Partner Contingencies - Posted by JPiper

import · June 5, 1999, 12:28pm

Posted by CThompson on June 09, 1999 at 12:40:39:

I was a little skeptical of the “subject to partners approval clause.” I would think, however, that having an actual partner would do the trick in protecting yourself from a lawsuit. Now of course, anyone can sue over anything. I would think the hope would be that you would not have to back out of the deal, therefore, the seller would have no reason to sue. The seller cannot sue over the simple fact that you have the clause in the contract, unless the seller is hurt by the clause. And even if hurt by the clause, I would think that a court would find that this is just one of perils of contracting. If the seller has adequate opportunity to read over the contract and it becomes the basis of the bargain, the court should uphold it. But, you MUST have an actual partner, which actually isn’t very hard to accomplish. The definition of a partnership is a business entered into by persons for the purpose of making a profit. . . You may need some documents to prove that there is actually a partnership, but I do know that there are times when partners can be held responsible for the actions of one another if they hold themselves out as being partners. In this case I don’t think there would have to be any formal partnership agreement for someone else to sue you for the actions of your partner. Anyway, this is just a little tidbit on what I know about partnerships. I do intend to research the issue a little more myself because I do have concerns about that clause.

import · June 5, 1999, 12:28pm

Posted by JPiper on June 05, 1999 at 12:28:35:

I noticed the posts below regarding the “partner contingency” and thought I’d make a few comments.

This is a contingency I don’t use?..I’ve never used it?..and probably will never use it unless I actually have a partner whose approval is required on the deal.

First, I think the legal basis for the contingency is shaky. Most people using this contingency DON’T in fact have a partner. The day that a seller has a problem with the investor using this contingency to walk away, the day that seller sues for damages and/or performance, the day that contingency is presented in a court is the day that someone is going is question whether there was in fact a partner. Now maybe you’ll claim that one of these potential assignees that you ran by the property (who didn’t buy) was your partner. Whether the court will buy this in the absence of any documentation as to the partnership is a question in my mind. My belief is that courts will look at the likelihood of the existence of a partnership?..and you are going to have precious little to substantiate that relationship. Or maybe you will persuade someone to outright lie and claim that they were your partner. I’d sure hate to base my business on something like that.

I’ve seen various lousy ideas come down the pike, generally propagated by one guru or another. Ideas like making your contract subject to a termite inspection?..then rejecting the property based on a clear report. Give me a break! This partner idea is not quite that bad?.but it’s close in my mind.

Has this contingency been tested in court? I don’t know. Most sellers aren’t going to pursue damages to begin with. But given the way that this contingency is being used, the only hope it has in court is for the court to rule that an assignee is a partner. I’d run that one by your attorney to see what he thinks the prospects are for that. My guess is that they’re limited.

Further, I think that using a partner contingency weakens your stance in the eyes of ANYONE with a degree of sophistication. If I were presented an offer with this contingency, after I finishing laughing and picked myself up off the floor, I would tell you to go get your partner. Either have him look at the property, or have him make the offer. But in no way would I accept an offer on such a nebulous contingency. I want to deal with decision makers?..not people who need approval from a third party.

The use of this contingency is not necessary. The property itself can drive the type of contingency used, but certainly an inspection contingency is almost always appropriate. In most cases that I can think of, an inspection contingency would be widely accepted, and more than sufficient.

My suggestion would be to run this one by your attorney?..see what he thinks the likelihood of success with this one is IF you are sued.

JPiper

import · June 7, 1999, 11:24am

Re: Partner Contingencies - Posted by Mark (SDCA)

Posted by Mark (SDCA) on June 07, 1999 at 11:24:44:

I agree. I have at most 2 contingencies on my offers: insepction and financing. Where I DO use a “partner” is in negotiation. It’s basically the good cop/bad cop ploy. I am allways very accommodating on price, inspection, repairs etc. But I do always have to run it past my partner (my wife) and she is much more difficult than I am. grin

import · June 6, 1999, 12:57pm

Re: Partner Contingencies - Posted by Hugh James

Posted by Hugh James on June 06, 1999 at 12:57:54:

