#15 The Art of Contractual Protection in Business with Mickey Fox

Speaker 1: 0:13

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Speaker 3: 0:47

Welcome funding insiders to another exciting episode of the TDJ Equity Funding Insiders podcast, your go-to source for insights into the world of financing, lending and everything in between.

Speaker 3: 1:01

I'm your host, jacqueline Jackson, and joining me today is Mickey Fox as our co-host for today's episode of our attorney hour. Mickey is a local attorney with a great reputation, specializing in business, commercial and real estate matters. His extensive experience also includes corporate and business consulting, as well as business construction and real estate excuse me, real estate litigations at both the state and federal levels. So, as loan brokers, we have seen where the clarity and contractual agreement is very important. So with this episode, what we want to do is to get a clear and comprehensive contracts not only outlined in the business terms, but also establish a responsibility and obligations to each party. This transparency builds a foundation of trust and falls on a positive lending relationship. So this episode, this episode we're doing today, is actually going to talk on that, with Mickey being here as a legal reference for us to discuss some of these questions. So let's thank Mickey for coming to our show today. Welcome, mickey, mickey, and thank you.

Speaker 2: 2:17

Good afternoon.

Speaker 3: 2:18

Okay, great, all right, so let's get this started. If you don't mind, let's go ahead and get into the questions. We've had you here before, so now we have you back on the contractual side as far as how it works with lending. So we're going to start off with our questions today, which is basically. The first one is how do well drafted business contracts contribute to the success of a lending process, and what role do they play in building trust between parties?

Speaker 2: 2:48

Well, first of all, thank you very much for having me back. It's a pleasure to be here. Contracts are really more than anything else. There are evidence of this discussion that you've had with this other party about what your deal is. If a contract is properly drafted, then you know what every term is, everything that you've agreed to, and it's set out and defined so that there's no disagreement later when you come to the funding table, as to what one piece means or what one party assumes. In order to really get a good, smooth funding process going, you need to have that agreement drafted out so that not just you and your business partner or whoever you're doing the contract with, understands it, but also so that people like Jackie understand what's going on, what they're funding, and then what the extent, the depth and breadth of that funding is, and maybe even what collateral is there.

Speaker 3: 3:47

Okay, so basically what you're saying and what we just to add to it from the broker side. You're correct on the understanding of the parties, because what happens is when you have an agreement that you brought to us saying this is my partner, so we're all together part of the lending, they want to see if that agreement is correct. Is it set up like your saying? It is Because they're going to go about what's in writing, not about what people say and what we run into that makes the lending process longer with this is that the contracts that they bring in, the language is not clear, and when the language is not clear, that stops. So I mean so, in your opinion, working with it being and give some examples I know you and I have talked about this before of people, how that that actually affect them and what they were actually doing with the contracts not being what it needs. So definitely give us an example to talk to us about that.

Speaker 2: 4:41

Well, let's start with just the basics of what a contract is right. It is a promise in exchange for a promise, and some of the most important parts of that are clear identification and who the parties to the contract are. Do you adequately name yourself or your business entity? Do you provide ample identification as to who's actually you know, for instance, taking out the loan? You don't want to personally be taking it alone if it's for your business entity, because then you're obliging yourself, your personal assets, to securing that loan.

Speaker 2: 5:14

Maybe the second thing you want to do is talk about what the loan, what the loan covers, what the scope of it is. Is it a maybe just an operational loan to give you a little free cash? Is it a loan that's intended to purchase a piece of property or secure a lease or something like that? You need to add that clearly defined and more specifically when it comes to collateralizing the loan. That is what guarantees the loan. You want to make sure that the items listed in that collateral document are the items you intend to collateralize. The other thing and I see this a lot more than you would think, and it doesn't happen so much with funding agreements, but just agreements in general, contracts in general is that I might have a contract where only one party signed it and I'm not sure if the other party has actually executed that.

Speaker 3: 6:09

Right.

