Piliero Mazza &
Pargament, PLLC

Vol. IV, Issue 6
September 1999

An Update for Federal Contractors and Commercial Businesses


SBA Issues Proposed
Regulation to Increase
Size Standards for
General Building

Leasing Issues:
Pitfalls That Can Cost
Your Company
Big Money

Company Web Sites
May Subject Businesses
to Personal Jurisdiction



SBA Issues Proposed Regulation to Increase
Size Standards for General Building Contractors

From September 30, 1988 until September 30, 1996, the Small Business Administration (“SBA”) was prohibited by statute from changing the size standards for construction and other related industries. The SBA also has made no adjustments for inflation since 1988.  Many businesses grew too large to qualify for small business status because of the inadequate and outdated size standards.  However, through enactment of the Small Business Act of 1996, Congress repealed this prohibition and required the SBA to review the size standards for these industries and make adjustments as necessary, taking inflation into account.  Almost three years later, on July 16, 1999, the SBA issued a proposed rule in the Federal Register adjusting the following codes for inflation:

Industry Group

Old Size Std.

New Size Std.

General Building Contractors
and Heavy Construction

Dredging and Surface
Cleanup Activities

Special Trade Contractors

Garbage and Refuse Collection/
Refuse Systems

$17.0 million

$13.5 million

$7.0 million

$6.0 million

$25.0 million

$20.0 million

$10.5 million

$9.0 million

These proposed revisions adjust the current size standards for inflation that has occurred since 1984, when the standards first became effective.  These adjustments are identical in size to the 1994 adjustments made by SBA with regard to most of its receipts-based standards to account for the inflation that had occurred since 1984, the year of the SBA’s last inflationary adjustment.  According to the proposed rule, the SBA chose to adjust the construction and refuse industry size standards to the 1994 level to keep them even with other receipts-based size standards.  Additionally, the proposed rule states that, although the SBA recognizes that inflation has occurred since 1994, the level of inflation has not been sufficient to warrant further adjustment beyond the 1994 levels for any of the receipts-based industries at this time.  According to the SBA, however, it is closely monitoring post-1994 inflation levels and will propose an inflation adjustment to all receipts-based size standards when it is warranted.

Formulation of Size Standards
On April 7, 1994, the SBA adjusted most of the receipts-based size standards to account for the past ten years of inflation.  In determining the rate of inflation, the SBA used the Gross Domestic Product Implicit Price Deflator established by the Department of Commerce.  The 1994 adjustment calculated inflation from the third quarter of 1982 to the fourth quarter of 1993 at a rate of 48.2%.  This is the rate used by the SBA in making the adjustments set forth in the proposed rule.

The Small Business Act defines a small concern as one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) meets detailed definitions or standards established by the SBA.  The SBA considers the second criteria in evaluating size standards and establishes standards at levels where firms at or below the stated amount would not be considered to be dominant in their field of operation.  According to the proposed rule, the SBA has determined that no firm at or below the proposed size standard levels would be dominant in its field of operation.

Long-term Effects of Proposed Increase
The SBA estimates that adoption of the proposed rule would add approximately 2,279 firms to the category of small businesses in the areas of general building contractors, heavy construction, special trade construction and refuse systems and related services.  Provided they meet other program requirements, these firms would be able to seek SBA assistance through the Small Business Set-Aside Program, the 8(a) Program, the Small Disadvantaged Business (“SDB”) Program and/or the HUBZone Program. Ultimately, the proposed  rule could lead to a substantial increase in competition for contracts under these programs.

This rule may also lead to an increase in the number of firms competing for unrestricted contracts.  As discussed above, the number of SDB and HUBzone firms eligible for price preferences on these types of contracts will increase.   An increase in the number of small firms competing for unrestricted contracts may prompt the government to set aside more contracts for competition among small firms, as opposed to offering price preferences to these firms.  The SBA estimates that approximately $45.2 million of the contracts awarded to these new small firms will be reallocated from large firms. This amount constitutes approximately 11.3% of the total amount of federal contracts expected to be awarded to small businesses in the construction category this year.

