Can I rent out a property if there are more owners than just myself?
– Ocoee, Florida
Possibly – depending on how your joint ownership is structured. That doesn’t mean it would necessarily be a very good idea to do so. I’d be very careful about going ‘off the reservation’ renting out a property you own with some other partners, members of an LLC or shareholders if you own the property within a corporation.
Let’s talk about corporations, first.
Clearly, I can’t run around willy-nilly, binding the McDonald’s Corporation to franchise sales and real estate deals. I’m not an employee of McDonald’s and I’m not a shareholder, and I have never been engaged as an agent or representative.
Furthermore, your local McDonald’s drive thru cashier can’t do it either – normally.
If you own shares in a corporation, you should have some bylaws written that determine who, specifically, has the power to bind the corporation in a contract. If your bylaws are properly written, you will restrict the authority to bind a corporation to a contract to the ‘adult supervision’ of the company. That is, to specific officers within the corporation.
You may delegate broader authority for some kinds of transactions – For example, you may authorize a fairly junior person to sign checks for deposit into a bank. But the bigger the commitment, the longer the period of obligation or the more complex the transaction, the more controls you and your other shareholders will want to have.
Are you an officer in your corporation? Have you been named in your corporation’s bylaws as someone authorized to sign contracts on behalf of your corporation? If so, then you can probably rent the property out on your own authority.
That doesn’t mean it’s a great idea. Good corporate governance means that the right hand should know what the left hand is doing, at all times.
Have you coordinated with the other owners? Is your move in line with the corporate strategy and the direction the firm is headed? Will the other shareholders be satisfied with the terms of the lease and the rent you are collecting? Do they even know you’re talking with a potential renter?
A good rule of thumb is that no corporation should be surprised by the terms of a 1-year contract for anything.
Limited Liability Companies
The same general principles apply to limited liability companies. If you are a partner in an LLC, you should have drafted an operating agreement between you and the other members. Just like with corporations, your operating agreement should spell out, specifically, who is authorized to contractually bind the LLC, and on what kinds of contracts. If you haven’t yet, do that before making any moves.
If you are a member in a general partnership, you’re crazy. But you can probably bind a partnership to a contract. This is because all general partners are ultimately jointly and severally liable for what any of the other partners do or fail to do.
If you’re in a limited partnership, you can bind the partnership if you are a general partner. If you are a limited partner, however, you would probably blow your liability protections as a limited partner by executing that contract, and become a general partner by default at that point. Limited partners aren’t supposed to take an active role in actually managing the company.
That’s the deal you make, in exchange for limited liability protection in a limited partnership. If you’re running around negotiating contracts and executing leases on behalf of the company, you aren’t conducting yourself as a limited partner.
The Doctrine of Apparent Authority
There is a legal doctrine you should be aware of called “apparent authority.” This becomes relevant if someone is holding himself out as someone with the authority to bind a company to a contract, and is designed to protect innocent third parties. It boils down to this:
A corporation which, by its voluntary act, places an officer or agent in such a position or situation that persons of ordinary prudence, conversant with business usages and the nature of the particular business, are justified in assuming that he has authority to perform the act in question and deal with him upon that assumption, is estopped as against such persons from denying the officer’s or agent’s authority.
In the legal context, the term estopped means the same thing as “stopped,” only more so.
That is, if a corporation allows someone to run around pretending they have the authority to bind the firm in a contract, and doesn’t stop that person, and even accepts some of their contracts, it may not hide behind its bylaws and claim the individual had no authority to bind the company if they don’t like how the deal is going.
So, circling back to your question: If you are one owner in a multi-owner situation, you may be authorized to rent out a property, depending on the form of association you chose to take with the other owners, and depending on what’s in the operating agreements or bylaws of an LLC or corporation, respectively.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.