Here are the contract negotiation and preparation tips you'll need to arm yourself with.
In a hurry? Jump ahead.
The first proposal might appear in a memorandum of understanding (MOU) and you’ll want to make sure that you have a statement like the one below if you haven’t received legal advice yet.
"The parties do not intend for this document to be legally binding.
Each party will seek legal advice about the terms in this MOU.
Both parties acknowledge and agree that some of the MOU terms may change accordingly".
So should you get a lawyer on board at this point?
I recommend you get a lawyer's help once there’s a firm idea of the key terms that the parties want in an agreement.
Next, you'll get to the formal legal document. So who prepares this?
In some cases both parties have equal information about an area.
For example, you've both got an MOU ready.
And, in this case, it doesn't really matter who prepares the formal legal document.
The recipient can always ask their lawyer to review and make revisions on their behalf.
But in some cases, one party will have more information.
Typically, in a sale situation, the seller knows more about what's being sold so its appropriate for them to prepare the sale terms.
Same deal as above, you can request revisions so it's no big deal.
If you are negotiating a contract where you have different interests to the other party, then you should each have seperate lawyers.
Here's a good example: you are the director of a company negotiating with the director of another company.
As both you and the other director have a duty to act in the best interests of your respective companies, you should get your own lawyer's help.
It can be more personable to deal with your contact directly rather than having all correspondence go through lawyers. And, it's likely to be more cost effective as well!
So, if you prefer this method (which I know many clients do), your lawyer will draft the terms for you and you'll send them to the other party.
Now, what file format should you use (and why does it matter?) - we'll go through this next.
It is always courteous to send contract terms to the other side in a word document rather than PDF in the early stages.
Some lawyers don't afford this courtesy.
If you get a PDF for the first draft from the other party, ask for the word version or use a PDF to word converter.
You’ll only want to receive or send a PDF version of the terms when they are final, known as the execution version of the contract.
Now, it’s good practice to give the other side a time frame to get back to you if you think the other side is dragging their feet with negotiations.
And to take this a step further, within your contract you can give the other party a time frame to execute.
This can be particularly important for commercial leases; the tenant is likely to spend costs upfront for fit-out etc. In this case, you'll want an executed version of the lease returned before fit-out work starts.
Negotiate the deal breakers first, if they can be solved, great you can move on to the detail.
For example, for a commercial lease, there’s no point negotating fitout contributions if you cannot agree on rent, rent incentives and the lease term first.
If the deal breakers aren’t resolved, you may want to walk away or resolve them first before moving onto the smaller items.
Deal breakers could be items that cost the most or are most onerous for you.
Again, coming back to the commercial lease example:
A deal breaker could be if the landlord does not allow for your lease to be subject to development approval, or does not allow subtenants or will not contribute to the fit-out when it would be fair to do so.
Be wary of aggressive negotiators.
They may be the same ones sending you a PDF hoping that you will simply sign and not request revisions. Or they may be the ones insisting that you pay their legal costs as well as yours.
The negotiation style of another party might be an indicator of how that other party will be in a commercial relationship.
So, if you’re talking about a 3, 5 or 10 year lease term or other long term contract, that same one-sided, take all negotiation style might carry over in other interactions so be careful.
Could there be another opportunity that’s better than the one you’re exploring?
I say this because if you’ve got red flags early on like an aggressive or unfair negotiation style, you might want to consider other options before you sign.
I wish you every success in your ventures!