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Restaurant operating income when escrow falls apart

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#1
What is the name of your state? CA

Hello,
I went into contract to purchase a restaurant. Apparently the owner got an issue going on with BOE/CDFTA and they put a hold on entire sale amount. As a result, we could not close the sale and seller backed out.
We, purchasers took early possession of the business and started operating from the day we opened escrow. Lease transferred, new bank accounts, and vendors all getting paid through buyers.
We paid 20% of the amount into escrow which was released to the seller.
And also paid about 30% through the months with the understanding that it will be applied towards purchase price at the close of the escrow (verbal and not written).
The businesses made about 200K during that operating period.

I understand that Seller will need to return the early released amount to buyers due to sale fall out.
What happens to the profit that was made during this period? Who has the right to it.
The business is technically owned by seller as the sale was in pending and did not go through. At the same time, we as buyers operated the business. There was no such agreement between both parties on this scenario.

Seller says that since the business sale did not go through, we only operated and he owns the profits.

Please shed some light on how this can be legally treated and resolved.
 


FlyingRon

Senior Member
#2
All that would be determined by the contracts in place for the purchase, etc... We can't tell. With as much money as you're talking about, it would be best to bring all the paperwork to an attorney. It would seem the proceeds would be in dispute whether the sale closed or not. There must have been some agreement to allow you to operate in advance of owning the "business."
 
#3
Please shed some light on how this can be legally treated and resolved.
Now you know why there's an old saying "Don't count your chickens before they hatch."

As to your current dilemma, here's my two cents worth. If it ever got to court it's possible that a judge might construe a lease agreement for the period that you were in possession. No way to predict.

If the $200,000 is in your bank account and the seller has a significantly lesser amount of your money you are free to tell him to pound sand and wait and see if he sues you.

If the $200,000 is significantly less than the seller has of your money, you'll have to decide whether you sue him or just be satisfied with the $200,000 and walk away.
 
#4
I understand. It is a general purchase contract. We did not write anything related to operating as such hoping for a straightforward closure. So, technically, the restaurant still belongs to seller and we were operating.
 
#5
Now you know why there's an old saying "Don't count your chickens before they hatch."

As to your current dilemma, here's my two cents worth. If it ever got to court it's possible that a judge might construe a lease agreement for the period that you were in possession. No way to predict.

If the $200,000 is in your bank account and the seller has a significantly lesser amount of your money you are free to tell him to pound sand and wait and see if he sues you.

If the $200,000 is significantly less than the seller has of your money, you'll have to decide whether you sue him or just be satisfied with the $200,000 and walk away.
Out of 200K, 140K was given to Seller in installments. no specific paperwork was done to this effect except verbal agreement that that money would be credited towards downpayment when the escrow closes.
 

justalayman

Senior Member
#8
Without a contract statimg otherwise, the money belongs to whomever the court says it belongs to. If nobody goes to court it will remain in possession of whomever has it now unless they willingly pay it to the other party.
 

LdiJ

Senior Member
#9
What is the name of your state? CA

Hello,
I went into contract to purchase a restaurant. Apparently the owner got an issue going on with BOE/CDFTA and they put a hold on entire sale amount. As a result, we could not close the sale and seller backed out.
We, purchasers took early possession of the business and started operating from the day we opened escrow. Lease transferred, new bank accounts, and vendors all getting paid through buyers.
We paid 20% of the amount into escrow which was released to the seller.
And also paid about 30% through the months with the understanding that it will be applied towards purchase price at the close of the escrow (verbal and not written).
The businesses made about 200K during that operating period.

I understand that Seller will need to return the early released amount to buyers due to sale fall out.
What happens to the profit that was made during this period? Who has the right to it.
The business is technically owned by seller as the sale was in pending and did not go through. At the same time, we as buyers operated the business. There was no such agreement between both parties on this scenario.

Seller says that since the business sale did not go through, we only operated and he owns the profits.

Please shed some light on how this can be legally treated and resolved.
You definitely need to consult with your own attorney and to have the contracts reviewed. The fact that you are now responsible for the lease for the space is a huge factor that cannot be undone, as well as your new accounts with the vendors.

Its no longer a situation where its black and white who owns the business that is currently operating out of the space. The landlord and the vendors are going to hold YOU responsible.
 

HRZ

Senior Member
#10
I'm hung up on if you paid 20% into escrow and the seller was unable,to move forward with the deal , why is that 20% not being returned in full to you ?

I see the other part as some sort of lease arrangement and all the profits or loss made by operator are with the operator . Had you turned a loss you can bet the ranch the seller would visit that one on you?
 
#11
Seller is willing to return the escrow amount.
The issue is with the profits made during the period when we operated. Part of the money was paid to him (about 70% of the profits) and with sale fall out....who owns that portion...Seller is not willing to return that amount.
 
#12
You definitely need to consult with your own attorney and to have the contracts reviewed. The fact that you are now responsible for the lease for the space is a huge factor that cannot be undone, as well as your new accounts with the vendors.

Its no longer a situation where its black and white who owns the business that is currently operating out of the space. The landlord and the vendors are going to hold YOU responsible.
Keeping the Lease and the vendor aspects aside..How does the profitability amounts play here.
Lease is switched back. Vendors are all settled from buyers company and seller assumed back the vendor payments. hanging thread is the profitability part.
 

LdiJ

Senior Member
#13
Keeping the Lease and the vendor aspects aside..How does the profitability amounts play here.
Lease is switched back. Vendors are all settled from buyers company and seller assumed back the vendor payments. hanging thread is the profitability part.
Again, I would have to read the original contract to be certain. However, I suspect that the profits would belong to the operator, not the seller.
 
#14
Without a contrast clarifying the issue there is no easy answer. .

Basicallly, you ran the business for the time you did so logically you would be due the fruits of your labor

BUT

The seller was not allowed to operate his business for the same time so he lost profits.

So why the sale failed may play an important part in figuring out who deserves to retain the profits.

So, if you cannot come to an agreement, either you just walk away or somebody suesmthe other party and the court decides.

I would suggest hiring an attorney (hopefully you already have one handy as you should) to read all pertinent documents and review the situation and provide you with an opinion based on actual facts.
 
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