Speaker 2: 6:10

Or I might have two different documents. They're two different drafts maybe of the same document where both sides have signed, but they've signed different drafts and then it's up to us to try to figure out what the party's intended. Really. Those are the big things. When it comes to funding matters like taking a loan out on something, you want to be clear on the term of the loan, the amount of the loan, how much your payments will be when the payment due dates, are the very simple things that kind of go into making that loan. You want to be careful of things like what puts you in default on that loan. It's amazing what can happen. A lot of lenders there was a period of time where a lot of lenders were going to think of a universal default, which means if you defaulted on any loan with anybody whether it be your credit card, your landlord, your uncle that could create default.

Speaker 3: 7:11

Student loans. They have CAVAR. It's the one we go to for student loans. They'll look to see if you defaulted on student loans.

Speaker 2: 7:18

Do not be in default on your student loans if you're trying to get credit for anything.

Speaker 3: 7:22

Oh man, yes, that will follow you.

Speaker 2: 7:25

So making sure that you have those elements written in, and written in clearly, that's super important and it's not something you need to worry about so much when you're going through somebody like Jackie, because that's part of their business is making sure that these agreements have these necessary terms. But I mean, if you're just trying to get along from, like I said, your uncle Harold, you want to make sure you have that. And if you're lending money, you really want to be careful of things like interest rates. You don't want to run a foul of usury. You want to make sure that you have payment due dates, things like acceleration clauses. There is a mess of things to consider when we're dealing with documents and evidence funding.

Speaker 3: 8:15

So I had like just to go on what you said. One of my mentors had made a good comment. When it come to contracts, if you know, you have a tendency to borrow even if you allow your family to borrow money, like you just mentioned, then a certain thing's usury and all that stuff. So when he said, come, get one link, pay for it one time legally to set you a contract up, then you can use that with anybody else that's going forward. So if you're in any type of business, to actually, I believe, to have an attorney and that's why we wanted you on this on our show is that so we can show the advantage that an attorney is not just when things are not, you know it's criminal. That's not the only time you need to think about it. When it comes to business, they're more your preparers. They're going to be the ones you're going to have in the beginning before you need them in business, am I?

Speaker 2: 9:01

correct. I will tell you there's an ongoing relationship that you really need to have with your attorney as well Because, for instance, I can create a loan document that maybe eight, nine times out of 10 will work for you in a given situation. There are different things that you can that can create some real big issues for you if you're not careful. And this is talking about usury. It's easy to run a fallow a usury law by putting too much of a monthly interest rate in it. If you, if you calculated as a PY, is that APR right? If you collect a little too much and you don't refund it to the customer, no, properly credited over those can create huge issues for you, Right, and especially with family members.

Speaker 2: 9:47

You know, if I had a dollar for every time somebody came to me with a family member they had loaned money to, I would not have to practice law right now. It just seems you know family and friends. It's always family and friends or maybe business acquaintances, somebody that you're very familiar with. It's better to have that in writing because, again, when things are good and when people are paying you, there's not a problem. When people aren't paying you, it's a problem, and in fact in Texas. It's possible that if you don't have that loan in writing, you may not be able to collect on it at all.

Speaker 3: 10:26

Wow, wow, wow. And see, that's what I'm talking about, that important stuff that we need to know, because a lot of us do business on what we've heard or what we thought or what we found online. You know we pretty much will do it that way, which is not best when it comes to contractual, like I said, contracts that need to be basically correct and legal, and I think we start businesses off our helps and we feel like, oh, I don't need an attorney for this, I don't need an attorney for that. But the thing is you do If it's nothing, but you have them to look at your contracts and get it set up for you. One time you have a contract that you continue to use, it's worth investing in that in the beginning of your business. Then, waiting to you go to court and find out the contract you got, it doesn't have any, it's not as weight in water. You know what I'm saying. So I mean, I know, you know what I'm saying.

Speaker 2: 11:19

Well and I know I said this last time I was on your show Lawyers are good about the it depends kind of answer. And what that means is that in a given contract, if you change a few facts here and there, it can greatly affect the outcome of the contract. And if you change a few things, some of the provisions might actually be illegal or they may not work the way you need them to work. You know. You know the overall contract might, so it's good to sit down with somebody and talk it through and even if you have this document that you've used, you know, 20 times in the past and it's always worked, understand that the law changes.

