Partition: When Co-owners “Divorce”
One of the most common types of disputes that I see arises when co-owners of property do not get along. Ideally, the parties would have signed an agreement when title was acquired that clearly sets forth their rights and obligations so that disputes can be resolved quickly. However, co-ownership does not always arise under such formal circumstances. It is not uncommon for friends and family to jointly acquire property without a formal agreement. Examples include siblings who inherit a property, unmarried couples who buy a house, or friends who buy a vacation home. Obviously, co-ownership can also arise between investors who pool their resources and buy an income property or development project together.
Co-owners can hold title to property in several ways. One way would be in the name of an entity where the entity is on title and the owners own a percentage of the entity. Another is where the owners hold title to their different respective percentage interests directly in their own name or in the name of their separate entity. This method of holding title is known as a tenancy in common.
Creating a tenancy in common relationship is easy – when co-owners hold title to their respective percentage interests directly, they are tenants in common, whether they have a written agreement describing their relationship or not. Terminating a tenancy in common, however, can be a little more complicated.
For example, what happens if one party needs to pull their investment out of the property? Typically, a co-tenancy agreement will contain a buy-out provision that governs how one party can leave the co-tenancy without forcing the sale of the property. Without such an agreement, the parties may be left to rely upon the law and their attorneys to resolve their dispute. Under these circumstances, there is only one tool in the toolbox, and that is a partition action.
In general, a partition action is a lawsuit to divide the ownership interests in a property. There are several types of partition actions. If the property consists of undeveloped acreage, it may be possible to physically divide the property with each party owning separate portions of the original property. This is known as “partition in kind.” Another type is a “partition by appraisal,” where the parties agree to have the property appraised and then one party buys out the other’s interest for an amount computed based on the appraised value. The most common method is a “partition by sale,” where the entire property is sold, and then the net proceeds are divided.
By law, any co-tenant has the right to partition, even if the other party does not want the property partitioned and cannot afford to buy out the first party’s interest. The only defense would be if the parties had previously signed a written waiver of the right to partition. Consequently, the withdrawing co-tenant can force the sale of the property, contrary to the other party’s preferences. Thus, for example, even if the property has depreciated in value, and therefore the timing of a sale is not optimal, the withdrawing co-tenant can still force the sale of the property, no matter how detrimental this may be to the other party.
This is just one of the reasons why drafting a co-tenancy agreement from the beginning is critical if the parties wish to avoid unintended consequences.