Prepare for Adjustments of Rent and Security Deposits at Closing

As real estate professionals we know that surprises at closing are generally not a good thing. They can take many forms, often can not be anticipated and typically create stress, adverse feelings and sometimes expensive consequential legal action. Adjustments of rents and security deposits at closing should not be a surprise to either the seller or the buyer, but overlooking the calculation of the actual amounts during the contract and due diligence stage creates a risk of disagreement at or right before closing.

The Florida Realtors® Commercial Contract Form makes the Seller responsible for delivering an updated rent roll and tenant estoppel letters to the Buyer at closing (paragraph 9(C)) and provides that taxes, interest, rents, association dues and insurance premiums acceptable to Buyer will be pro-rated through the day before closing (paragraph 9(D), but this does not insure that the amounts in question will be agreed to and it does not specifically address tenant security deposits. The closing/title agent may calculate the pro-rations and place them on the Closing Statement, assuming he or she has been provided, in advance of closing, the leases or the estoppels that verify the monthly rent payments and security deposits held by the seller/landlord, however, if those documents are incomplete, illegible, late to be produced or not produced at all, the calculated amounts may be inaccurate and the additional time and collaborative effort to make the correct calculations may delay closing.

Agents who represent sellers should remind their clients to obtain tenant estoppel letters from tenants as soon as the buyer has completed its due diligence and removed contingencies. They should also assist the client in collecting and keeping track of those estoppels and delivering them to the closing agent. Agents who represent buyers should assist their clients in obtaining copies of the tenant estoppel letters in advance of closing and confirm that they have been delivered to the closing agent. If the closing agent is an experienced attorney then it is likely that she will send an e-mail to both agents and the parties at least one day before the closing and request a confirmation that her calculation of the adjustments is acceptable. If this step is overlooked then the “surprise” at closing is more likely.

To eliminate the possibility of surprise, I recommend that the calculations be included in a contract addendum to be signed prior to closing. The addendum should identify each lease or tenant and the credit amount given by seller to buyer for security deposit and the monthly rent. It is also a good idea to include any other adjustments that the parties have agreed to as part of the transaction. By having their clients sign the addendum prior to closing or, at least confirming their agreement to sign the addendum at the closing table, agents can mitigate the risk of surprise and disagreement at the closing table.

Is Personal Liability Limited in an LLC?

Limited liability companies (LLCs) are very popular because they are easy to set up and they provide limited personal liability. The “limit” of the personal liability is typically the investment amount, often referred to as the capital contribution. If the company is sued and found to be liable, then the company will be responsible for the damages, but the members or managers will not be personally liable. That is the essence of the limited liability protection provided by the LLC.

There are, however, circumstances where the protection will not be limited and the members or manager of the LLC may have personal liability to the person or entity that has been harmed or damaged. As might be expected, liability is not “limited” when the behavior is bad or inappropriate. What type of bad behavior you ask . . .

As examples, but not an exclusive list, if a manager or member of the LLC fails to perform his or her duties as a manager or as a member of the company and this failure constitutes one of the following, then personal liability may not be limited:

  •  was a criminal act; or
  • resulted in an improper personal benefit (directly or indirectly); or
  • resulted in an improper financial distribution that deprives the company of being able to pay its debts or creates insolvency; or
  • was commited recklessly or in bad faith or with malicious purpose or exhibiting wanton and willful disregard of human rights, safety, or property; or
  • was a breach of fiduciary duties of loyalty and care to the company or to the other members of the company; or
  • constitutes conscious disregard of the best interest of the limited liability company, or willful misconduct.

Also, there is no limit to personal liability of a manager or member for taxes owed to the United States and for Florida sales or use taxes.

Florida Revised Limited Liability Act – 3rd Post

In this post I want to discuss one of the significant clarifications that The Florida Revised Limited Liability Act (“the Act”) provides regarding how LLC’s are to be managed. In the definitions section of the Act, which appears in Section 605.01012 and in the Management section of the Act  which appears in Section 605.0407 the Act provides two types of LLC possibilities:

  1. The “Manager-managed liability company”  which is an entity managed by one or more managers who have the exclusive right to decide the affairs and activities or the company.
  2. The “Member-managed liability company” where the management and conduct of the company are vested in the members of the company.

