Alex, the serial developer, who wanted to go into partnership with his childhood friend Yannis to buy a plot on one of the Greek islands and build a resort on it, sat opposite me in my office and recounted in minute detail his conversation with Yannis at the taverna and the understandings the two had reached about the partnership and the project. He was as excited as a child who has just come home from his first day of school.
We began listing all the issues that needed handling on the whiteboard: a partnership agreement with Yannis, each one's share, role, responsibility and so on; the checks to be carried out on the land - engineering, planning, legal; the business plan to be prepared for the project, financing, and a long list of further questions and tasks. I looked at Alex, his eyes shining with excitement, clouded by a haze of boundless optimism. I knew that any attempt to warn him about the dangers of blindly relying on childhood friendships would fall on deaf ears. He was already picturing himself sipping ouzo with Yannis on the resort terrace, counting the profits and handing out dividends to the happy investors.
Before we parted I warned Alex: “I understand that you are childhood friends, and I also understand that you're enthusiastic about the idea and the project, but I suggest you be careful and not put the cart before the horse.”
“I won't make a move without a green light from you,” he said, and said goodbye.
Based on Alex's data, I sat down and drafted a partnership agreement between him and Yannis. The agreement was sent to Alex for review, he approved it, and then the draft was passed to Yannis. Two days later I received a furious call from Alex.
“You want to destroy a friendship of more than 40 years? You want to ruin my project? What did you write in that agreement that made him so angry?”
“Alex, calm down. I sent you the agreement, you approved the wording by return email and told me to send it to Yannis. I don't understand what the problem is,” I asked in surprise.
“What's the problem? What's the problem? The problem is that Yannis exploded at me on the phone, asking how it is that I don't trust him? How, after so many years, I send him an agreement like this to sign? Why do we even need a partnership agreement, when we've agreed on everything?”
“Come on, Alex, you're a serious businessman and developer. You read the agreement, and you know it is decent and fair to both sides, and if there is something in it that bothers Yannis, I suggest he say what, and we will discuss it.” I added, “I'm not buying these outbursts, and I wouldn't be shaken by them. It's part of business negotiation. You need to look after your money and your investors' money. Studies show that detailed and comprehensive partnership agreements significantly reduce the risk of legal disputes between partners. Breathe deeply, try to talk to Yannis, to understand his considerations. Try to reach an agreement that is acceptable to both of you.”
Alex thanked me and said goodbye. I hung up with a heavy sense of a missed opportunity. I knew this story could end sadly, with a deep rift between two childhood friends and perhaps even heavy financial losses.
Stories like this, unfortunately, happen quite often. Take, for example, the famous dispute between Mark Zuckerberg and Eduardo Saverin, the founders of Facebook. Saverin claimed that Zuckerberg had pushed him out of the company after he had invested his money in it without a detailed partnership agreement being signed. The dispute ended in a long and expensive lawsuit that badly damaged their relationship.
A partnership agreement is essential for every joint real estate transaction, and especially in international transactions - it is a cornerstone of the success of any joint venture. It is a vital legal document that clearly defines the relationship between the partners, their rights and their obligations, and thereby prevents misunderstandings and potential disputes that may arise along the way. The agreement should specify exactly what you plan to build: a hotel? villas? a restaurant? It is important to be clear and precise about each partner's role: who is responsible for what? Who makes the decisions? It is important to divide the work clearly and fairly, in order to avoid ambiguities. The agreement should set out how the profits and losses of the project are divided. The agreement defines the decision-making process, the way the project is managed and the supervision mechanisms; the conditions for one of the partners to exit the partnership and the consequences of that exit. What happens if there are disagreements? How are disputes resolved? It is important to set a fair mechanism agreed in advance. It is important to note that a partnership agreement in international real estate must be tailored to the specific characteristics of the project, the country and its laws, and the relationship between the partners.
A partnership agreement is like an insurance policy. It will not prevent all problems, but it can limit the damage in the event of a dispute.
“A partnership agreement is like a map for the joint venture. It charts the way and helps to navigate safely between the obstacles.” - John Smith, international real estate developer.
Alex, contrary to my advice, decided to move ahead and advance the project with Yannis without a partnership agreement. He believed that their many years of friendship and the trust they had in each other would overcome any obstacle along the way. The two agreed between them that Yannis would handle everything concerning the Greek side of the planning, approvals and construction, while Alex would handle everything concerning investor fundraising and financing, marketing of the project and sales. Yannis also persuaded Alex that his local lawyer would handle all the legal matters (although Alex did not take a step, and did not agree to approve anything, until I had gone over the documents and approved them or advised him what to correct or change).
The problems and disputes were not long in coming...
But more on that another time.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית