Partition Sales Part I: When Co-Ownership No Longer Works
With the current increase in legal disputes between co-owners of real estate, it is a good time to reprise and update our 2014 Series on Partition Sales. Today’s Article, Part 1, will focus on what Partition Sales are and how they work.
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By Steve Beede, BPE Law Founder / Counsel
Here is a situation: Dave and Jim had a great partnership for years purchasing and operating rental properties. When Dave suddenly died, his ownership interest was left to his children who had no interest in real estate. They just wanted the money that they felt the property was worth. But Jim doesn’t want to sell because the market is just coming back and he’s convinced that by waiting a few years, the property value will come back. What legal rights do the parties have in such situations?
1. The Demand for Sale – Any co-owner can force a sale or buy-out. Under California law, no-one can be compelled to remain a co-owner of real estate if they don’t want to. People become co-owners in many different ways including purchase, inheritance, gifts, foreclosure, etc. But often, for as many different reasons, they want out. This triggers a lot of related issues such as:
(1) What is the Property really worth?
(2) Is a buy-out price based upon current fair market value or what the owners would net from any actual sale after payment of sales costs and commissions?
(3) Are there Leases in effect giving tenants occupancy rights that may affect sale?
Bottom-line however, if the parties cannot reach a buy-out or sale agreement, the person who wants out can force the sale through a two-part legal process called Partition and Accounting. But before that commences, typically the one that wants out will have an attorney-generated Demand for Sale served on the other party. While the involvement of an attorney ratchets up the seriousness of the matter, the Demand also serves the important legal purpose of putting the refusing owner on legal notice that unless they agree to sell or buy-out, a lawsuit will be filed against them to force the sale. This step may become critical when it comes around to determining who is going to pay the costs of the legal action.
2. The Partition lawsuit – The person seeking to force the sale starts the legal process by filing a lawsuit against the other requesting the Court to Order a division of the common property. This division or partition can be accomplished by a physical division of the property, a sale of the property and a division of the proceeds, or a partition by appraisal whereby one co-tenant acquires the interests of the other co-tenants based on a court ordered and supervised appraisal. Since a partition action is an action in equity (fairness), the court, unless there is agreement, will determine which method of division is fairest. Significantly, because the person who refused to sell has essentially forced the other to go to Court to force the sale, the Plaintiff can typically recover Attorneys’ fees where they are incurred “for the common benefit” of parties entitled to share in the lands divided. This is why the Demand for Sale is important. Since this is a lawsuit that impacts title to the real property, at the time the Complaint is filed to start the lawsuit, the Plaintiff will also record a “Notice of Pending Action” (also called a Lis Pendens) which will tie up the title and prevent any transfers of title until the dispute is either settled or decided by the Court.
3. Appointment of Referee – California law does not simply require that the parties list the Property for sale by a mutually acceptable real estate broker. Instead, the law requires that the Court appoint a neutral third party called a “Referee” who will have the Property appraised, contract with a Listing Broker, and handle the negotiations for the benefit of both the current and prospective owners. Referees are typically attorneys or real estate brokers acting as an agent of the Court. They are paid for their services from the sale proceeds.
4. The Property Sale – assuming that the Court finds that there is good cause for the Property to be sold, the Court will issue an Order instructing the Referee to cause the Property to be sold and requiring that the Parties cooperate as is needed. Pricing is generally set based upon a value determination from a licensed Appraiser. The Property is generally then listed for sale at that price with a licensed real estate professional. From this point forward it is just like any other sale except the Court stands ready to resolve any disputes that arise along the way. If a purchase offer is received, either party will generally still be able to buy-out the other at that price although some commission liability may remain if they do so.
5. The Accounting Phase – After the sale is completed, all of the remaining sale proceeds are available for division between the former owners. Unless and agreement is made between the parties, the Judge will determine who is entitled to what from the proceeds. This typically flows as follows: (1) the Receiver fees and any remaining costs of sale are paid; (2) the Plaintiff is reimbursed for their costs and attorneys incurred fees in forcing the sale; (3) Any costs such as taxes, utilities, etc. paid by one side for which the other has not contributed will be reimbursed so that the parties’ contributions match their ownership interests in the Property; 4) income earned from rents or other use of the property will be distributed; and (5) any remaining proceeds are divided between the parties according to their ownership interests.
Obviously, this has been a brief introduction to the legal process of Partition and Accounting of real estate. Actual legal proceedings can be very complex although a great many resolve once a lawsuit has been filed and the reluctant owner realizes that the selling owner is serious. BPE Law has handled numerous Partition actions for our clients including one where the other owner could not be located.
For over 20 years, the attorneys of BPE Law Group, P.C. have been assisting our clients with their real estate, business, and other legal needs. If you have questions concerning real estate, business, or any other legal matter, give us a call at (916) 966-2260 to schedule a Consultation with one of our experienced attorneys or email Keith at email@example.com.
This article is not intended to be legal advice, lending advice, or a specific recommendation of any particular lender or company, and should not be taken as such advice.