Thomas Kearns Publishes Article in NYREJ on the “Pick-Your-Partner” Principle in LLC Agreements

New York Real Estate Journal (subscription required) recently published an article authored by Co-Chair of Olshan’s Real Estate Law practice Thomas Kearns entitled “Does a Deal with Taylor Turn into a Deal with Travis?” In the article, Tom uses a headline-making engagement—Taylor Swift and Travis Kelce—to highlight a critical issue in real estate investment LLCs: the assignment of membership interests and the legal distinction between economic rights and governance rights. “Generally,” Tom explains, “a mere assignee of an LLC interest get the economic benefits of the interest but do not automatically enjoy all of the other rights of the assigning party unless formally admitted to the LLC as a member, either by the consent of the LLC’s manager or members or through an express provision of the LLC agreement. Some LLC agreements have assignment provisions that permit transfers to family members without any consent to permit estate planning and to encourage a long-term hold of the asset. The definition of family in LLC agreements can vary but often includes spouses.” While some agreements permit family assignments without consent for estate planning purposes, sponsors are increasingly drafting provisions that limit assignees to economic rights only and exclude voting or governance rights unless formally admitted as members. "While case law is confused and depends on the exact wording of the clause,” Tom writes, “restrictions on the admission of assignees should be enforceable. Of course, circumstances may vary.” He stresses that existing agreements should be reviewed carefully to address potential exposure, especially regarding voting rights, books and records access, and indemnification provisions (including “fees on fees” claims). Managing these issues effectively, Tom concludes, requires a mix of careful drafting, thoughtful member consent processes and proactive planning to avoid unintended partnerships: “The decision to admit an assignee may be as much political as legal and may depend on the relationship of the business partners, the other deals they have together and the level of concern over approval of future decisions. But managers and members of LLCs should be cognizant of the issues involved and that there may be a difference between being a mere assignee and an admitted member depending on the exact wording of the LLC agreement.”