Section 605.0102(41) further states that the Member-managed liability company is NOT a manager managed company. Well . . . obviously . . . we would think to ourselves. But this distinction is made for a reason.

Although manager-managed and member-managed LLCs have long been the two options under Florida law, by virtue of the Articles of Organization form provided by the Florida Department of State Division of Corporations (“Department”) used to register limited liability companies, a large number of Florida limited liability companies exist in a type of hybrid which I will call the “Managing Member managed entity.” The printable form provided by the Department which can be found by clicking here and the online form which can be found by clicking here require that either a “Manager” (MGR) or a “Managing Member” (MGRM) be identified. (Note that the annual report form also provides the same choices.) The option of identifying a “Managing Member” is problematic because it suggests to third parties dealing with the LLC and possibly to other  members of the LLC, that the person or entity named as a “Managing Member” may have superior management authority to the rest of the members, in short, this is the essence of a “Manager.”

If the LLC uses an operating agreement and the operating agreement clearly designates that one or more members shall be “Managing Members” with the exclusive right to manage the affairs of the LLC, this gives the world and the members themselves evidence of intent, albeit still outside the intended statutory context of having management shared among all the members or the named manager(s).

But if there is no operating agreement or other writing that reveals the intent of the members, however, the use of the term “Managing Member” in the registration form creates a risk of disagreement among members who might believe that they have equal management authority under the statutory framework even though they were not specifically named in the registration documents. It also creates the possibility of confusion for third parties having to deal with the LLC and not knowing for sure whether someone identified as a “manager” has the same or different authority than a “managing member.”

This is why we have the explicit and seeming redundant statement in Section 605.0102(41) distinguishing that a member-managed limited liability company is not a manager-managed limited liability company. To further help correct this hybrid problem, the term “Managing Member” will no longer be used on the Articles of Organization form after January 1, 2014. The Annual Report form will also be revised to offer either the selection and identification of at least one member or one manager, but not a managing member.

Florida Revised Limited Liability Act – 2nd Post

In my last post, I began writing about the Florida Revised Limited Liability Act (“the Act”) because it is an important piece of new legislation in Florida. It is important because more limited liability companies are created annually in Florida than any other type of businesses. As of this writing, the Florida Department of State Division of Corporations reports that there are 706,223 active registered limited liability companies in the state and in 2012 169,450 new LLCs were registered. By comparison, there were 104,490 for-profit corporations registered. The reason LLCs are so popular is because they are easy to create, easy to manage and easy to operate. The fact that the Florida law that governs limited liability companies was recently entirely revised is, therefore, important. It will affect all LLCs created as of January 1, 2014 and, effective January 1, 2015, ALL LLCs operating in Florida.

It is daunting to endeavor to write an informative blog about a statute that is so complex and comprehensive. As an example, the Act contains 69 defined terms, which is 43 more then the existing LLC statute. I could write a blog entry for each defined term per day and take two months to do it. I prefer to attempt to cover some of the important elements of the new statute and hopefully communicate useful information for those thinking about using a limited liability company for their business venture and those already using one.

The first thing to remember is that the Florida Revised Limited Liability Act (“the Act”) is a default statute. This means that unless the members of a limited liability company specifically provide how their LLC is to be structured, managed, and operated by way of an operating agreement, the statute provides the default rules. Yes, you can create an LLC and not write an operating agreement (or have an attorney like myself write it). The Act will be there to tell you what you can and can not do and what happens when . . .

But if you do invest the time or money to draft an operating agreement to establish the contractual terms under which you want your LLC to operate, then the operating agreement will supersede the statute and will be the controlling document. If, in any respect, the operating agreement is silent on a particular issue, then the statute is there as a backup to provide the rules that apply.

This is not a new concept. The existing LLC Act has provided the same default backstop. However, under the Act, there are now a lot more rules on what an operating agreement can not do.  Under the existing LLC act, there were six. Now the Act provides seventeen provisions that the operating agreement can not eliminate or waive. These are referred to among attorneys as the “non-waivable” provisions. They are listed at Florida Statutes Section 605.0105(3). Instead of providing the laundry list of these 17 non-waivable conditions, I will just list a few that I find most note worthy:

  • the operating agreement may not exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct or a knowing violation;
  • the operating agreement may not provide for the indemnification of a member or manager for the conduct involving bad faith, willful or intentional misconduct or a knowing violation;
  • the operating agreement may not completely eliminate the duty of loyalty or the duty of care that a member or a manager has, but it may put parameters on these duties so long as they are not manifestly unreasonable.

