People with seemingly similar interests and strategies, who know and trust each other, will agree to join forces to buy a property, and often these arrangements will work well for many years.
What happens though when one party wants out?
It is a commonly held belief that for one investor to have the property sold, there must be unanimous agreement.
This is not true.
In fact the opposite applies. Any single investor in a group (in the absence of a Joint Venture Agreement to the contrary), can trigger the sale of the property, by notice to the others.
Often this is quite a shock for the others, who do not understand, until they take advice, that they cannot force an investor to remain in a joint investment, until all parties are ready to sell.
So what are the steps in the process when one investor wants out?
The first step is for the departing investor to give notice of the intention to get out of the investment. If there is a Joint Venture Agreement, then the rules of process and terminology will be set down in that agreement. If not, then these rules apply.
The parties will then have some discussion about the options, which, broadly are:-
A. The remaining investor(s) will buy out the departing investor; or
B. The property will be sold.
Usually this depends upon:-
(a) The value of the property, the equity in it;
(b) The finance arrangements;
(c) The economy and saleability of the asset.
VALUATION
One of the most critical determining issues is the value of the property.
There is obviously a conflict of the interests of the departing investor against the remaining investor (the departing investor wanting the price as high as possible, the remaining investor(s) as low as possible). It is important not to press this difference to a ridiculous end. It is quite open to one party to say, either, “Well if you think the price should be that low, you sell it to me for that amount and you go”, or alternatively, “If you think the price should be that high you buy me out at that price and I’ll go”. It is very difficult to back-track from a position such as this.
It is open to the parties to agree a value. If they cannot, then a Valuer can be engaged.
There are subtle variations on the valuation process:-
(i) A Valuer is appointed by agreement between the parties and the parties accept that valuation;
(ii) Each party gets their own Valuer, and the value agreed is the average of the two opinions;
(iii) A disinterested independent party (often the President of the State Law Society), appoints a Valuer;
(iv) One party will propose a panel of three or more Valuers, from which the other will choose.
It is important to seek a formal agreement when the Valuer is appointed, that both parties will abide by the valuation. This is not an automatically accepted process. It is reasonably common for a party aggrieved by a valuation, to attempt to renege upon the acceptance of the figure provided.
Once the valuation is agreed, an agreement for the transfer of the departing investor’s share can be made. Even if you are not the departing investor, it is important to ensure that you take taxation advice on the transaction, as it may have consequences even for the continuing investor(s).
If the parties cannot reach agreement or if neither can afford to buy out the other, then the departing investor has a right to have the property sold.
It is important to agree the format and pricing of the sale process. Again, a value (list price and minimum sale price (or reserve) if there is an auction), needs to be agreed. An agent and sale process also needs to be agreed.
In the event that all of these things cannot be settled and completed between the parties, the departing investor has the right to apply to the Court to appoint a “Statutory Trustee for Sale”.
A Statutory Trustee for Sale, usually an Accountant with an Insolvency speciality, will be appointed by the Court with instructions to sell the property.
From the moment this Order is made, both parties lose control over the process. Once the Trustee is appointed, neither party can interfere, complain or influence the process. The Trustee will simply sell the property and divide the proceeds. Both the costs of the Application and the Trustee’s costs are taken out of the sale proceeds before distribution to the investors. This can be an incredibly expensive process, but is also a quite handy and useful threat for a departing investor.
DOCUMENTATION
In order to avoid the process breaking down and time and money being lost, it is essential to record the various stages of negotiation, and to finalize an agreement for the dissolution of the investment process.
There are subtle variations on the process above, depending upon the structure of the investment (partnership of individuals, Company Trusts or more complex partnership arrangements), but the methodology is essentially the same regardless of the complexity of the investment vehicle.