Thanks for an excellent post. As goofy as things can be out here in the real world, there’s always someone waiting to sue over something, and the partner approval clause is likely as good as any. And we all know the clauses some people come up with can border on plain silly. In any event, I wouldn’t use the partner approval clause for the simple reason that it makes me look very unprofessional. I either seriously want the property or I don’t, and a simple inspection or attorney modification will do the trick. I’ve only been the victim a couple of times (so far) of buyers wanting to insert weird weasle clauses. I mark them out or do business with someone else.

import · June 5, 1999, 2:35pm

Re: Partner Contingencies - Posted by Tracy

Posted by Tracy on June 05, 1999 at 14:35:51:

Mr Piper,

I have read several of your posts and would like clarification. Please do not take this the wrong way because I am new and earnest in learning. My goal is to grasp concepts better and apply them. What I do not understand is the mixed messages I get when reading your posts. Here is an example:

You say, "The day that a seller has a problem with the investor using this contingency to walk away, the day that seller sues for damages and/or performance, the day that contingency is presented in a court is the day that someone is going is question whether there was in fact a partner. " Aren’t you being somewhat paranoid? Aren’t you to worried about a seller suing because of a clause? Here is why I ask.

In discussions before you say you do not have a problem controlling a property and placing it in a trust to keep the lender from finding out so as not to have them call the loan due DOS. Why is it you are not as worried about a lender calling the loan due and the seller suing because you should know better versus a simple partnership clause that maybe you do not have a partner? Both of these instances seem to have the same chance of the investor getting sued, unless you are more paranoid about one than the other.

Thanks for your clarification in advanced

Tracy,

import · June 5, 1999, 2:12pm

Re: Partner Contingencies - Posted by BRnBA

Posted by BRnBA on June 05, 1999 at 14:12:47:

I agree with Piper on this one. I also do not at all blame Sellers or Brokers for wanting proof of funds. If I were in their shoes I would certainly want to know I’m dealing with someone who can perform on their own merits.

import · June 5, 1999, 7:33pm

Re: Partner Contingencies - Posted by BRnBA

Posted by BRnBA on June 05, 1999 at 19:33:31:

Tracy, the risk of violating the DOS clause is nothing more than having the loan balance come due. The other is a potential lawsuit, and like Piper says that could be the profit on the entire deal. If you have ever been sued or known someone who has or even thought about it seriously, you’d avoid a lawsuit like the plague.

import · June 5, 1999, 4:00pm

Re: Partner Contingencies - Posted by John Behle

Posted by John Behle on June 05, 1999 at 16:00:02:

It’s hard to find even 2 cents worth to add to one of Jim’s posts, but I do want to echo that.

The circumstances mentioned “non existent partner contingency” and “land trust to avoid due on sale” are very different. “Misrepresentation with the intent to deceive” is one of the definitions of fraud. I believe a court could construe the first example as just that and I think I’ve read or heard something about just that. That of course doesn’t mean it’s automatic - just a risk.

The second case is just a risk of a lender accelerating a loan through their contractual rights. I don’t believe a judge would even hear a case like that unless somehow a lender was damaged badly. For example, if someone put a bunch of properties in land trusts and then didn’t make payments. (I think that was a discussion last week).

I almost always have contingencies and they are real contingencies. I would never back away from a deal unless something were mis-represented to me. It does lead to a real risk of a lawsuit and the potential to lose my real estate broker’s license.

I disagree strongly with someone playing what has been called “the greater fool theory” of trying to tie up properties with no intent or capability to perform.

How does that correlate with all the discussions of “flipping” properties, lease options, etc. - PERFECTLY. You can flip properties (not my personal philosophy), but you should know your potential buyers or at least your market to the point of knowing you can market that property. You may not ever be able to be 100%, but pretty close. Have a buyer you know and have qualified and have a backup buyer - and maybe another.

This may mean spending more time in cultivating that end of your business. Doing so avoids the highly questionable ethics of tying up properties, running the risk of hurting sellers and the VERY real possibility of being sued.

Leading sellers along does hurt people and run risks. That is very different from running a business as a professional “Bargain broker”.

As far as contingencies like backing out of a deal with a “Termite inspection clause” that comes back positive - that has been tested in the courts and you will likely lose. Seems to me I even heard some so-called educator even laugh about it one time - “Well gee, Mr. Seller - I wanted termites”. You probably won’t hear his same joke - he isn’t around any more, but don’t worry someone else will come along and try to get you to rationalize your ethics.