Speaker 3: 12:04

That's true, it's true.

Speaker 2: 12:06

And I'm going to tell people this. I think it's pretty apparent, but the legislature is full of lawyers who draft laws that are interpreted by judges who are lawyers, Right.

Speaker 3: 12:19

Right.

Speaker 2: 12:20

We have clients that are lawyers, right, you know, or who have, or lawyers who have clients. There's a lot of lawyers in the process and anytime there's a bunch of lawyers in the process, you know it's going to cost you much.

Speaker 3: 12:33

Right. So he, basically he's saying so it's going to cost us either way. Okay, you know. Yeah, it does.

Speaker 2: 12:43

But look, an hour of my time, it's not that much. It's not that much to pay for a lawyer, right? And just just a short amount of time for the lawyers to sit down. Look at your documents. Give you a good idea about what's what's workable, what's not workable, what meaning revision, right, what changes to the law might have happened?

Speaker 3: 13:03

Exactly.

Speaker 2: 13:05

And also last time I had mentioned that the department of labor changed its its way of classifying 1099. So, contractors or contractors, that changes everything. You know. Once that goes into effect, the way we do business as as contractors, when we are people, is really going to change a lot. And if so, if your your contract agreement with those 1099 subcontractors worked this month, it won't work after launch. Right, things will change Right.

Speaker 3: 13:40

So it's just great to. If you're in business this is what we're talking about You're in business and you want to grow this business, then these are some things you have to look at contracts being really legal contracts, especially if you're looking at funding. And I do want to take time to mention the type of contracts we see, or the lender need to see, before we actually go to closing or even pre approval, and things are like that, and H or approval is. Some of the following are and I want you all to take notes of this, listener your office lease. Office lease needs to be signed by landlord and you, okay, that's an office lease. Okay, they need that. They would like to have copies of the original office lease. They have asked for that at times. All right. So then you have your partnership agreement, where any type of agreement that you all have, where you're going to bring your partner in and, like Mickey talked about that, family and like you said, we do family for his bar and money and everything, but you, we also bring family in and in business with us, like you said, and it's a good time when they come, but it ain't a good time when they leave. Right At TDJ equity funding.

Speaker 3: 14:49

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Speaker 4: 15:42

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Speaker 3: 16:13

So that's another thing we have to look at, which is the partnership agreement and operating agreement. Again, these things like if you can say they have to, you need to sign them. Your operating agreement it tells us legally how, who's going to be running a day-to-day operation, what's going on, who's all involved in the company. It also let us know the ownership, because anybody that owns 20% or more in a company, any company that documents have to be brought to the long table. That's what people don't understand. If you own sometimes it's less than that they'll take 20% or less, and sometimes it may be 10 or 15, but either way go Whatever the lender says then if you are part of that company, you need to bring all that information to that particular company.

Speaker 3: 16:56

If you have someone and you work, like on a credit, people come to us with the credit. Well, if the majority owner has the lower credit, then that's going to weigh the biggest weight on whose ownership and what you all get. That's something down the road is a whole different show, but they need to be aware of that. The other kind of contract is an equipment contract purchases and lease. Some equipment does not allow you to refinance or does allow you to pay them off early, stuff like that. You need an attorney to look at these contracts that you have, because then when you bring them to us and you want to consolidate your debt, well, guess what, that $98,000 machine that you got, we can't put that under the debt. You got to pay that separate and now it's part of your debt.

Speaker 2: 17:36

You want to have the attorney look at these things before you enter into those contracts.

Speaker 3: 17:40

Yeah, you're right Before you enter right.

Speaker 3: 17:43

Right, right, definitely. So, thank you. So definitely. We want you and that's what I'm saying. I mentioned these so you all can have them to look at it, and then any other type of debt contracts you may have, especially if you want us, as the lenders, to actually combine that. If we're going to combine it, then we have to actually one see that the contract, what you have, is a legitimate contract that you have and that is something that can be refinanced. They got to check that out and see if that can happen as well, because we have found out some contracts on some debts do not allow you to do that. And that was a biggest thing. And, like you said, come to you before you get into those type of contracts. So let's talk about the relationship of having an attorney. So, from a legal perspective, what would you think for is the language and the components that should be in a business contract to protect them? Name a couple of you. You think they should just generally have in there for sure.

