s decision on unconscionability and enforceability of the contract. The Ohio Supreme Court explained that for a contract to be held unconscionable, in Ohio, it must be procedurally unconscionable, and substantively unconscionable.

The Ohio Supreme Court held that the use of Taylor’s printed form contract was not procedurally unconscionable, per se, and there was no evidence that the Benfield’s were treaded unfairly or forced to sign the (arguably) one-sided contract. The court also noted that the arbitration provision was not buried in “fine print”, and the Benfields initialed the clause, signaling that they read and understood it. What’s more, the court pointed out that there was a choice; the Benfields could have used another builder.

As to the arbitration clause itself? The Ohio Supreme Court declared that the clause was not substantively unconscionable, even though it did not detail what the costs of arbitration would be, nor warn that rights to a jury trial were being relinquished (“loss of the right to a jury trial is a necessary and fairly obvious consequence of an agreement to arbitrate”; See Taylor at 364, Para. 54, citing Pierson v Dean, Witter, Reynolds, Inc. 742 F.2d 334,339 [7th Cir 1984]). While the Taylor contract did contain a provision calling for the arbitration to be held in Louisville, Kentucky vs. Clermont County, Ohio (which provision was held void, per Ohio law), the contract’s “severability clause” served to remove that provision and keep the rest of the contract intact (“severability provisions are agreements directing a court or other decision maker to strike out any provision held invalid, but uphold the rest of the contract).

The Ohio Supreme Court also dismissed the Benfields’ arguments that the entire contract was unconscionable because of the presence of egregious clauses, in addition to the arbitration provision, such as a “liquidated damages clause” (a clause providing, ahead of time, what the amount of damages for a breach of a contract will be, regardless of the actual damages) and a clause holding the Benfields responsible for Taylor’s attorneys fees. The court held that it was improper for the court of appeals to have even reviewed whether or not the rest of the contract was unconscionable, because those types of arguments should be made in the arbitration that was designed to resolve, “any claims”. “The court of appeals erred by determining the issue of unconscionability regarding the parties’ entire contract, rather than just the arbitration clause”. Taylor at 368, Para. 68. Having said that, the Ohio Supreme Court went out of its way to hint, without officially deciding, that the $950 liquidated damages provision was not outlandish, and that a “one-sided attorney fees clause” is permissible in Ohio, in certain circumstances. “Even a ‘contract of adhesion’ [standardized contract prepared by one party, and offered to the weaker party, usually a consumer, with no realistic choice as to contract terms] is not, in all instances unconscionable per se.” Taylor at 363, Para. 68.

What does this all mean if you are a home buyer? Most importantly, do not assume that a seemingly “one sided contract” is just “boilerplate”, and not enforceable. Read everything, seek legal advice, negotiate clauses you don’t like, and consider other contractors if you are told the form contract presented to you must be signed as is.

If you are a builder, take note that arbitration clauses are enforceable in homebuilding contracts, but:
1) Ensure there is no “fine print” in your contracts;

2) Consider highlighting any arbitration provisions (explain them, and have the homebuyer initial them);

3) Ensure that your contracts have a “severability clause”;

4) Read and appropriately change your “standard” forms (preferably, with legal advice), before giving them to the homebuyer. Why invite litigation? If there are seemingly one-sided, unfair provisions, simply have them modified to be fair. For example, a clause to the effect that: “the prevailing party shall be entitled to reasonable attorneys’ fees”, is more fair than: “homebuyer shall pay all of Builder’s costs of enforcing its rights under this contract, including attorney’s fees”. The fairer these types of provisions can be, the less likely an aggrieved party will look to challenge them, and the more likely they are to be upheld by a judge or arbitrator, if challenged.

Upcoming Audio Conference: Understanding the New AIA Contracts

For those seeking a straight forward understanding of the newest
revisions to the most often used AIA construction form contracts (A201; A401), check out the National Constitution Center’s 60-minute audio conference:

"The New AIA: General Contractor Agreements with Subcontractors"
Tuesday, May 20, 2008, 1:00-2:00 p.m. ET

To Register, or for more information, click the link below or call 800-859-8676 (enter priority code: 11425): The Price is $199.00
http://ConstitutionConferences.com/A1A1a?ID=-554411425