Deadlock-Breaking Mechanisms in Real Estate LLCs: Avoiding Litigation When Members and Managers Fail to Agree

Description

Deadlocks typically arise when LLC members or managers fail to reach an agreement or obtain the required voter approval for a particular course of action. The failure to provide deadlock-breaking mechanisms in the operating agreement can result in significant expense, loss of time, litigation, or even dissolution. Where the LLC's purpose is investing in and operating real estate, deadlocks can result in deterioration of the asset or a defaulted loan.

Counsel can employ various provisions in LLC agreements to break a deadlock, including buy-sell provisions, external or internal "tie-breakers," rotating or alternating voting procedures, put or call options, and where appropriate, provisions for partition or sale of the company or its assets. These provisions may be critical for the continued operation of the business.

Absent such provisions, LLC statutes will typically provide for judicial remedies, including placing operational control in a custodian or dissolution of the entity. Operating agreements that do not offer mechanisms for breaking deadlock may nevertheless provide alternate methods of resolving disputes, such as mediation and arbitration. Counsel should understand the pros and cons of these alternatives for the LLC's members.

Listen as our authoritative panel outlines and provides drafting tips concerning various deadlock-breaking mechanisms in operating agreements. Counsel will also discuss arbitration vs. mediation, and why either option is likely preferable to litigation or judicial dissolution of the entity.