I have undertaken to write a series of articles that requires you to remember the problem week to week or to cut out and refer to the first of these articles in order to follow subsequent articles. I hope that you did cut out last month’s article, or that you can get it online, and that you remember that Tom and Harry undertook to buy an old house, repair it, flip the house, and share the profits. As their broker, you advised them to take the house in both their names. During their remodel, returning from a day’s work on the house, Harry caused a traffic accident that took Harry’s life. Tom is sued, literally for all he’s worth, by a lawyer who alleges that Tom and Harry were partners, even though they never agreed to be that, and nothing was ever signed to that effect.
Be careful of your very first step because you will likely be guided by your friend’s emotions in your thinking. That’s always a mistake. First, advise your friend that he seems to have a legal problem, not just a simple mistake.
Now, Tom is upset with the lawyer because Tom knows he’s being wrongfully sued. You, as Tom’s confidant and real estate broker, are asked to help, including to help sell the house. I will tell you later why, if it’s not obvious, but first get Tom in the hands of a lawyer.
A lawyer is likely to start by telling Tom that a “partnership” is defined by law to be any time two or more people come together for a joint purpose with the thought that they will share control regarding the decisions made, and share the profit or loss from the enterprise, they are partners even though they never signed an agreement to be that. In truth, even though in the example Tom and Harry signed no partnership agreement, and maybe even never expressly said “we are partners”, they are.
From that knowledge, many conclusions follow. The first is that any partnership debt becomes a debt of each partner, 100%. Harry’s trip home at the time of his accident was probably in pursuit of the partnership’s business, and one for which each partner is 100% liable, even though Tom was nowhere near the accident. All the contracts to improve the house, plumbers, electricians, roofers – all were working for Tom and Harry, and all are partnership debts – therefore Tom’s debt.
The house is something realtors call “tenancy in common” property because it’s owned in both Tom and Harry’s name. But, it was bought with joint (read “partnership”) funds, and therefor is really a partnership asset. Because the house is titled in both names it can’t be sold to liquidate partnership debt until Harry’s estate is probated. In probate, all of Harry’s creditors will have claims against all of Harry’s assets, and partnership creditors may stand in a very long line. Remember, partnership creditors have a claim against Tom for everything they don’t collet from Harry.
The bottom line is, Tom’s lawyer has his hands full. This could have been avoided if Tom and Harry had each owned one half interest in an LLC that held title to the house. But you, Tom’s friend, can only play the cards you have.
Realtors, you will see Tom and Harry. Please get them in the hands of someone who understands their plan before they start their investment, not after. Actually, the facts I’ve used for this article are artificially simple. Suppose instead of two similar old drinking buddies, Tom and Harry are not similar at all. Harry is either dishonest, horribly undisciplined, or more likely just lazy. Tom can’t learn these things just drinking and playing poker, but he’ll learn them quickly when they work side by side fixing this house.
This is really not an advertisement for lawyers. But lawyers really do see these things every day, and normally after too many decisions have already been made.
Realtors, understand that there is a vast difference between a residential and a commercial sale of real estate, even if the property to be transferred is exactly the same. The liabilities of the parties, and all lending rules, are vastly different.
Doctors have told me an experience with medicine that I saw in law many years ago. They say their patients often don’t open up about their medical issues, or sometimes even disclose all their symptoms, because they are embarrassed. Sometimes the professionalism of real estate agents, lawyers, or closing agents is to figure out what we’re not being told.
You will add to your service by understanding that a commercial purpose in real estate demands far different rules than a residential purpose. One of the principal differences is the disclosures that must be made under Johnson v. Davis, as you’ve seen in prior articles. An example of that undisclosed purpose is a closing we saw within the last 60 days. A large waterfront house was set to be closed by Old South Land Title. Shortly before closing, the closing agent learned that its rooms were being rented to separate tenants. We suddenly had tenants, leases, parking requirements, zoning and many other issues to deal with. While those matters made closing more complicated (and more expensive) had they not been discovered and dealt with at closing, they would have grown more expensive had they not been resolved during closing.
Several readers have told me in conversation that they had read the introductory article in this series and had been looking forward to the next one. You have no idea how happy it makes me that you read the first article and that it caught your interest. Thank you for reading, and for letting me know.
In our next article we will talk about the house that Tom and Harry are working on. And Thanks, again.
This article was published in the Coastal Homes publication of the Northwest Florida Daily News on November 2, 2019: