Cut it out: the beauty of a severance clause.

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It is said that the law is the fabric of society, without it we would have nothing but unruly human beasts roaming the earth’s surface. However in business, sometimes the law actually gets in the way. Yes you read that right. English law believes in freedom of contract, however there is always a risk that a contractual clause may be invalid or illegal – e.g. it offends against public policy or competition law – often this is the case with non-compete clauses and restrictive covenants (clauses that tell a party what they cannot do). This is why clever lawyers make use of “severance clauses” when drafting contracts.

A severance clause (or severability clause) tries to mitigate the damage that may be caused by the interference of the law in a contract. How does it do this? It ensures that a contract will continue to be enforceable even if one of its terms is found to be illegal, invalid or unenforceable. Severance clauses assist in helping a contract to SURVIVE. Pretty cool right? For example, if a contract for the sale and purchase of various vegetables is suddenly subject to a new law stating that no one can sell or purchase carrots (ridiculous but it’s an example), why should the contract die just because the sale and purchase of carrots is illegal? A severance clause would carve out or sever the ILLEGAL part of the contract and require the parties to continue to perform the remaining LEGAL part of the contract i.e. the selling and purchasing of courgettes (zucchinis), potatoes, aubergines (eggplants), peas and so forth. In other words, business shouldn’t stop if it doesn’t have to stop. This is why a severance clause is simply beautiful.

Let’s look at an example of a basic severance clause:

If a Clause of this Agreement is determined by any court or other competent authority to be unlawful and/or unenforceable, the other Clauses of this Agreement will continue in effect.

The above clause severs the illegal part of the contract. BETTER versions of a severance clause will try to sever as little of the illegal clause as possible. Here is an example:

If any unlawful and/or unenforceable Clause would be lawful or enforceable if part of it were deleted, that part will be deemed to be deleted, and the rest of the Clause will continue in effect (unless that would contradict the clear intention of the parties, in which case the entirety of the relevant Clause will be deemed to be deleted).

Even BETTER severance clauses will give the parties the option to modify or correct the would be severed clause, in order to make it legal. Here is an example:

If any provision or part-provision of this agreement is or becomes invalid, illegal or unenforceable, it shall be deemed modified to the minimum extent necessary to make it valid, legal and enforceable. If such modification is not possible, the relevant provision or part-provision shall be deemed deleted. Any modification to or deletion of a provision or part-provision under this clause shall not affect the validity and enforceability of the rest of this agreement.

If  any provision or part-provision of this agreement is invalid, illegal or unenforceable, the parties shall negotiate in good faith to amend such provision so that, as amended, it is legal, valid and enforceable, and, to the greatest extent possible, achieves the intended commercial result of the original provision.

Severance clauses are usually included in any contract as a boilerplate (standard) clause – however don’t take that for granted. Go check your contracts and flag this magical clause with your lawyer. Get your lawyer to advise you – could your severance clause be better? Do not rely/use the examples in this post, they are EXAMPLES. Your lawyer will draft a robust severance clause tailored to YOU.

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BREXIT explained.

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Before you read this, just in case you didn’t know, BREXIT refers to the possibility of Great Britain (aka the United Kingdom) leaving the European Union after the referendum in June 2016. It’s a play on the words Britain and Exit. In this post, I am going to try and explain the Brexit debate, however, please know that thelegalknow is wholly against BREXIT. I will therefore TRY to be as neutral as possible in this post.

What is a referendum?

A referendum is a general vote by the electorate on a single political question which has been referred to them for a direct decision. In the UK, David  Cameron, the current Prime Minister has approved a referendum asking the British public whether or not it thinks that Britain should remain in the European Union. The big day is Thursday 23 June 2016.

The exact question will be “Should the UK remain a member of the EU or leave the EU”?

What is the European Union?

Five years after World War II ended, France and Germany came up with a plan to ensure that their two countries would never go to war against each other again. The result was a deal signed by six nations to pool their coal and steel resources in 1950. Seven years later a treaty signed in Rome created the European Economic Community (EEC) – the foundations of today’s European Union. The UK was one of three new members to join in the first wave of expansion in 1973. Today the EU has 28 member states with a total population of more than 500 million.

At the heart of the EU are laws designed to allow most goods, services, money and people to move freely within EU member states.

The four key institutions which work together to run the EU are as follows:

  • the European Commission – the EU’s administrative arm – is responsible for proposing and drafting EU legislation;
  • the European Parliament – represents EU citizens – is responsible for approving draft proposals, together with the European Council, from the European Commission and making them law;
  • the European Council – represents member states – is responsible for approving draft proposals, together with the European Parliament, from the European Commission and making them law; and
  • the European Court of Justice – is responsible for upholding EU law in member states to make sure EU law is applied in the same way in all EU member states. It also settles legal disputes between national governments and EU institutions. Member states are required to comply with the court’s rulings and may be fined if they do not do so. This is completely separate from the European Court of Human Rights in Strasbourg, which interprets the European Convention on Human Rights, the EU has its own Charter of Fundamental Rights.

Each member state effectively appoints representatives to each of these institutions.

Why is there a referendum?

The British government promised to hold a referendum on EU membership before the end of 2017. There have been growing calls for a vote on whether to stay or leave the union, as it has allegedly become more powerful and expensive. The BREXIT campaign worries that the UK is paying more in membership fees but gaining little in return other than increasing immigration.

Why does Brexit matter?

The Brexit campaign maintains that by breaking free from the EU, the UK could reduce taxes for its citizens and reduce the burden of immigration. However, those campaigning to stay in the EU contend that if the UK should decide to go off on its own, the move could create widespread job losses and economic uncertainty. Currently, the EU is the UK’s largest trading partner. If enterprises in the new EU are reluctant to do business with British companies, British companies could face substantial setbacks.

Additionally, if Brexit occurs, the UK, just like Norway and Switzerland, will still have to comply with EU rules without having any influence over them. The UK’s exports would be subject to EU export tariffs and they would have to meet EU production standards. It could be even more costly for UK exporters if they face EU legal arguments against UK standards – there could be a lot more court cases (LAWYERS will get richer, YAY). There is therefore a feeling that the UK is always likely to be better positioned to secure beneficial trade deals as a member of the EU than as an individual and isolated player.

What will be the impact on the EU if Brexit occurs?

The potential implications of Brexit are complex, as they hinge largely on what economic actions the UK takes after splitting off from the rest of the EU and how the rest of the world reacts to such a move. The impact would be widespread and drawn-out. The actual process of the UK leaving the partnership and establishing new agreements with remaining EU countries would take years. Many businesses would face immense uncertainty during this time.

In order to reduce this uncertainty, Brexit advocates are weighing potential options. They’re considering either supporting a second referendum on which model to pursue or making an effort to create a consensus behind what the UK’s trade deals would look like after the nation’s exit. Sounds like a political mess to me!

So there you have it. BREXIT in a nutshell. You should hopefully now have a vague idea of what’s going on. I tried to stay neutral but I love and care about business and the arguments to STAY in the EU make economic sense to me. The pennies we would save in domestic tax pail in comparison to the billions we could lose in trade with the EU and the world (President Obama made America’s view very clear). If you are a UK business owner/entrepreneur reading this, please make sure that you VOTE and vote for what you think will be GOOD for UK BUSINESS not UK AESTHETICS.

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HOW TO… be an entrepreneur in your day job.

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Some of us are not quite at the point of saying goodbye to the salary and entering the world of risk and unpredictability. However, guess what? You don’t have to kick the day job in order to start honing the skills of an entrepreneur. Whilst you are planning your future business, you can start to test your entrepreneurial ability now, at your desk, under the nose of your boss.

  1. Respond to a request with a suggestion – If you are planning on leaving your day job, it is often because there is something about it, maybe how it is run or what it actually does, that you do not like. SO since you’re planning your exit, why not challenge some of those things that drive you nuts. When asked to negotiate that sale or purchase on the usual terms, suggest a different tactic. If you are asked to, yet again, make that same salad for the Monday customers, suggest changing the ingredients a bit, for example adding a bit of chilli? If you are asked to do the rota for whatever, suggest a change that makes that rota better. Start to challenge the norm. That’s what you do as an entrepreneur right? You see what others do not and you push the boundaries.
  2. Be yourself – This one is difficult in an office environment or a store where you are reminded daily that it is better to conform than to be yourself. But hey, you’re about to go it alone so you may as well shine and encourage others to shine too. I have a few clients who are unapologetically themselves. They ask you the most direct questions or they decline to come to an event you’re hosting because they, in their words “can’t be bothered with that sort of thing”; I respect these clients. Try to be the person you want to be and see how people respond. Do those under you work harder for you? Do those above you listen more? You can then get a feel for how you will be perceived by others when you are running your own business.
  3. Get to know everyone – When you eventually go it alone, you’ll need to be a people person. You will need to let everyone know who you are, where you are and what you’re up to. You will need to market yourself. So why not start now? Start marketing who you are. If you’re in a big organisation, go and talk to other teams; pop up to the third floor and say hello to the person you email in accounts every Monday. Basically, start honing your networking skills.
  4. Say yes – If you are asked to do something new, do not shy away. If it is out of your comfort zone, step up and take the challenge. Sink or swim that’s what you’ll be doing as your own boss with no one to delegate to. You’ll be doing new things daily, from attending events to speaking at events, from negotiating contracts to drafting strategies. Just do it and get used to a) the initial fear and b) the adrenaline once you realise that, whether you’re doing it well or not so well, you are trying and you are learning.
  5. Ask for help – When you set up on your own it is all about resources. You will be calling in favours and hiring professionals at a competitive price. SO whilst you are still in a day job, get used to asking for help from the people who know how to do what you can’t. If you don’t really know how to use your computer, ask IT for help. If you’ve never been part of a pitch and want to learn, ask a colleague who has done one before. Get used to asking for help, NOW.