Comments to the proposed rule must be submitted to Gary M. Jackson, Assistant Administrator for Size Standards, 409 3rd Street, S.W., Mail Code 6880, Washington, D.C., 20416, on or before September 24, 1999.


Leasing Issues: Pitfalls That Can Cost
Your Company Big Money

One of the biggest liabilities most small and mid-size companies will ever incur is their office lease. Most leases range from three to ten years and may involve hundreds of thousands of dollars of rental payments over the term of the lease. Surprisingly, and notwithstanding the enormous liability involved with an office lease, many companies enter into leases without taking the same precautions that they do with other large contracts. As a result, tenants are often shocked when they discover their actual obligations and liabilities under a lease. The following is a summary of some of the areas that a prospective tenant should fully consider before entering into a lease.

Commencement Date
It is a fairly common occurrence that the commencement date identified in the lease is not the date on which the tenant is actually able to occupy the leased premises. The most common reason for this is a delay in the completion of the initial construction of the tenant’s improvements to the premises. Unfortunately, unless otherwise specified in the lease, regardless of whether a tenant is able to take possession of the premises, it may still be required to pay rent. Moreover, the tenant may be forced to "holdover" at its current space at an inflated rental rate. Consequently, the tenant may be faced with significant expenses, particularly if the delay is substantial. Accordingly, it is imperative that these considerations are addressed before entering into a lease.

Usually one of the first things a company considers before entering into a lease is the amount of the rent. Rent is normally calculated on a set price per square foot. This is referred to as base rent. However, many tenants fail to fully consider the additional rent that they will be required to pay during the term of the lease. Additional rent commonly includes the tenant’s pro rata share of specific taxes and operating expenses incurred by the Landlord in its operation of the building. The lease provisions for additional rent should be carefully reviewed to determine whether all expenses and taxes are reasonably related to benefits to the tenant. Additionally, in order to estimate the amount of future payments, tenants should require the Landlord to provide information regarding the amount of operating expenses and taxes for previous years.

Payment Security
It is common for landlords to demand security for the substantial rental obligations assumed by small or mid-size firms when entering into leases. The security demanded by a Landlord may take the form of lease guarantees, letters of credit or enhanced security deposits.

Landlords commonly seek a lease guarantee from the owner or principals of the prospective tenant. Under a lease guarantee, if a tenant fails to pay the rent, the lease guarantor (i.e., the owner or principal) will be required to pay the rent. Thus, for example, if a company goes out of business or is otherwise unable to pay the rent, the guarantor could be forced to make all the remaining rental payments required during the term of the lease. In short, a lease guarantee can subject an individual to personal liability and other options should be explored during negotiations.

In lieu of a guarantee, landlords may accept a letter of credit or enhanced security. However, both forms of security may tie-up a company’s limited resources during the entire term of the lease. Therefore, if a letter of credit is required, it should be negotiated so that the amount of the letter of credit is reduced during the term of the lease to reflect the tenant’s reduced rental obligations. An enhanced security deposit may be similarly structured or may accrue interest for the tenant during the term of the lease.

Leased Premises
Obviously, after the lease is signed, it is too late to decide that the space is too small or otherwise unacceptable. Therefore, it is critical that prospective tenants perform a careful physical inspection of the leased premises and fully understand the total amount of space available. Prospective tenants should not hesitate to physically inspect the premises as many times as necessary. This is particularly important if the premises will be rented in "as is" condition. Ask your broker, or if you get a chance, ask the current tenant about aspects of the premises that may be important to your business, e.g., cabling, wiring or ISDN connections.

Additionally, make sure that the lease identifies the square footage of the building and the premises and includes an exhibit which shows the premises as outlined on a floor plan of the building. A prospective tenant should understand how the landlord calculated the square footage of the premises and, if possible, independently measure the premises. The landlord should warrant that square footage is accurate and that the tenant may lawfully use the premises for its intended purpose.