Speaker 2: 18:35

Well, ok. So with every contract, like I said, you need to have clear identification of the parties, the term of the contract, what the contract's really about. Is it about a loan? Is it about a job you're doing? You need to have the whole scope of that set out payment terms, dates of completion, things like that and you need to make sure that you have good signatures, people who are authorized parties. That's an important thing. You have a signature by somebody, maybe by a member, and that member is not authorized by the company or the clerk that was at the front desk at the time.

Speaker 2: 19:16

Right, those are the basic things.

Speaker 2: 19:20

But there are other things in these contracts that, when you see them, I really want people to understand what they are.

Speaker 2: 19:28

There's a clause in almost every contract and I'd like to see it in all contracts. It's called a corporation clause, but basically what it says is look, never mind all those talks we had before we came to contract, never mind all the discussions we had, the emails we had, the documents we might have talked about, whatever agreements we might have had, this contract is the only agreement. It is the full and complete understanding of our agreement. We're not going to rely on some email chain that happened a month ago. We're going to rely just on this contract. So if you see that integration clause, what it's saying is we're not going to be looking at anything else other than this one document. Right, woeyer's called it an integration clause and that's kind of counterintuitive. Some of the other clauses you want to look for are things that set forth the law of the contract, especially if you're kind of close to the state line or if you're doing business with somebody in another state.

Speaker 2: 20:39

You want to make sure that you have Texas law. If you can't apply that way, you kind of have a better understanding of what you can expect. If you have Connecticut law applying, for instance, then you have to rely on that law and some of the expectations that you have here in Texas won't apply there. Venue jurisdiction jurisdiction and venue are actually two different things. So when you see jurisdiction it doesn't really mean anything other than the court has the right to say what you're looking for is a venue provision that says all the lawsuits, all arbitration, anything you're rising out of or coming through this contract, they're going to be done in a certain place. And if you're in Cullen County, for instance, you don't want to have a venue that's down in Houston. Or if you're in Flower Mound, you don't want to come all the way over to Cullen County. That makes it a little easier for you and, more importantly, if you have an attorney that you have an ongoing relationship with, you don't want that attorney to charge you for traveling down to Houston for every year.

Speaker 2: 21:51

So that's something that's kind of important. You're looking for breach provisions. What events in this contract, what events will occur that will cause you to be in breach or the other party to be in breach of the contract, and then what penalties result from that? Is this a breach that can be fixed? Is there a notice requirement that says, ok, if somebody breaches it, I need to send notice and then you have 30 days to fix it, or something like that you want to. Big thing is you want to check for indemnification requirements, whole armless requirements. Are you agreeing that you're going to pay the other guys costs and fees and everything if there's a breach of the agreement? That's not just attorney's fees, that can be loss of business. That can be you. If they get sued by somebody else, you know, and they lose something, you may be liable for that as well. And that's why you make it a big deal that you always want to have a good insurance policy, good business insurance policy, to cover those things you want to look for. You know attorneys fees Clauses to see who's gonna pay whose attorneys fit If somebody wins a lawsuit or some sort of litigation or something or arbitration about this. On these kind of provisions. I like to see it with both sides. You know, if one side gets an attorney's fees provision, the other side should get it to. I think that's fair right.

Speaker 2: 23:26

But generally the the biggest part is you got to remember these agreements are not what happens generally when things are going well, right, it's what happens when something goes wrong. For instance, what if you can't get funding? You've got an agreement to purchase something and you can't get funding. You know the standard contracts here in Texas, the ones put out by the Texas Real Estate Commission the public called promulgated contracts. They usually have a A, an example, and you said it. But it's an extra document. It's that deals with funding and what happens if you don't. If you can't get funding, that'll let you out of the contract. So you don't know any money. That's a big one, you know. You want to make sure that you know what's gonna happen if you don't get funding right.

