As any developer knows, it’s always better to try to split the costs of the design and approval of a project than to bear them alone. Developers will typically go through the design and approval process while under contract to purchase the land for a project. While the developer of property will enter into a direct contract for professional services with a vendor, if the wind is blowing the right way, the seller will agree to split the design and approval costs with the developer.

The design and approval process can be a long, difficult road and it may result in a dead end. Architects, engineers, and other vendors who provide services during the development approval process may dedicate tremendous effort only to discover that their hard work is all for naught- the project will never be. Or, the closing may have occurred and the seller has yet to make good on its obligations to the vendor under a cost-splitting agreement. When things get messy, the vendor will look at all options available to get paid. It you’re a developer considering splitting a vendor’s costs with the seller of the land, what kinds of thing should you be considering?

Describe – don’t just name – the vendor as intended third party beneficiary.

It’s a good notion to name a vendor as a beneficiary of a land contract and it is not uncommon for drafters to include language in agreements describing a vendor as a “third party” or to provide that a seller will make payments to a vendor for services rendered during the design and approval process. Yet, drafting a land contract to give a vendor the legal status of a third party beneficiary can be more difficult than one might first realize.

There are no magic words. To actually make a vendor a third party beneficiary under a contract, the parties to the contract must mutually intend that the vendor receive a benefit pursuant to the contract. The benefit bestowed must be one “which might be enforced in the courts,” Snyder v. Freeman, 300 N.C. 204, 220, 266, S.E.2d 593, 604 (1980), and the parties to the contract must have intended “the benefit of the contract to run…to the third person” rather than to themselves, Lane v. Aetna Cas. & Sur. Co., 48 N.C. App. 634, 638-39, 269 S.E.2d 711, 714-15 (1980).

Because courts look first to the language of the contract itself to determine the mutual intent of the parties, one of the easiest things to do to ensure that the seller will remain on the hook for its agreed upon share of the cost of services is to include recitations that reference the law regarding third party beneficiaries. The developer will want the land contract to explicitly state the parties’ intent for the vendor to be a direct rather than incidental beneficiary, for the vendor to have an enforceable right against the seller, and that the benefit of the seller’s obligation to the vendor under the land contract run primarily to the vendor rather than to the developer or the seller. Additionally, to ensure that the early termination of the land contract does not affect the vendor’s right to pursue the seller for any deficit on the obligation stated in the land contract, the drafter will want to explicitly and specifically state that the rights of the vendor against the seller survive the termination of the contract as well as closing.

Don’t leave the payment schedule to the discretion of the vendor.

Because land contracts are often terminated prior to closing, the contract should never make the seller’s obligation to the vender conditional on a contingent event, such as closing or expiration of a feasibility period. These events can always be affected by the parties or external circumstances without the vendor’s consent, and as such they may never occur. The better practice is to put in the contract dates certain by which payments will be made by the seller to the vendor. If these dates need to change at some point after execution of the contract, then the changes can be made by modifications.

Prior to executing the services contract, negotiate for the seller to guarantee the payment of professional services fees.

If the developer has not already entered into the services contract with the vendor, advise the developer that the seller should guarantee a portion of the fees on the services contract between the developer and the vendor. Since consideration for a guaranty cannot usually be given after a contract is formed, and a guaranty will put the seller directly in the path of liability, the developer’s attorney will have limited time to recommend negotiating for the guaranty, and even then the developer will only be able to negotiate the guaranty if the developer is in a strong position. Another scenario is where the developer is able to provide in the land contract that the seller will provide a guaranty on the services contract, and to specifically provide a liquidated damages remedy for this obligation.

Include an indemnification provision in the contract.

In the event that the developer encounters a situation where he ends up paying or owing the vendor the full amount for the services, the developer will want to know that it will be able to recover from the seller what the seller agreed to pay the vendor. This can be addressed simply with an indemnity provision in the contract that allows the developer to recover any amounts paid to the vendor on behalf of the seller upon the furnishing of adequate documentation. Again, this is a provision that the drafter will want to specifically and explicitly provide survives the termination of the contract and closing.

The pitfalls of contract drafting for developers are numerous, complex, and nuanced. Third party issues are among the multitude of contract issues that developers have to confront in unique ways. Developers need a legal team that knows the ins and outs of the developmental process and the contingencies that go along with it.

If you are a developer in North Carolina, get in touch with the Commercial Real Estate team at the Forrest Firm as early as possible. We will start your project off with a solid legal foundation.

You can contact Patrick Lineberry by phone (336)660-2570 or email patrick.lineberry@forrestfirm.com

As a business lawyer, I am often asked how businesses can best ensure that their customers pay outstanding bills in a timely manner. 