I list these rules because they affect the concept of personal liability protection. Perhaps the most common reason  people choose to use an LLC for their business is that they believe an LLC provides liability protection. The name itself – Limited Liability Company – suggests that using this type of entity will protect you personally. The protection, however, is not absolute. The protection could be lost if a member or manager acts inappropriately. What is inappropriate?  The Act provides the standards in Section 605.04091. This section gives us more clear definitions of the duties of loyalty and care that members and managers have to the LLC, to each other and to third parties who may be dealing with the LLC.

To the lay person or, more specifically, the person that wants to set up an LLC for their business because they think using an LLC will protect them from personal liability, these provisions will surely seem complex and legalistic and, indeed, they are. The take away point, however, is that an LLC can provide personal liability protection, but that protection is not absolute. The members of a Florida LLC (really any LLC) should try to understand what responsibilities they have towards each other and to third persons otherwise they may be at risk of acting in a way that makes them personally liable for their actions.

Florida Revised Limited Liability Company Act

On May 3, 2013 the Florida legislature past the Florida Revised Limited Liability Company Act (SB 1300) and the bill was signed into law by Governor Rick Scott on June 14, 2013. Created under new Florida Statutes Chapter 605, the revised act becomes effective on January 1, 2014 for all limited liability companies created from that date on. All Florida limited liability companies already existing prior to January 1, 2014 may continue to operate pursuant to the previous LLC act under Chapter 608 until January 1, 2015. Thereafter, Chapter 608 is repealed and all LLCs in Florida will be subject to the revised LLC act.

I will attempt to highlight important aspects of this new Florida LLC law in the following posts.

Leasing in a mixed use property

Mixed use projects have become increasingly popular in down town redevelopments. Leasing transactions in mixed use projects can be challenging if the lease form that is proposed was designed for a different type of use, for instance an office lease form offered for a retail use. Agents involved in such transactions should be aware of the issues that arise when the lease form is not appropriate for the intended tenancy.

Start by looking for inconsistencies in the “permitted use” clause of the lease. For instance, a check cashing business may be specifically prohibited in an office lease, but the proposed retail tenant on the ground floor may offer check cashing as an incidental service to its customers. Additionally, limitations on hours of operation may conflict and should be analyzed in the context of the use that is contemplated. Retailers often operate on weekends when office businesses are closed. Make sure that the use restrictions in the building or project do not conflict with the tenant’s intended business.Operating expense pass-throughs warrant specific attention. Operating expenses that apply in office buildings are different than those that apply to retail properties. Common areas in office buildings often include lobbies, hallways, bathrooms, elevators and stairways. Retail tenants on the ground floor of an office building may not use any of these common areas, but if these areas are included as part of the CAM charges then the tenant may be subject to paying a share of these charges unless the lease is modified accordingly. Expenses for items such as janitorial services, elevator maintenance, and utility charges may also be inappropriate.

Additionally, limits on annual increases in operating expenses are handled differently in office and retail leases. Retail leases tend to distinguish between controllable and non controllable expenses and tend to place caps on the annual increase of controllable expenses (everything but property taxes, insurance and utilities). Office leases calculate provide a base rate per square foot for all expenses passed through to the tenant and the tenant pays annual increase over the base amount. Reconciling these two different calculations can be challenging if the landlord does not have the accounting systems in place to accommodate it. With creativity, however, a workable leasing solution can be negotiated.Parking is another important clause to look at. Retail users rely on the ability of customers to visit their business and prefer to have parking within short distances from their store. The access to and from office parking garages should be considered within this context.

The rules and regulations in office buildings also vary significantly from those in a retail center. For instance, office tenants generally do not have the right to advertise their business on the exterior façade of the building. A retailer, however, relies on such signage to inform customers of their presence to generate foot traffic so the applicable lease provision may need to be modified.