Speaker 3: 24:19

So it's more of a clause, protection clause, and you write that's well is important to have real estate agents as well, because a lot of people like I can do stuff and you can don't get me wrong, you can but one thing about having a real estate agent when I talk to my realtors that they know the legal Legalities of real estate investment.

Speaker 2: 24:37

So no, you have to be careful with that. A real estate agent cannot advise. Let me finish. That's what I'm saying.

Speaker 3: 24:44

No, no, there's not one of this one. I'm saying having a real estate agent, when it comes to that real estate contract, it will have everything in it to protect you as a buyer or seller. That's what I was saying. That's why I say you want a real estate agent, because at least that agent knows how it's supposed to go.

Speaker 2: 25:02

And what's your right? Long as they're using the promagated contracts from the Texas real estate commission, we're in spot right, that's what I was talking to.

Speaker 3: 25:11

One to residential one is from the state is what I was talking to. One. You know the the form, so that's what I was looking at. But I'm just saying, even with that, the contract covers you is safe, instead of you drawing up your own contract and trying to do Things your way. That's what I'm saying. Contracts across the board are good If you're going to utilize them and let them do what they need to do is what I'm saying.

Speaker 2: 25:33

The standard contracts can be good. There's a section in there for special conditions and what I see sometimes is people getting a little out over their skis and writing provisions into the special conditions. That Really amounts to the practice of law and they create problems and they don't mean to and I understand that as long as their factual statements you know about, you know what can base with a house in the barbecue, you know that kind of stuff. Right, that's fun. But when they start talking about you know this, this contract is subject to some of the contract or you know.

Speaker 2: 26:10

I've seen other provisions in there. They were much worse. It gets a little Difficult and if there's anything like that that you need in a contract, please go see an attorney. Just, you know, spend the $255 whatever it takes to go sit with the attorney to make sure that you have it properly trapped it, because I've had more than one case of litigation when a real estate agent got a little over their skis with things and it just created a mess, completely unintentional. You know everybody means to do well, but the increase problems later right, right and of course that's that.

Speaker 3: 26:50

That attorney, this in you when you given suggestions, which is right. They do need to come see an attorney on that. But definitely understand my thing is Contracts with people looking at it, compared to you doing. I guess that's more, mickey, what we see a lot when not a lot, but when people come with contracts they're not come with contracts, it was done by attorney. You know, I'm saying they're coming with it and that's what I'm talking to, not the ones that come correctly and, like you said, definitely guys, even though we're not a real estate Station podcast, but definitely, like I said, if you're in real estate and you need to go look at get some attorney, definitely see an attorney. I believe you're definitely correct on that. So we want to do that.

Speaker 3: 27:27

I think he is basically just talking about the contracts that do come our way that we run into that a lot of people have no clue, like you said, that they should have had an attorney involved and we'll hopefully they can see from this. We're not trying to get you to spend all. We want you to spend money and then you just deal with it's not that. It will slow you down and getting money and it also will cost you down the line you know for money if you don't have your contracts correct. Am I? Am I right? What more are we on the same path on that, You're absolutely right, and it's a business deduction.

Speaker 2: 27:59

You can deduct it usually off your business income tax or your personal income tax, depending on you work it. What they do want to mention you mentioned Contracts for things that people are trying to refinance. One thing I want to say is is that if you're using your, your accounts receivable, if you're using your AR as part of the basis for your, your securitization, for your funding, the Underwriters may want to see the contracts upon which those ARs are based. So, for instance, if you've done worker, if you're doing work for somebody else and you can't expect to receive some money in and you're gonna use that Expectation of funds, so like factoring cuz we that's what we call, that's factory.

Speaker 3: 28:46

So we'll take the invoices from a business that we got and they get money on that, okay, I got you all right.

Speaker 2: 28:52

So basically, you want to make sure. You want to make sure that they can collect those months right. Doesn't do any good if they've got a really bad contract. Exactly, that's a perfect, perfect example.

