A well-drafted partnership agreement between real estate co-owners prevents the disputes that lead to expensive dissolution proceedings. Investing in this documentation at the outset of the partnership is one of the highest-return legal investments available.
What a Good Partnership Agreement Covers
A comprehensive real estate partnership agreement addresses: ownership percentages and how they were determined, decision-making procedures for routine and significant decisions, expense sharing and income distribution, what happens when one partner wants to sell or exit, restrictions on transferring shares to third parties, what happens upon a partner’s death, incapacity or bankruptcy, and dispute resolution procedures.
Decision-Making Provisions
One of the most common sources of partnership friction is disagreement about decisions. The agreement should specify which decisions require unanimous consent, which require majority vote, and which can be made by a designated managing partner. Clear decision-making rules prevent deadlock.
Exit Mechanisms
Exit provisions are often overlooked until they are urgently needed. Right of first refusal, buy-sell agreements, and mandatory sale provisions all provide mechanisms for partners to exit without court proceedings. Drafting these when everyone is cooperative is infinitely easier than negotiating them in crisis.
Valuation Mechanisms
The agreement should specify how the property will be valued when a partner exits or a buyout is triggered. Options include appraisal by an agreed expert, averaging multiple appraisals, or formula-based approaches. Pre-agreed valuation mechanisms prevent disputes about the property’s value when stakes are high.
Updating the Agreement Over Time
Partnership circumstances change. Ownership percentages may shift, partners may have children, and the property’s situation evolves. Periodic review and updating of the partnership agreement keeps it relevant and effective.