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Do you need a break?

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When you’re running an up and coming business, costs are always on your mind. The less costs you have, the more profit you can make. So what do you do? You look for savings, HOWEVER, one of the biggest overheads of any business, often gets overlooked; RENT. In the UK most businesses rent their premises from a landlord as tenants under a lease. When the market was booming (pre-credit crunch) landlords had the upper hand setting high rents and long leases however in today’s challenging economic climate, landlords and tenants have found that long leases and high rents are no longer sustainable; there needs to be a compromise. This is why most commercial leases contain a BREAK clause which enables either the landlord or the tenant or BOTH to end the lease early and seek better terms elsewhere.

How does it work?

Say for example, you own a restaurant. You have a three year lease. In year one, business is booming however in year two, it’s not doing so well because the government has got rid of a big housing estate next door causing footfall to significantly decrease. You still have to pay your rent which in year one, was a piece of cake but now in year two, is a massive burden. You review your lease agreement but ALAS you’re locked in until the end of year 3. You go to the bank to apply for a loan. Whilst doing this you spot a great  empty space in a shopping centre round the corner. You know that your business would thrive there. You review your lease again, alas,  NOTHING HAS CHANGED, you’re STILL locked in until the end of year 3.

In the above scenario, not having a break clause in your lease prohibits you from getting out of a high rent deal in a poor area for your business. Your overheads increase and your profits decrease. Let’s look at this scenario WITH a break clause.

You have a three year lease. As soon as business starts to fail in year two you begin to review your options. You look closely at your lease agreement and to your joy you see that you have a break clause that kicks in after 18 months. You serve a notice to your landlord in accordance with the lease agreement, notifying him that you want to end your lease early. Your landlord accepts and at 18 months you move out of the premises and into the space that you spotted in the shopping centre. HAPPY DAYS.

Can you see the benefits for your business in having a break clause? It gives you some leeway to reassess one of your business’ biggest expenditures. In some circumstances where the location and premises still suit your business needs but the rent is just too high notifying your landlord that you are thinking of sending a notice to activate your break clause could help to bring your landlord to the negotiation table and agree a more sustainable rent. Landlords are business people too and what they value more than anything else is reliable tenants. However, as with everything in law (and that’s why you need a lawyer) there is more to it than just having a break clause and sending a notice. Here are a few considerations to bear in mind:

  1. Form and Service of Notice – You must comply exactly with method and form of service of a notice to exercise a break clause. Also once the notice has been served, it cannot be withdrawn. If the notice complies, you WILL be moving out so consider it seriously.
  2. Timing – It is important when drafting and negotiating the break clause that it is clear when the break date is and what the required notice period is. A break clause may occur on one or more specified dates or be exercisable after a specific period of time has elapsed. Your lawyer can help you work out what works for your business. Landlords usually never want to lose a tenant so they will hold you to strict compliance with the break clause notice provisions; the best thing is to diarise them so that you always have them on your radar and  consider them well in advance.
  3. Break conditions – These conditions must be strictly adhered to. If these pre-conditions are not complied with, your break notice may not be accepted. The most common pre-condition is that all rents due under the lease must have been paid. You must make sure that your lawyer negotiates this condition carefully. A lot of money is wasted in court where it is not clear whether a tenant has to pay a full quarter’s rent or just the apportioned rent up to the date of the break clause. There have been instances where a tenant has had to pay the full rent with no refund. Another pre-condition is that the tenant must give up vacant possession meaning the premises should be EMPTY. Take all your stuff and go.

So do you need a break? Yes! Make sure that you are always giving your business options and do NOT forget to use them.

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How your business can help the world.

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Ok so what does business facilitate unintentionally, every day that can assist in breaking down barriers, prejudices, discrimination etc in one swift swoop…they bring PEOPLE, all kinds of crazy, different people together! Admittedly the intention isn’t initially to get everyone to hold hands and appreciate their various differences but it certainly ends up that way. You see in our common quest to make money, we end up fostering relationships with everyone and anyone because money doesn’t care about gender, sexual orientation, faith or race and that’s THAT. Anyone can make it.