For all but the largest businesses, this is more than a theoretical question – when a customer fails to pay one or more invoices it has a dramatic impact on cash flow and the bottom line. 

Here are ten steps you can take to increase the chances that your business will more effectively and efficiently collect receivables:

1. Gather relevant and important information before you extend credit.  This includes full and complete legal names, physical and mailing addresses, Federal tax identification numbers, social security numbers, drivers’ license numbers, birth dates, banking information (including the name of the bank, account numbers, and routing numbers), and the names and addresses of all officers and directors.  The time to ask for this information is before you extend credit, not when your customer is already in default and owes you money.
2. Insist that your customer sign a formal written credit agreement and/or credit application (the “contracts”). While it is perfectly legal to extend, and receive, credit without a credit agreement or credit application, having a formal written, and signed, document will ensure that both you and your customers understand each other’s duties and obligations, and the consequences of not following through with them.
3. Confirm that the contracts properly identify the customer to whom you are extending credit.  If the customer is a corporation, limited liability company, or other business that registers with the Secretary of State, make sure (1) they are up to date on all required filings and (2)the name on the contracts matches the name on file with the Secretary of State.  If the customer is a sole proprietorship and/or does business by a name other than its formal legal name, make sure the “doing business as” name is on the contracts.
4. Include a provision in the contracts entitling you to reasonable attorney fees if the customer defaults and you have to hire a lawyer to collect the debt.  Under North Carolina law (N.C.G.S. § 6-21.2), “reasonable attorney fees” are 15% of the unpaid balance.  While that may be more or less than you actually end up paying a lawyer, if you have the reasonable attorney fee provision in your contracts, then you will be able to recover that amount over and above the actual debt.  The reasonable attorney fee provision is only valid if it is in a writing signed by the customer, so make sure it is in the written and signed contracts. 
5. Include a litigation venue provision in the contracts.  In lawsuits against consumers, you will, most likely, be limited to filing suit in the location where the contract is signed or where the debtor lives.  But in commercial lending cases, a venue provision may enable you to make sure the litigation is more conveniently located for you.
6. Include a choice of law provision in the contracts.  Different states have different laws, and some may be better, or worse, for your business, your industry, and/or debt collection.  Talk to your legal advisors to determine the state laws that work best for you, and then choose that state’s laws, without taking into account that state’s conflict of laws provisions.  And remember – a choice of law provision applies only to substance, not procedure; so the venue you choose, not the state whose laws you choose, will likely still govern the statutes of limitations that apply.
7. Include an interest provision in the contracts.  Similarly, make sure the contracts include a clear and identifiable default date, the date the interest begins to accrue.  Make sure to put both the due date for the bill and the applicable interest rate if the bill is not timely paid on the invoice.
8. Get personal guaranties!  Personal guaranties need to be in writing, and creditors most often obtain them from owners, directors, and officers of the borrower.  North Carolina is a tenancy by the entireties state, so also obtaining a guaranty from a spouse is ideal – but doing so is limited by various Federal and state laws, so you need a legitimate business and/or credit related reason to obtain a guaranty from the spouse; make sure you document that reason at the time you obtain the spousal guaranty.
9. Keep clean and legible copies of all documents.  In an age where server space and cloud computing have enabled anyone and everyone to maintain anything and everything electronically, there is no reason to not have, at a minimum, a clean and legible electronic copy of every document relating to all of your customers.
10. Update your contracts regularly. Keep in mind that laws change, customers change banks, directors and officers come and go, business owners sell their businesses, and your own business and/or industry needs will also change.  As a result, you need, at regular intervals, to have your customers reapply for credit by completing a new credit application and, if and when you agree to continue granting them credit, sign an updated credit application.
11. (BONUS!!)  Do not let your customers fall too far behind with their payments.  Make sure you have a process in place for contacting customers when they do not timely pay their invoices, especially if it becomes a habit. Typical plans involve taking different steps when a bill is 30, 60, and 90 days past due.  Keep in mind that, the sooner you take action with a customer who has not paid on time, the more likely it is that you will get paid.  And finally, if a customer falls too far behind – stop extending additional credit!

Brian Bernhardt focuses his practice on IRS tax controversies, tax litigation against the IRS and the Department of Justice, and advising nonprofit organizations on tax and governance matters. Brian also has experience as a creditors’ rights attorney, where he has represented creditors throughout North Carolina in all types of consumer and commercial collection matters. With over 20 years of experience, he is an invaluable resource for any business, non-profit organization, or individual in need of tax or governance advice.