How to get out of an unhappy partnership

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

17 September 2017

David sent me a three-page email detailing his problem. In short, he is in an unregistered partnership with two of his friends. They pooled some money together and bought two real estate properties in equal shares. One sits on a “60x30” plot and the other is on an “80x40”. The two are on the same street and host a single-level building each.

A few years ago, they were ordered by the County government to carry out some major repairs which cost Sh1.5 million. Since his partners did not have any cash, David financed the work on the understanding that they would each pay him Sh500,000.

Over the years, his partners have not fulfilled their end of the deal and David fears that he might never get his money back. He has proposed that they allow him to collect and keep all the rent until his dues are paid but they say they desperately need this cash.

David now wants to get out of the partnership; so he called in a valuer to inspect the properties and the combined value came to Sh24 million. Thus his share in this partnership is currently Sh8 million.

He is quite certain that his friends cannot afford the Sh8 million needed to buy him out plus the Sh1 million they owe him for the repairs. So he asks the question: “What if I took the smaller property as part of the payment, how would the numbers work out?”

Well; assuming that the buildings are proportional to the sizes of the plots, we can distribute the Sh24 million combined value proportionately. The bigger plot measures 80x40 = 3,200square units while the smaller one is 60x30 = 1,800 units. The total size of the two properties together comes to 5,000 square units.

Thus the larger property is 64% of the whole, while smaller one is 36%. So, if David takes the latter, he will walk away with something worth Sh8.64 million. Since his stake in the partnership is Sh8 million, he is getting Sh640,000 more. However, his partners owe him Sh1M for the repairs; so, they will need to pay him an additional Sh360,000 in cash.

Alternatively, David could take the larger property whose value is Sh15.36M (64% of Sh24M). Since his stake is Sh8M, he would now have to pay his partners at total of Sh7.36M. I asked David if he can raise this money and he said he doesn’t.

So the only workable way out is to take the smaller plot and push his friends to pay the Sh360,000. But where will that leave David’s partners? Before the exit, they were each taking 33% of the combined rent. After this deal, this will share 64%, that is, 32% each.

Clearly this does not leave them very badly off. Thus, unless they want to be uncooperative, they shouldn’t have any major difficulties working out a payment plant plan for the Sh360,000 they will owe David after he exits. After all, he has not asked for any interest for the duration they’ve kept his Sh1 million.