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.

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.