Sunday, January 17, 2010

Legal Remodeling Can Be Expensive

Have you ever heard a realtor refer to a house as a “tear down”? Tear downs are typically old, small, and often run-down houses on nice lots. For the typical tear down, the cost of remodeling and expanding the old house, replacing the leaky roof, replacing the inefficient furnace, adding air conditioning, and renovating the 1950s-era kitchen and single bathroom are just not worth it. Instead, it just makes more sense to bulldoze the old place and build a completely new house to the buyer’s specifications.

Clients bring me projects all the time that will either require legal remodeling or a tear down. Here is a typical scenario: The client begins discussion of a business transaction with another company. The client chooses not to involve a lawyer until after the business deal is struck. The client has often been presented with a draft contract from the other side. The client may already have gone back to the other side with the client’s own revisions. Finally, it dawns on the client that this is a serious transaction and that the document should be reviewed by a lawyer. That is when they call.

When the client emails me the contract or brings it by the office, the client will often say: “I think we have this one pretty much done. I just want to make sure it is generally OK and there are no legal landmines in it. Just take a quick look and get back to me.”

A quick look usually determines that the document is an unmitigated disaster. If the document has been prepared by the other side’s legal counsel, every term will be skewed to the other party’s benefit. If the document is “home made,” or written by a person with no legal training (whether by the client or someone with the other party), it will almost always be a mishmash of undefined terms, incomplete thoughts, and key omissions. I have literally seen supposed sales contracts that omit what the seller is to sell and the buyer is to buy.

There has been more than one occasion when, after reviewing one of these Frankenstein’s monsters, I have had to ask the client to begin at the beginning and tell me as simply as possible what the business transaction is supposed to be. More often, however, I have to tell the client that the document is a disaster and that the preferred approach would be a legal tear down: Trash the document and start on a clean sheet of paper.

Unfortunately, many clients seem unwilling to take this advice. If the document was prepared by the other side, they are concerned that submitting a new document will be perceived as an insult or will derail completing the deal. If the client prepared the document, they seem to take an ownership interest in defending the document – “Well, I don’t think it’s nearly as bad as you say" – rather than getting it right.

And so the legal remodeling process begins, often with the instruction to make “the minimum changes necessary changes for it to be acceptable.” There are a number of expressions that apply here. One of my late mother’s favorites was “you can’t make a silk purse out of a sow’s ear.” Although we do the best we can under the circumstances, the result is usually just what the client ordered: Minimally acceptable, but far from optimal.

In addition to ending up with a less than optimal document, legal remodeling usually costs just as much, if not more than a tear down. Starting on a clean sheet of paper almost always results in a better result.

Although a tear down is usually preferable to legal remodeling, it is still not optimal. In the scenario set forth in this post, the tear down still occurs after the client and the other party have cut the basic business deal. Business lawyers are used optimally when they are involved early in the process, and certainly before the key terms are struck. Lawyers can provide valuable input on how the transaction might best be structured. Lawyers can also identify key terms and conditions that should be included to protect the client’s interests. Lawyers can also advise the client on whether terms proposed by the other side are carry unanticipated risks.

Again, the irony is that involving a lawyer from the beginning and doing the transaction correctly will probably be no more expensive than either a last minute tear down or a remodeling project. All of this simply reinforces the universal rule that it is almost always more efficient and less expensive to involve a lawyer earlier in the process than later.

4 comments:

  1. I reposted this on my blog (with proper credit to you). I preach this concept to my clients all the time. I have never seen it presented like this. You guys have an impressive blog. Keep up the good work.

    http://www.outhousegeneralcounsel.com/2010/01/legal-remodeling-can-be-expensive.html

    Daniel

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  2. I have cited your blog post extensively on my blog. I have also added few ideas of my own. Thanks.

    www.dypadvisors.com/blog/2010/01/18/business-lawyer-early-business-transactions

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  3. What is even more expensive is when the contract is signed, and the client later comes to you when litigation is imminent and asks you to fix it. A day late, and a dollar short. I've seen so many cases in which attorneys' fees after the fact are exponentially higher than they would have been to negotiate and memorialize the deal.

    ReplyDelete