We talk about un-professional agents and they are plentiful, yet un-professional, dangerous and ignorant investors cause as much or more damage.

Some people promoting some of the ideas and techniques you hear about have actually gone to jail. Others should have. Even some of the better materials out there have highly questionable techniques that are highly un-ethical and even potentially illegal.

I think everyone needs to learn all they can about this business and take nothing at face value. Be a student of many and develop your own strategy and philosphy weighed against your own principles, talents and resources. Do not be a “follower” of a Guru. Learn all you can from everyone and weigh it.

If something doesn’t sit right with you, learn more or discard it. As one great leader and teacher said “Prove all things, hold fast that which is good”.

import · June 5, 1999, 3:28pm

Re: Partner Contingencies - Posted by JPiper

Posted by JPiper on June 05, 1999 at 15:28:20:

I think this is a fair question. I also believe that anytime I or anyone else says something that creates a mixed message in your mind, you should question it.

First, the question “Aren’t you being somewhat paranoid? Aren’t you to worried about a seller suing because of a clause?” I would definitely say that when it comes to areas that I feel represent the potential for lawsuits where I would lose, I am definitely paranoid. It only takes the legal fees associated with one lawsuit to wipe out the profit of a deal, or perhaps several deals. I don’t know about you, but to me ANY cautionary move I can make that minimizes this possibility is probably going to make sense to me. In this case I believe that it’s an extremely high probability that IF a seller sued in a situation that a partner contingency was used by an investor that the investor would lose. Why take that chance when it’s not necessary? The whole point of a contingency is to MINIMIZE risk?.I don’t think the partner contingency necessarily accomplishes that.

Here’s another thing that I believe in while I’m at it. I believe in stating the truth. The partner contingency does not represent the truth as used by most investors, as I see it. In reality the typical investor is attempting to assign a contract to an assignee, not a partner. IF I felt the need to broach this issue with the seller I would simply make my contract subject to the locating of an acceptable assignee. I might explain this to the seller by stating that I have a number of contacts that I regularly assign contracts to, and that I will be running them buy the house for that purpose. I have used a similar contingency in a few lease/option transactions. I don’t typically make offers in situations where I have no intent to close if I can’t first find the buyer. I DO make offers subject to inspection, but for me that’s typically a legitimate contingency where I am going to evaluate the cost of repairs?..not where I’m using it ONLY to find buyers, and my failure to find a buyer will result in not closing. Whether this is acceptable for you, or in your situation, only you can say.

As it pertains to a “subject to assumption” of a loan via the use of a trust. I don’t do this first of all without a full discussion of the implications with the seller. The reason for this is that I’m going to have the seller sign a disclosure document that sets forth the possible risks of such an assumption. The point here is that the seller is not UNAWARE of the implications of the subject to assumption. He has FULL opportunity to question me regarding my intent. He then signs a disclosure statement acknowledging this in writing. In other words the seller has an opportunity to evaluate the deal in terms of full disclosure. Could the seller sue over this in the future? Of course he could?.you can sue over anything?..a good reason to have some healthy paranoia. But if he does, one of the documents that will presented in court will be a disclosure document setting forth the details of the assumption and the possible risks in terms of ongoing liability to the seller. Further, my intent, IF a lender were to accelerate a loan, is to pay the loan off or to assume or otherwise negotiate something else with the lender. Under these conditions it’s a little difficult to see why the seller would be suing. IF YOUR intent in the situation of a lender acceleration is to walk away, and IF YOU have no disclosure document signed, I would say that there’s a possibility that the seller could sue.

My contention would be that anything that you do in this business carries with it a risk. One of those risks is a legal risk?.a risk associated with the seller suing. In light of this risk, I think it’s imperative for investors to do things that can be supported in a court, and to do as much as possible to minimize legal risks. Legal risk doesn’t mean you don’t take CALCULATED risk, planned risk, well documented risk?.but it DOES mean you should ALWAYS take steps to minimize risk. I do that in terms of subject to assumptions, and I also do in terms of the contingencies that I choose.

JPiper

import · June 5, 1999, 9:10pm

Re: Great Leader and Teacher - Posted by Charles - DFW

Posted by Charles - DFW on June 05, 1999 at 21:10:05:

From reading your post - I would guess you have read alot of the teachings of that “Great Leader and Teacher” that you quoted - as well as his teacher.

Thanks,

Charles