If your company places limitations of authority on its officers, it doesn’t hurt to make that public to boost protections in case one of your officers tries to bind your company without authorization, a specialist in complex commercial real estate law says. 

Companies can be caught off guard when they learn an officer has tried to sell or borrow against an asset in a rogue effort at self-enrichment, says Matthew McGuane, a partner at Levine, Kellogg, Lehman, Schneider & Grossman who represents title companies in transaction disputes. 

In a typical scenario, a company owns a limited liability company whose sole asset is a commercial property, and the president or one of the managers of that LLC will improperly represent to a buyer or lender that the company is either selling or borrowing against the asset. The company typically learns of the deal only after the fact, and by then it can find itself bound to the terms of the deal even though the officer didn’t have authority to enter into it. 

“It might be an anomaly because of the type of work I do, but I’m always handling these types of cases,” McGuane, who focuses his practice in South Florida, told Legal Dive. 

Even if the company bylaws or the LLC’s articles of organization make clear the officer doesn’t have authority to enter into a binding transaction to sell or encumber the asset, the party on the other side of the deal can assume the officer has the proper authority by virtue of that person’s position.

Courts have long recognized what’s known as the doctrine of apparent authority, which grants to a party the reasonable assumption that they’re dealing with an authorized person if the person’s title would lead them to assume that.

States have tended to put their own twist on the doctrine. In Florida, for example, under Section 692.01 of the state's corporate law, parties can assume the person they’re dealing with is authorized to transact business with them unless they know otherwise. But they’re not responsible for doing the due diligence to know otherwise. 

“It frees up commerce in a lot of ways,” McGuane said. “People don’t have to dig deep in every single transaction.”

Although many rogue transactions involve a single-asset LLC, they don’t have to take that form; it can involve any transaction by a business entity, but the single-asset LLC is relatively common in McGuane’s experience. 

“A lot of property in South Florida is held in the name of an LLC for tax reasons or to shield assets,” he said. “But it could also be a partnership, a limited liability partnership, sometimes a trust — any time you’re dealing with a business organization as an owner of a property as opposed to an individual.”

Even though rogue transactions don’t happen frequently, it’s a light lift for a company to protect itself, McGuane said. It just requires a company to file a public notice that, notwithstanding the person’s title, a particular officer doesn’t have the authority to bind the company.

It could be the president or several managers of an LLC or it could be the officer of a company or partnership. In Florida, the notice would be filed with the state department in its official real estate record. In other states that have similar statutes, the details would differ. In California, for example, the relevant law is under Title 1, Chapter 2, of the state’s corporate code.  

“It imparts constructive notice,” McGuane said. “It could list the legal description of the commercial real estate involved, and could have the statement of limitation of authority. By virtue of that being recorded in the official real estate record, everyone now has knowledge of it. Even if you don’t have actual notice of it, the law will hold you as having notice of it.”

Once notice is filed, if an officer acts improperly, the company can have the deal terminated because the other party had constructive notice that the officer didn’t have the authority to enter into it. 

“It protects the company,” he said. “If the person goes rogue and tries to sell the property, there will be notice in the record that he can’t bind the company. In-house counsel can help by knowing what protections are there in their state.”