Manufacturers and suppliers are all over the world, we drop an email to China, New York or London with a click. If there is a big event in our industry, we doll ourselves up and go and meet the cool kids with eager hand shakes and smiles of “give me your business“. In business, we don’t care whether your hand is black or white, if you are paying we will shake it and if you are talented we will hold it. Take McDonalds for example, there is a restaurant in pretty much every country with an airport. I’ll never forget the joy of seeing those golden arches after almost 3 months of eating spicy food (delicious as it was) for breakfast, lunch and dinner in beautiful India. I ate three McChicken sandwiches in one go at a familiar table, in a familiar decor and with a familiar service, nevertheless they also had masala fries and tandoori nuggets; amazing. McDonalds know that DIVERSITY and CULTURE is good for business.

Even the legal industry in the UK has recognised this. Traditionally pale, stale and male with degrees from Oxbridge only, the English legal profession is now more diverse than ever. In fact, globally, major law firms are continuously expanding all over the world, recruiting from oversees and right round the corner. Just go on to the website of Clifford Chance, Norton Rose Fulbright or Linklaters and have fun clicking on the sites of their many global offices. Even the ordinary pop star knows that culture and diversity pay, if you ever meet Beyonce, ask her where she HASN’T performed or Justin Bieber how many endorsements he has done in Japan! Ok you get it, but how does this HELP?

You see, in recognising that diversity and cultural awareness is good for business you help the world to stay connected and to integrate. Entrepreneurs, businesses and startups are key tools in building a community of human beings and not a community of “us and them” which politicians love to exploit. Imagine how much more we can achieve if we actively encouraged diversity and it wasn’t just a by product money making. If you own a restaurant and your beef suppliers are a farm in Scotland, a work trip to Scotland could really encourage relationships and mutual understanding. Or if you manufacture your clothes in China, going over and seeing with your own eyes, the place where your stock begins could encourage your Chinese team and also enlighten you to improving conditions for workers over there (this is an issue for another post on another blog). I’m sure this can all be put more elegantly but you get the gist right. I did a post on Corporate Responsibility which touched upon this BUT this post isn’t about your branding or your promotion its about YOU consciously making your company an educator to its employees and a friend to its customers; that’s how your business can help the world.

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What UK Apprentice 2015 winner, Joseph Valente, taught us.

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I’m going to be honest and say that this year’s UK Apprentice crop were not the best. My guilty pleasure, I was hooked from the start but I struggled to get behind one of the candidates and cheer them on. HOWEVER, a late bloomer but still a bloomer, Joseph Valente came to the forefront. With his comic moustache (which he later shaved), baby face and cheeky grin it was initially easy to dismiss him as someone contending for the “experience” but he soon proved us all wrong. Joseph had something that guarantees success in one form or another; Joseph had PASSION.

I’m not a plumber (I’m a lawyer as you may have guessed) but Joseph made me WANT to be a plumber! He made me believe that plumbing was the future, the only future. I began to think “hey maybe I could get a van and set up a plumbing business using his business model”. THAT is the POWER of passion. If you are passionate about your business you are always winning. You win investors, you win employees, you win customers, you WIN!

You also develop and push boundaries. Joseph grew his business over ten years, straight out of secondary school. Stopping and starting in reaction to every closed door and new direction. His passion gave him persistence to keep going, to keep trying  and eventually to succeed. But what is success when you have PASSION? Joseph was continuously being told that he already had a successful business so why did he need Lord Sugar’s investment? Joseph answered them with “I just want the world and everything in it”. What Joseph taught us is that success continuously changes when you have passion because as you begin to achieve your goals, your passion drives you forward to create and achieve new goals. It’s remarkable. Passion drives you to 1) achieve; 2) learn; and 3) grow continuously.

If you haven’t watched the UK Apprentice, just watch the penultimate episode in which Lord Sugar’s pals interrogate the candidates. What do you notice? Joseph isn’t scared and Joseph doesn’t have to lie. He knows his business inside out. Even when weaknesses are highlighted, he still leaves every interviewer BELIEVING in him. Whilst the other candidates appear flushed and annoyed, Joseph is EXCITED!

Now I’m not saying that the other candidates did not have passion, they did BUT it was not nearly as convincing as Joseph’s and that’s why he won!

So this was a different but essential post. As business owners you need to keep the fire burning. YOU are the fuel for the whole thing. It’s that age old saying, “if you don’t believe in yourself, no one will.” As a lawyer, I can tell you that it is so EASY working for the passionate ones. Often more demanding and involved they INSPIRE me and bring out some of my BEST work. Have you noticed what I’m passionate about? Read the “About” page.

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