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Richard
Richard, Attorney
Category: Business Law
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Experience:  32 years of experience practicing law and a businessman.
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Hello, This is a convoluted situation but here goes: I am

Customer Question

Hello,
This is a convoluted situation but here goes: I am the 50% partner in an LLC registered in Texas. The other partner and I split all the startup costs and the operating expenses in half. There is no operating document. Recently we got a notice from a bank that the owner of the space we are leasing is in default and that we are to pay our rent directly to the bank. We paid one month to the bank and nothing after that due to the uncertainty of the situation. Oh and by the way, our building owner who issued us a commercial lease failed to mention that the building was considered a residential property by the City. We had been trying to get a Certificate of Occupancy but the process required some affidavits to be signed by the owner. Well the owner is no where to be found so he won't sign and technically the bank is not the owner of the property so those lawyers won't sign. Meanwhile we have no a space which people come in and out of that has no CO. The City has given us a breather due to the black hole we are in with the building ownership. Remember we have not paid any rent and we are moving into being 2 months in arrears. The bank is playing nice but I'm quite sure that they busily searching in the best scenario for someone to assume the note on the building or worst case to complete the foreclosure process. Either way, new ownership. Somewhere in this convoluted situation, I realize that my business partner have a fundamental philosophical difference in the way we approach business so I am leaving the LLC. I am trying to complete a separation agreement. The partner wants to continue on and that's fine but I want some compensation for my LLC shares. Should my first concern be ridding myself of any liability that may occur and not worrying about any financial recovery? We have hard assets of furniture. The only real liability was our lease that we had to personally guarantee for 9 months because our LLC was only about 2 months old when we signed our lease. But do we really have a lease now?
Submitted: 2 years ago.
Category: Business Law
Expert:  Richard replied 2 years ago.

Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good morning. First, on the personal guaranty on the lease....even though you may have personally guaranteed the lease, neither you nor the LLC is going to have any liability for the lease because your landlord...whether it be the original owner or the bank after foreclosure....has not performed due to you having no CO and thus is in default. That gives the LLC the right to terminate. Second, whether you are entitled to any financial recovery is going to depend upon whether the LLC has any value as it stands now. If not, no matter what you may have invested, since there is no operating agreement, you would simply be entitled to 50% of whatever the LLC is worth. If it has hard assets, you would value those and be entitled to 50%. But, since your partner wants to continue, you may have some leverage for him to be willing to pay you to leave. Third, the only personal liability you have here is the guarantee of the lease since the LLC is a limited liability entity. Though the landlord is in default, it's always best to avoid lawsuits, so if you can get a release from your partner and, more importantly from the bank, from any obligation on the lease; and since the value of your interest is probably minimal, if you can walk away with no worries about the lease going forward, that would, in my view, likely be your best path to pursue.



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Customer: replied 2 years ago.

Okay, then a quick followup. My sense is that if the partner renegotiates the lease for a lower rate and then continues to operate, she will be operating with the assets that I paid half the money for. Plus I am responsible for a number of the clients we have.


 

Expert:  Richard replied 2 years ago.
The key here is your leverage with your partner to get you out. You have no obligation to leave and if she wants you out, she's going to have to come to a value that is agreeable to you. Otherwise, you can just hold on to your interest. But, either way, you really need an Operating Agreement to address how to manage the business and address the terms and conditions of your business deal.
Customer: replied 2 years ago.

Actually the validity of that lease makes all the difference in my approach to this. If the lease is not valid then it's like saying we have no financial obligation other than our monthly expenses. In that case there is some cash and other hard assets that I would want to have 50% of. I have to get some answers on that lease situation.

Expert:  Richard replied 2 years ago.

I will be happy to address any particular issues you have with your lease.

Customer: replied 2 years ago.

In actuality we cannot really move forward with getting a CO because the property has to be converted from residential and commercial. There's a whole slew of things that have to be done that involve the owner of the property and as of now there is no "owner". We are trapped in a gray area. My partner is probably not going to agree to getting out of the lease as it stands now because then the bank may give us a 30 day notice to vacate. The partner desperately wants to hold onto the space and she seems to want to wait out the process until she gets a new lease because even if it were valid, we violated the terms by not paying.


 


I know this is annoying and after this response, I'll let you go.

Expert:  Richard replied 2 years ago.
If you cannot use your leased premises for its intended purposes, then it doesn't make any difference if you haven't paid because the landlord is in default. But, if you can't get a CO, then the lease situation is not going to get remediated. Thus, you have a claim against the landlord for the default, but that doesn't satisfy your lease situation to where you can operate there. I'm sorry!
Customer: replied 2 years ago.

You are correct. The space has to be a commercially viable space in order for it to be leased as a commercial space. That means that someone (bank or new owner) would have to agree to make the changes for the conversion. The building is located in prime property near downtown. The property adjacent to us was just sold to builders constructing new expensive townhouses. This all may be a moot issue.

Expert:  Richard replied 2 years ago.
Let me know as things progress and I will be happy to address any specific concerns.
Customer: replied 2 years ago.

Okay I will let you know but I don't see a way to rate your helpful response on this very complicated matter.

Expert:  Richard replied 2 years ago.
No worries...you take care. It's been my pleasure to help you today.
Richard, Attorney
Category: Business Law
Satisfied Customers: 47093
Experience: 32 years of experience practicing law and a businessman.
Richard and 5 other Business Law Specialists are ready to help you
Expert:  Richard replied 2 years ago.


Thank you so much for the positive rating! I appreciate having had the opportunity to serve
you! If I can be of assistance to you in
the future, just look me up and I will be happy to help!

Expert:  Richard replied 2 years ago.
Thank you also for the bonus! I appreciate your generosity and kindness!

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