Real estate partnerships are no different from any business partnership in that things can go wrong for a variety of reasons. These reasons can include poor communication, misaligned objectives, financial difficulties, and changes in circumstances. Open communication can solve many problems, but if it is determined that the situation requires significant action, an in-person meeting focused on key issues may help to find a resolution. If things are past that point, action may need to include a partnership dissolution. This blog contains some things to consider.
Review the Real Estate Partnership Agreement
Once things start appearing to go sideways, you should take the opportunity to review the partnership agreement and any related documents. This will help make sure that you are clear on the rights and duties of each and every partner. The agreement should contain information regarding how disputes should be resolved. This is an excellent time to consult with legal counsel if there are rights or responsibilities that you do not understand in the agreement. An attorney can provide guidance and recommendations based on a review of the partnership agreement and a discussion of your objectives.
Different Ways to Go About the Breakup
After you have exhausted all your other options and decided that a real estate partnership breakup is the best way to go, there are several ways to approach it. It is crucial to know your options because they carry different costs and advantages. Some of the objectives that you will try to accomplish during the breakup include protecting your assets, which would consist of:
- transferring real estate holdings,
- equitably dividing profits,
- distributing any existing debts
You will want to avoid any negative consequences such as increasing tax liability, losing control of assets, and harm to the goodwill of the business. Thus, an amicable dissolution discussed by the partners ending in mutual agreement is the best way to go. In this scenario, a written agreement will be prepared and executed, specifying the exact terms of the division of assets and liabilities.
Less commonly, the partnership may naturally expire at the end of a time period as specified in the partnership agreement. If that period is coming soon, it may be most cost-effective to let it run out while safeguarding assets to the extent appropriate.
If things are running poorly from a cash perspective, a bankruptcy may be the natural conclusion for the partnership. Bankruptcy courts have extraordinary powers and can effectuate a dissolution when a partnership is insolvent and can no longer pay its debts.
When a partner dies or is incapacitated, the partnership agreement may call for the dissolution or other termination of the partnership. All of these forms of breakup require careful administration, particularly in complex or significant enterprises.
What Are My Rights As a Former Partner?
When the real estate partnership breaks up, the specific rights that you have generally depend on the agreement and state law. Commonly, those rights include the right to receive your share of the assets and profits. This means when you deduct liabilities and debts, the equity and cash would be divided amongst the partners based on their shares. You also will have the right to inspect the partnership’s books and records, an important function that also coincides with and allows other rights. For example, the right to request an accounting of the partnership’s transactions. You have the right to participate in the winding down of the matters of the partnership. You should receive notice of any proposed actions or decisions related to the breakup of the partnership.
Should I Sue My Former Partner?
This is a significant question and varies from situation to situation. Resorting to litigation should be considered the last option. You should consider other methods of resolving the dispute since suing can be time-consuming, expensive, and may not produce the desired goals.
On the other hand, if the conflicts cannot be resolved through traditional negotiation, mediation, and other dispute resolution means, it may be necessary. This may be the case where the other partner has not been willing to act in good faith, or simply fails to respond to your communication attempts. If time is of the essence and there is a risk of substantial harm if the problems are not resolved fast and decisively.
Similarly, if important predicate legal rights need to be established to prevent conflict or loss down the line, immediate action may be indicated. All of these factors can be complicated and are certainly worth discussing with an experienced legal professional.
Before starting litigation, you should consider the potential costs and benefits of mediation. A mediator, such as a retired judge, can assist in facilitating a conversation and working out a resolution between the partners. This is particularly useful where a neutral set of eyes can move parties beyond blind spots, assess the value of assets that are part of the discussion, or predict what might happen in litigation.
How Can My Attorney Help?
An attorney can help from the get-go once the waters start to get turbulent. Legal counsel can identify sticky issues that are present and may arise, issues in the real estate partnership agreement, and opportunities for mediation. They can advise on budgeting the costs of dissolution, in terms of how much it will cost and how long it will take another key factor.
At this point in an unpredictable economic cycle – interest rates, unemployment rates, and recession in the news, businesses are striving for certainty and to reduce the risk of loss. Dealing with a difficult or impossible partnership situation can be stressful, but necessary. Please do not hesitate to contact one of our experienced lawyers for legal advice. Call the trusted attorneys at Lowthorp Richards at (805) 981-8555 or fill out our online contact form. We operate primarily in the Tri-Counties area – Ventura, Santa Barbara, and San Luis Obispo.