INVESTING IN REAL ESTATE IN VIRGINIA USING LIMITED LIABILITY COMPANIES (LLCS) – WHAT YOU SHOULD KNOW

Also read Introduction to Limited Liability Companies in Virginia

The LLC Is an Entity Separate and Distinct from Its Owners

The single most common reason people hold hold property in an LLC is to protect their personal assets This can be done because “[l]ike a corporation, a limited liability company is a legal entity entirely separate and distinct from the shareholders or members who compose it. See Mission Residential, LLC v. Triple Net Properties, LLC, 275 Va. 157, 161, 654 S.E.2d 888, 891 (2008); See also Erie Insurance Exch. V. EPD MD 15, LLD, 297 Va. 21, at 30-31, (“Created to amalgamate characteristics of both partnerships and incorporated entities, an LLC is a legal entity entirely separate and distinct from the members who compose it”).

Pursuant to Va. Code § 13.1-1009, unless the articles of organization provide otherwise, every limited liability company has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including, without limitation, power to sue or be sued in its name.  Furthermore, Va. Code Ann. § 13.1-1019 states:

Except as otherwise provided by this Code or as expressly provided in the articles of organization, no member, manager, organizer or other agent of a limited liability company, regardless of whether the limited liability company has a single member or multiple members, shall have any personal obligation for any liabilities of a limited liability company, whether such liabilities arise in contract, tort or otherwise, solely by reason of being a member, manager, organizer or agent of a limited liability company. …

Therefore, if an LLC owned property that is to be leased, the landlord is the LLC not the managing member/owner of the LLC.   In this situation, the owner of the LLC could not be directly sued simply because he owned the LLC which holds the property.

Piercing the Corporate Veil.

            To ensure complete liability protection, the member(s) of the LLC must comply with all proper procedures with respect to managing the entity. Such items include having a complete Operation Agreement, separate bank account, no co-mingling of funds between the LLC’s accounts and the personal accounts of the LLC manager or members.  Also, complete minutes book containing a record of all business contracts and decisions must be kept.  Without these procedures, a creditor may be able to pierce the corporate veil and the member may lose any liability protection.

Case Law Example of Veil Piercing

In the case of A.G. Dillard, Inc. v. Stonehaus Constr., LLC, No. 151182, 2016 Va. Unpub. LEXIS 16, at *5-*6 (June 2, 2016) the Court held that because the defendant LLC had no bank account, held no assets, had been legally insolvent for several months, had had its funds siphoned off by its controlling member, and had made no effort to collect the substantial debt owed it by its controlling member, it was sufficient to establish that the defendant LLC and the controlling member were “not separate personalities” and that considering the LLC and controlling member “as discrete parties would cause an injustice” to the plaintiff “in that it would not receive the benefit of its judgment against” the LLC. Id. Therefore, the Court concluded, the plaintiff’s “complaint stated a claim to pierce [the defendant LLC’s] corporate veil to reach [the controlling member].” Id. at 10.

What is Title Insurance?

Throughout the United States, the smooth and efficient transfer of land is made possible for two primary reasons.  The first is that all ownership records are held in our county courts in land records, creating an easy method of determining ownership.  The second is the title insurance industry that provides security and indemnification for transfers of property where the land records are incorrect, encumbrances are un-released, or in the event of fraud or other criminal activity.

As no conveyance can be made without free and clear title, in the event there is an encumbrance, property cannot be sold.  No lender will provide the purchase money and certainly no prospective purchaser would choose to purchase.

That is where title insurance comes in to play.  In the event a cloud is discovered, the title insurance company can issue a letter of indemnity to cover the new purchaser and new lender so that the transaction can go forward.

In addition to aiding in the transfer of property, title insurance covers a multitude of other risks involving the ownership of land described below.

Enhanced vs Basic Title Insurance – Explaining the Difference In the Context of LLC Ownership. 

There are two basic forms of title insurance; Basic and Enhanced.  The basic title insurance covers all defects in the title up to the time the property is purchased, but not any problems such as criminal activity after purchase. An enhanced policy covers title problems that occur after the purchase of the property.

Another difference between the two is that no title insurance company will issue an enhanced policy for corporate entities.

For an LLC, the enhanced forms of title insurance cannot be issued, only the basic policies will be issued.  Furthermore, if you purchase property as an individual and purchase an enhanced policy, if you convey the property to an LLC in which you own the interest, your enhanced policy immediately downgrades to the basic.

Title Insurance Policies

As mentioned above, ownership of land in the United States is recorded in the courthouses around the country.  The deeds, mortgages, liens, judgments are all kept in the county courthouse where the property is located.  Therefore, the provenance of ownership is proven through those records.

However, mistakes happen that can alter the rights of the person who believes he owns the land or some right in the land.  That is where title insurance plays a vital role in our nation’s land rights.

ALTA –  American Land Title Association

The trade association, ALTA is an association for insurance companies and real estate settlement agents and those in the profession of transacting land conveyance and insurance. Most insurance companies use the ALTA standard policies for insuring title.  They come in two basic forms, standard and enhanced, which can be augmented through special endorsements.  A chart of comparison is attached as Exhibit A.

Basic Title Insurance

The Basic Owner’s policy protects you from defects and liens in the history of your title through the date and time your deed is recorded in the public records

Enhanced Title Insurance

1. Enhanced Owner’s Policy provides expanded title coverage for owners of one-to-four family residences, including condominiums.
2. Post-policy Forgery
3. Post-policy Encroachments
4. Post-policy Adverse Possession
5. Coverage extended to homeowner when someone claims to have the insured’s title arising out of someone else’s continued use and occupancy
6. Post-Policy Easement by Prescription
7. Coverage if another claims right to use a part of the insured’s land as an easement because of continuous use over time
8. Building Permit and Zoning Violation
9. Coverage for losses up to $25,000, after a small deductible, for building permit violations and forced remediation of zoning violations, and up to the full policy amount for forced removal of structures due to zoning violations
10. Expanded Access
11. Expanded to include both vehicular and pedestrian access to and from land, based upon legal right
12. Subdivision Violation
13. Homeowners are covered up to $10,000, after a small deductible, for protection against subdivision violations prior to purchase
14. Restrictive Covenant Violations
15. Coverage provided for violations of restrictive covenants, occurring before homeowner acquired land if the homeowner is forced to correct or remove the violation or if the homeowner’s title is lost or taken because of the violation
16. Structural Damage for Mineral Abstraction or Easement Use
17. Encroachment of Boundary Walls and Fences
18. Protection of up to $5,000, after a small deductible, for encroachments onto a neighbor’s land, onto an easement, or over a building set-back line
19. Encroachment of Improvements onto Easements and Set-backs

The most important benefit of an enhanced policy, in the author’s opinion, are the post-coverage elements Post-policy Forgery, encroachments, adverse possession and easement by prescription.

With the rise of identity theft and mortgage fraud, criminals can forge certificates of satisfaction to create the appearance that your mortgage is paid off, then forge your names on deeds to transfer title to the criminal, apply for a loan, get the money and disappear.

If that happens and you have enhanced coverage, the insurance company defends your title.  If not, you pay your attorneys to defend the title at your own cost.  That could be tens or hundreds of thousands of dollars in attorney’s fees and costs through a quiet title lawsuit.

Final Thoughts

The decision as to how to hold title in an investment property involves considerations as to who your partners will be, how will you resolve conflict, who will you be leasing to and what level of insurance will you need to protect yourself from a judgment.  Please contact Mr. Terry Fox at Fox and Moghul for more information.