How to break up a partnership that has gone sour

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

19 May 2019

Tom and Dick are brothers and they have a common friend, Harry. Several years ago, Tom, Dick and Harry formed an informal investment partnership. They raised money in equal shares and deposited it in a joint account. In due course, they bought two parcels of land on opposite sides of Magadi road. One was 4 acres and the other 6 acres.

Somewhere along the way, the brothers (Tom and Dick) encounter a family emergency and borrowed one million shillings from their partner and friend, Harry. As the saying goes, “don’t mix business with pleasure (or friendship)”, this loan has become a big strain on the relationship between the three partners.

The three have had many discussions about it and it is now clear that Tom and Dick cannot pay back the loan. The emergency they were sorting out took down with it most of their other investments and financial resources.

So, the three have agreed that they can settle the debt using the land. However, they do not wat to sell the investment to an “outsider”. Their idea is to give over the one plot to Harry. They hired a professional valuer who estimated that the whole land is worth about Sh8 million; that it, Sh800,000 per acre.

Now, since there is a natural boundary between the two parcels of land – Magadi road – Harry has offered to take over the 4-acre piece and leave the 6 acres for the brothers, Tom and Dick. The question is: how much money should Harry add in order for the exchange to be fair?

This question arises because as an equal partner, Harry owns one-third on the 4-acre parcel. Thus, out of its current market value of about Sh3.2 million, about Sh1.07 million belongs to Harry.

Furthermore, Harry also owns one-third of the remaining 6-acre plot. His interest in this parcel is 2 acres, or Sh1.6 million.

At first sight, this looks like a very complicated situation so the best approach is to break it down into what Harry is getting and what he is giving up.

He is getting a 4-acre piece of land valued at Sh3.2 million.

He is giving up two things: first, the one million-shilling that he lent the brothers and Secondly, his entire one-third share of the partnership, that is, Sh2.667M (Sh8M divided by 3). This comes to Sh3.667M.

The difference between what he is getting (Sh3.2M) and what he is giving up (Sh3.667M) is negative Sh467,000. In other words, Tom and Dick should pay him this Sh467,000 for the exchange to be fair.

When I give Harry this calculation, he replied: “These are my friends and I know the problems they are facing. I will just take the land and forget the balance. I hope this will give us a chance to repair the damage to our relationship”