Deadlock in a Two-Partner Property Venture: A Worked Buy-Out

Two equal partners disagree about selling. A worked example in SAR of what the buy-out costs, how the valuation gap is bridged and what the delay is worth.

Equal partners with no tiebreaker produce deadlock, and deadlock has a price. This worked example takes two investors holding a let building in equal shares, one wanting to sell and one wanting to hold, and follows the arithmetic of a buy-out: the valuation gap, the transaction costs, the funding and what six months of argument costs the partner who was right.

The situation

Two investors bought a small let building in equal shares four years ago. One now needs capital for another commitment and wants the building sold. The other believes the asset will perform better over the next three years and wants to buy the departing share. The agreement contains no deadlock clause and no valuation mechanism, so they must negotiate one before they can negotiate the price.

Assumptions (illustrative)

• Illustrative current value of the whole building on an accredited valuation: SAR 8,000,000.
• Each partner holds a 50% share, so the pro rata value of one share is SAR 4,000,000.
• Illustrative net annual income after all costs: SAR 480,000 for the whole building.
• Departing partner's opening ask: SAR 4,400,000 for their share.
• Remaining partner's opening offer: SAR 3,600,000.
• Illustrative costs of a full sale of the building to a third party: 4% of value in combined transaction tax, agency and professional fees, borne as the parties agree.

Step 1: Establish the reference value

The parties jointly instruct one Taqeem accredited valuer. The valuation comes in at SAR 8,000,000, giving a pro rata share value of SAR 8,000,000 divided by 2, which equals SAR 4,000,000.

A single joint instruction replaces two advocacy valuations. The gap between the opening positions was SAR 800,000, and a shared reference removes most of it before anyone negotiates.

Step 2: Price the alternative of selling the whole building

Sale proceeds of SAR 8,000,000 less costs at 4%, which is SAR 320,000, leaves SAR 7,680,000. Each partner receives SAR 7,680,000 divided by 2, which equals SAR 3,840,000.

This is the departing partner's real alternative, not SAR 4,000,000. Knowing this number tells both sides where a negotiated buy-out must land to beat a sale.

Step 3: Find the range in which a buy-out beats a sale

The departing partner is better off above SAR 3,840,000. The remaining partner avoids the 4% sale cost on the half they already own, worth SAR 4,000,000 multiplied by 4%, which equals SAR 160,000, so they can pay up to SAR 4,160,000 and still be no worse off than selling.

The zone of agreement runs from SAR 3,840,000 to SAR 4,160,000, a range of SAR 320,000. Both opening positions sat outside it, which is why the negotiation felt impossible.

Step 4: Settle the price and the transfer cost

They agree SAR 3,960,000, roughly the midpoint. The transfer of the share carries its own cost: at the published headline Real Estate Transaction Tax rate of 5%, which should be confirmed with ZATCA for the specific transaction, 5% of SAR 3,960,000 equals SAR 198,000, allocated to the buyer by agreement.

The tax on the transfer is a real part of the buyer's cost and belongs in the comparison. Whether and how it applies to a particular transfer is a question for ZATCA and a licensed adviser, not an assumption.

Step 5: Fund the purchase and test the income

Total outlay for the buyer is SAR 3,960,000 plus SAR 198,000 plus illustrative professional costs of SAR 42,000, which equals SAR 4,200,000. They now own the whole building earning SAR 480,000 net, against SAR 240,000 before, so the additional SAR 240,000 of income sits against an outlay of SAR 4,200,000.

That additional income on that outlay is a return of about 5.7%. If borrowing the money costs more than that, the buyer is paying for conviction rather than earning a margin.

Step 6: Price the six months spent arguing

Six months of distributions withheld while the dispute ran: SAR 480,000 multiplied by six twelfths, which equals SAR 240,000 held back from both partners. Illustrative additional legal and valuation cost from the dispute: SAR 90,000. Combined cost of the delay: SAR 330,000.

The delay cost slightly more than the entire zone of agreement they were fighting over. A deadlock clause drafted at formation would have cost a fraction of that.

What changes the answer

• If the two sides instruct separate valuers and the reports differ by 10%, the zone of agreement disappears and the only remaining routes are a third valuer or a forced sale.
• If the buyer needs finance, the lender's own valuation and conditions set the ceiling, and the timetable stops being the partners' to control.
• If the building's main lease expires within the next year, the valuation moves and the departing partner is better off selling than waiting.
• If the tax treatment of a share transfer differs from the treatment of a whole sale on these facts, the arithmetic in step four changes and must be confirmed with ZATCA and a licensed adviser.
• If distributions continue during the negotiation, the delay cost falls sharply, which is itself an argument for a clause that keeps income flowing while a dispute is resolved.

What the numbers tell you

• A joint instruction to one accredited valuer is the cheapest step in any partner exit.
• The alternative to a buy-out is a sale net of costs, not a sale at the valuation figure.
• The remaining partner's saving on their own share's transaction costs defines how much they can pay.
• Transfer taxes and professional costs belong in the buy-out price comparison from the start.
• Keeping distributions running during a dispute removes most of the pressure that makes disputes expensive.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira builds the numbers on a Saudi property with you before you commit: rent and cost evidence, condition and capital expenditure, the appraisal and the sensitivities that decide whether the deal survives a bad year. The investment decision stays yours, and so does the advice of your licensed tax and legal advisers.