What is a Power of Attorney?
A Power of Attorney (POA) is a legal document that grants one individual (the “attorney-in-fact” or “agent”) the power to act on behalf of another (the “principal”) without relinquishing the principal’s rights to continue to act on behalf of itself. A properly crafted POA is a safe and convenient vehicle for transacting business affairs and is particularly useful in situations where decisions must be made in the absence of the principal.
Types of Power of Attorney?
There are 3 common types of powers of attorney:
- General power of attorney – This type of POA grants the agent the same authority that the principal has to make decisions, handle and manage financial affairs and business affairs.
- Limited power of attorney – This type of POA grants the agent specific powers that limited to a certain area or scope of duties and typically are limited to a defined period of time.
- Durable power of attorney – This type of POA can become effective immediately or become effective at the time of incompetency or incapacitation; however, the authority granted to an agent ends when the principal is no longer incompetent or incapacitated or upon the principal’s death.
The type of power of attorney that you will need will depend on your unique circumstances; however, every power of attorney should contain some basic elements.
What should be included in a Power of Attorney?
- Name the principal. To avoid challenges regarding the legitimacy or validity of the POA and to reduce the risk of fraud, ensure the identity of the principal with specificity. Consult with an attorney because jurisdictional requirements about what constitutes sufficient identification may vary.
- Designate an attorney-in-fact. The attorney-in-fact will “step into the shoes” of the principal and have authority to make decisions and take binding actions on behalf of the principal. For this reason, is it imperative to choose someone trustworthy, responsible, and capable of acting on your behalf. Whether the POA grants authority to an individual or an entity, it should clearly state the names, addresses, and other identifying information of the designated attorney-in-fact.
- Outline the scope of the agent’s authority. Are you granting broad authority over the daily operations and management of your affairs or are you limiting the agent’s authority to a specific action? The POA should detail the specific actions the agent is authorized to perform. For commercial real estate transactions, this may include authority to negotiate and execute letters of commitment and loan documents, the power to sign transfer title to property or permission to handle financial matters related to the transaction or the business in general.
- Duration. While durability is presumed in some jurisdictions, others require POAs to include statutorily mandated durability language. Specifying the duration of the POA also eliminates any concerns regarding the timeframe during which the POA is valid or for how long the agent can act. Clear durability clauses are the best way to prevent indefinite or unauthorized use of their powers by the agent and is especially important if the relationship between the principal and agent changes. Additionally, adding durability language allows an opportunity to review, renew, or update the POA periodically as circumstances may change.
- Signatures of the principal and agent before a notary and recorded, if required. To be valid In California, the POA must be signed and notarized before a notary public. Other jurisdictions also require witnesses to sign the POA before a notary public. Check with an attorney to ensure that the POA complies with all state statutory requirements.
In general, POAs should only be used to grant authority to act as the agent for an individual in that individual’s own affairs. A POA purporting to grant authority to an agent to sign an agreement and bind an entity will not be enforceable absent either (a) the governing documents of the entity specifically authorize the delegation of authority pursuant to a POA and any conditions to such delegation have been met; or (b) the entity adopts a resolution granting authority directly to the agent or to the individual to appoint an agent using a POA. When considering a POA under the aforementioned circumstances, the following steps are necessary to ensure that the attorney-in-fact has proper authority to bind the entity:
- Identify the Business. Be sure to include the name of the entity, its state of formation, and the address of its principal place of business.
- Know who has Authority. Review the organizational documents, such as the Articles of Incorporation, Bylaws, and Operating Agreement to understand who is authorized to act on behalf of the business.
- Check for Consent. The managers or governing body of the entity must consent to the appointment of a POA. The organizational documents will outline the conditions required to appoint a POA with authority to bind the company. Typically, this consent will be found in an entity resolution that identifies the agent and scope of the agent’s authority and is signed by the entity’s governing body.
Most Private Lenders are aware that agents who transact business on their behalf need the authority to do so, but many are not aware that failure to properly document this authority may at best stall, or at worst, completely invalidate, their commercial transactions. Whether you’re an individual or an LLC, these guidelines will help prevent unauthorized actions and protect the interests of your business. If you have general questions about POAs or the validity of your POA, the Geraci Transactional Attorneys are happy to assist.