Property Ownership Dispute
Friends and relatives sometimes buy a rental house or commercial property together as partners, either in the name of a LLC or partnership or their individual names. If irreconcilable differences arise amongst the partners, what can they do?
If all partners want to sell the property, the answer is simple. List it for sale. However, when only some of the partners want to sell, the answer is to file a lawsuit for partition. What partition means depends on the nature of the property.
For a single family home, partition would be an outright sale of the property. Why? Because the property cannot be divided into multiple parcels. So, the court would order a sale of the property and a division of the sale proceeds according to each partner’s ownership interest.
On the other hand, if the property has multiple residences or commercial buildings, the court can and will likely order the property divided up and the pieces will be distributed to the owners. For example, I recently had a case where my clients were partners in a partnership owning a 1.5 acre parcel that had two commercial buildings. My clients wanted to keep their investment; the other partners wanted to sell the entire parcel. In that case, the correct resolution is to partition the property into two parcels, with one of the buildings on each parcel. That way, my clients can keep their portion of the real estate investment – without incurring capital gains taxes on a sale – and the other partners can sell their portion of the property. This is fair to everyone and comports with the law of partition.
Complications may arise if a deed of trust encumbers the property. If the encumbrance can be satisfied by the sale of one of the sub-parcels, then the mortgage holder will likely support the partition. If not, the partners may need to refinance the property with an agreement from the lender that the two sub-parcels will secure portions of the loan. The key here is to make a plan that satisfies the lender(s) holding interests in the property.
Another important issue in deciding to file a lawsuit for partition or to oppose one is the cost of attorneys’ fees. The plaintiff who files the lawsuit for partition is entitled to recover attorneys’ fees against the other party (the defendant) if the plaintiff prevails in the case. Because cotenants have an “absolute right” to partition under most circumstances, the plaintiff is likely to win an award of attorneys’ fees. Therefore, when this issue arises, the smartest move for the party opposing partition is to reconsider whether to oppose it. Otherwise, the defendant will lose the partition action, the property will be sold or divided, and the plaintiff will also be awarded attorneys’ fees.