Speaker 3: 29:02

You are correct. So we, you are right on that. That is correct. Yeah, and we just had that incident this week. That's what I'm kind of surprised you said that.

Speaker 2: 29:12

But the contract happens so often, right? Yeah, and there's one other thing I want to think. I want to mention if our important things to put in a contract, generally a Contract will be construed against the drafter. So if you pull this contract down off the internet or if you write it up yourself or whatever, and you get somebody else assigned and you're trying to sue them, if there's a term in the contract of phrase or word, the definition of something, the scope, anything, if anything's up in the air as to what it means, you're gonna lose. It's gonna be construed against the drafting party. Now you can, you can contract out of that. There are provisions that you can put in to stop that. But remember that if you draft your own contract, you're the one that's gonna have to stand up in front of the judge and explain why you didn't explain it better.

Speaker 3: 30:03

Wow, wow, that is wow. That is so true that. Thank you so much. Is it anything else, which I probably got an idea what you're going to say? But I'm going to ask you anything else you would like to tell our listeners for some recommendation or a call of action for them today? Close it out, I'll show today.

Speaker 2: 30:22

Remember this.

Speaker 2: 30:24

You know, I know attorneys sound like they cost a lot of money and it looks like they do, and yeah, you know I cost a lot of money.

Speaker 2: 30:36

But what you get from that is maybe a little piece of mind. And I'm going to go back to what I said the last time I was on the show it's better to know what your risks are and to choose to not deal with those right now than it is to have that decision made for you by events and circumstances. Going to an attorney that's part of what you should get a good outline of what those risks, what your exposure is on things, what kind of things. You know you might insure against or not insure against, but you can make that choice. That for me. I want to educate my client so that they know what these things are, so they can make their own decisions rather than have them made by court, rather than have them made by life. They get to make those decisions and that empowers you to do what you want to do in business and to make your business run better.

Speaker 3: 31:33

Exactly. Thank you, and that is so, so true. And again, to add on to what he has, is that, guys, these contracts on our end, if they're not correct, you looking at a long time of you getting your money or the possibility of you not getting it at all. That's why it's important about contracts for you all to understand how important it is to have those done correctly and legally Okay. Again, we want to thank Mr Mickey for coming in and we love having him on our show. We look forward to him coming back on our show as well, mr Mickey. So thank you, thank you, thank you.

Speaker 2: 32:09

Well, you're welcome, mr Jackie. I love, I love being around you. You are just an awesome person. You know you bring light into the room when you come in. You got your smile. You are one of the few people who are smart enough to know that there are things you don't know about. Most lawyers don't have that. Most lawyers know everything right, but you're a real pleasure to work with and I want to recommend to people that if you want to go to somebody who's going to sit down with you and take your time, take their time to get to know you, get to know your business and to try to help you get through things effectively, conscientiously and inexpensively. You know, give a shout to Jackie, she's good.

Speaker 3: 32:51

Thank you, thank you, thank you, and on that note I want to end up. Thank you so much for that Want to end. I know it have actually given an overview to make sure everybody understand, like a recap. So we did talk about contracts and we talked about the scope of terms that need to be in them. According to Mickey, we need to be careful of what those are. Also, signatures is what he said. You need to make sure that's done across the board. And he talked about the clauses of different contracts and things of that nature. So he gave us some information that really would help us to understand how contractors work.

Speaker 3: 33:22

And understanding contracts is not just about compliance, you all. It's about empowering you as a business, as an investor, to make informed financial decisions. So, and to our listeners if you like what you heard and would like to stay informed about getting money for your business, listen to TDJ equity funding insiders podcast on all major podcast platforms. Now, if you would like to be a part of our funding insiders community where we give our documentation and information about the lending process and more, subscribe at wwwtdjequityllcnet backslash podcast. Until next time, thank you and take care.

Speaker 1: 34:07

We hope you enjoyed this episode of TDJ equity funding insiders podcast. If you'd like to be a guest or get in touch with us, please visit our website at wwwtdjequityllcnet, forward slash podcast or email us at podcast at wwwtdjequityfundinginsidersnet. Until next time, take care.