Addressing Shortfalls Created by Capital Contribution Defaults

One of the fundamental issues addressed in real estate joint venture agreements is the co-venturers’ respective obligation to contribute money to the venture. Given that capital contribution obligations of the co-venturers are not always recourse obligations (and that the co-venturers are often single-purpose entities with no assets apart from their interests in the joint venture), joint venture agreements must establish effective mechanisms for dealing with funding defaults that do not rely on a lawsuit by the venture or the non-defaulting venturer against the defaulting venturer—a remedy that in any event would not result in an expeditious satisfaction of the venture’s cash needs. This article examines the remedies customarily available to non-breaching venturers in the event of a funding default, and briefly discusses certain issues to consider when determining which of these remedies are appropriate in any particular circumstance.

Legal Framework

Since many (likely most) joint ventures formed today to own real estate in New York are either New York or Delaware limited liability companies or limited partnerships, a quick word on permissible remedies under the laws governing those forms of entity is appropriate. Both Delaware’s and New York’s limited liability company and limited partnership statutes afford co-venturers significant flexibility in dealing with capital contribution defaults. In nearly identical language, each of these statutes expressly states that the applicable operating or partnership agreement may provide for specified penalties if a member or partner fails to make a required capital contribution, which may take the form of the remedies described below or other penalties or consequences.¹ The Delaware acts go even further in acknowledging, outside of the limited context of capital commitments, that an operating or limited partnership agreement may contain such default remedies as the members or partners desire² and that the policy of such acts is to give “maximum flexibility to the principle of freedom of contract.”³

Common Remedies