Americans with Disabilities Act
The Americans with Disabilities Act ("ADA") requires that buildings be constructed in a manner that ensures accessibility by the disabled. Therefore, if your company intends to construct any initial improvements or alterations to the premises, the lease should expressly identify whether the landlord or the tenant will be responsible for costs associated with any required ADA compliance work. For example, if your company is renting most or all of a floor, the local building authority may require that the common areas, such as the restrooms and lobbies receive ADA upgrades. Failure to specify in the lease who will be responsible for the costs of this work may lead to major disputes once the lease is signed and construction begins.

Assignment and Subletting
Although your company may anticipate using the space throughout the term of the lease, it is difficult to precisely predict your company’s needs two, three or four years in the future. This is particularly true for government contractors whose contracts are subject to termination for convenience by the government. If for some reason your business changes and your company is unable to pay the rent, it is critical that another company be permitted to occupy the space and pay rent. While many prospective tenants may be inclined to overlook this clause, a company is well advised to negotiate the best terms possible for subleasing and assignments. At the very least, the lease should provide that the landlord will not unreasonably withhold its consent to the tenant’s subleasing or assignment.

The foregoing are just some of the important issues that should be considered by your company before entering into a lease. While lease brokers may be helpful on some of these issues, brokers are sometimes in a difficult position given their need to maintain a continuing business relationship with the landlord. Therefore, you should use your independent judgment and, depending on the company’s experience in this area, possibly use legal counsel to review and negotiate your lease.


Company Web Sites May Subject Businesses to Personal Jurisdiction Nationwide

Having a company web site is fast becoming a necessity to compete effectively in today’s marketplace. In fact, as electronic security is enhanced, and the courts continue to provide guidance on the boundaries of fair cyber-competition, businesses can be expected to increase their use of the Internet to sell their goods and services.

The ongoing growth of e-commerce has many far-reaching legal implications. Perhaps one of the more significant concerns that not all business owners have come to appreciate is that using web sites to transact business may subject the company to personal jurisdiction in courts throughout the country, and perhaps internationally. Thus, a small company with an office in Virginia may find itself forced to defend a lawsuit brought in California. The time and expense associated with hiring separate local counsel to defend the lawsuit, and perhaps sending company representatives across the country to testify, can be substantial. Moreover, litigating in unfamiliar territory where the company is unknown may place the company at a distinct disadvantage.

The first step in addressing this concern is to examine the nature of the activities being conducted on the company’s web site. Although many courts have not yet addressed the issue, the decisions rendered thus far suggest that merely operating a passive web site will not subject the company to personal jurisdiction in states where users accessing the site are located. At the other end of the spectrum, actively selling goods and services through the Internet is likely to subject the company to personal jurisdiction in states where those goods and services are sold.

A more difficult question is raised when the company does not sell goods and services over the Internet, but rather, maintains a message board, chat room or other means of active communication with users. The question of personal jurisdiction is also unclear where the web site promotes products and lists an "800" telephone number through which users can purchase those products. Further guidance is expected on these types of issues as additional court decisions are issued.

Even if a company is actively engaging in e-commerce on its web site, it may be able to restrict resolution of user disputes to the company’s home state through use of an appropriate provision in its web-site user agreement. Many company web sites employ user agreements or "terms and conditions of use" in an effort to contractually bind the user to terms favorable to the web site owner. For example, user agreements frequently contain warranty disclaimers and limitations of liability. To address the concern of personal jurisdiction, a clause can be included in the agreement to require all disputes be resolved in the courts of the web site owner’s home state.

Whether a court will uphold such a personal jurisdiction clause will depend, in large part, on the enforceability of the user agreement. Recent court decisions suggest that user agreements are more likely to be recognized as binding contracts if the web site automatically takes the user to a screen containing the agreement and requires that the user click an "I agree" icon before accessing the web site.

Businesses can look forward to more definitive guidance on issues such as personal jurisdiction and enforceability of web site user agreements as the courts continue to issue decisions on these matters. In the interim, a business can enhance its position by using an appropriate dispute-resolution provision in its user agreements.


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