Partition Sales: When co-ownership no longer works
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 legally happens in such situations?
1. 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 purchase, inheritance, gifts, foreclosure, etc. But often, for as many different reasons they want out. Typically, when that happens, one will ask the other to buy-out their interest. 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? These are just a few of the issues. 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 process called Partition and Accounting.
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, 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.
3. The Property Sale – unless an agreement is reached, the Court can issue an Order giving the Plaintiff the right to sell the Property and compelling the Defendant’s cooperation. 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.
4. 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 Plaintiff is reimbursed for their costs and attorneys fees in forcing the sale; (2) Any operational costs 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; and 3) 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 several successful resolutions in the past month.
For over 20 years, the attorneys of BPE Law Group, P.C. have been advising and representing property owners and real estate licensees in dealing with their legal concerns and maximizing their opportunities. If you have legal questions, give us a call at 916-966-2260 or e-mail me at firstname.lastname@example.org. Our flat fee consult for new clients may get you the answers you need for the questions you have.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.