Are you and a friend or family member looking to buy real property together? Or have you already done so and a disagreement has arisen? Though owning property with a trusted friend or family member may sound like a great idea and can have many advantages – it also has some risks.
Things to Consider
There are many things to consider before purchasing real property together, such as how it will be used, how it will be managed, how it will be maintained and improved, and how taxes and expenses will be paid. No matter how close the relationship, unforeseeable events can occur or circumstances may change causing disagreement. So it is wise to create a written co-ownership agreement setting forth the intents, rights, and obligations of the parties. But because of the friendship or family relationship, many co-owners do not do this. So what happens if a disagreement arises? The co-owners should first look to the co-ownership agreement to determine rights and obligations. If there is no such agreement - or in some cases even if there is - and the disagreement cannot be worked out, then owners have a right to seek a judicial order to equitably divide the property. This article will discuss these judicial rights. But first it’s important to know a little bit about co-ownership rights.
Types of Ownership
In California, when two or more unmarried individuals purchase property together, they each typically own an undivided interest in the entire property and that ownership interest is known as either a "tenancy in common" or a “joint tenancy.” Tenancy in common and joint tenancy are fancy legal terms to describe types of ownership. California law makes tenancy in common the default form of ownership. So if no specific form of ownership is specifically created by the owners, then it is a good bet that they own the property as a tenancy in common.
Under both tenancy in common and joint tenancy forms of ownership, each owner has an equal right to occupy the whole property and cannot exclude the other owners from the property. In other words, each owner has a right to live at the property. And if one owner moves in, then the other owners are generally not entitled to demand or collect any rent. These occupancy rights are often the source of disputes between co-owners, particularly if the property is a single family home and one owner is enjoying the benefit of residing in the home while the other owners are not. Disputes may also arise concerning other uses. For instance, one owner may want to develop the property while the co-owners want to sell the property. All decisions to develop, mortgage, or sell the entire property may only be made collectively by all co-owners. This can be a source of friction between the owners. So back to the question – what happens if a dispute arises and there is no co-ownership agreement?
How to Resolve the Dispute
Given the close relationship between the co-owners, they should initially sit down and informally try to work things out between themselves or with a third person intermediary. If they cannot agree on a way to continue as co-owners, then they may consider the following solutions: one owner may seek to buy out the other owners; one owner may wish to sell or transfer his or her interest to a third person; or all owners may agree to sell the property and divide the proceeds. Informal resolution of the dispute will undoubtedly save a lot of time, money, and headache and may salvage the relationship.
Partition Action - To Sell the Property
If the co-owners are unable to resolve their dispute, then the law authorizes an owner to file a lawsuit to compel the division of the property. The owner should always consider the cost and time involved in doing this. The owners will probably need to hire attorneys, and it can take more than a year to get a final determination. The type of lawsuit to divide real property is called a "partition" action. The co-owner who files the partition action is essentially seeking to compel the equitable division of the property. Any co-owner may file a partition action in the Superior Court at any time to obtain an order dividing the interests in the property. A partition action is simply the legal procedure to terminate and divide common the ownership interests. Because real property typically cannot be physically divided, the Court will frequently order the sale of the property and then divide the proceeds between the co-owners.
Notice of Pendency of Action
When a partition action is filed, the co-owner bringing the action must record a Notice of Pendency of Action on title to the property. This is simply a document that is filed at the County Recorder's office that gives notice to everyone of the pending partition action. This notice would likely impact the marketability of the property until the partition action is completed.
Division of Proceeds from the Sale
The proceeds from the sale in a partition action will typically be distributed to the owners in accordance with their respective ownership interest in the property. For instance, if an owner owns a 25% interest in the property, then 25% of the proceeds will be distributed to that owner. However, each owner may be entitled to credits for certain qualifying advances that he or she personally made for the benefit of the property. When an owner makes personal advances to preserve the property, the value of that owner’s investment in the property may increase by the entire amount advanced. Upon the sale of the property, the co-owner is then entitled to be reimbursed for all of the advances before the balance of the proceeds is divided. Whether a co-owner is entitled to any credits is determined by the Court based upon the facts and circumstances of each case and each credit claimed. The function of the Court is to divide the proceeds in a fair and equitable fashion.
Credit for Improvements
A co-owner may seek credit for advances made to improve the property. A co-owner may receive credit for any improvements he or she has made in good faith to the property which have enhanced the value of the property. The credit should be the amount the improvements have enhanced the value of the property. So for example, if a co-owner personally paid for the addition of a garage, and that addition increased the resale value of the property, then he or she may be entitled to a credit and reimbursement from the proceeds of the sale in the partition action.
Credit for Expenses
A co-owner may also seek credit for advances made to satisfy certain expenses. Generally, each owner is responsible for his or her own pro-rata share in the expenses of the property. However, when a co-owner makes advances toward expenses in excess of his or her pro-rata share, then he or she may be entitled to credits for those advances in the partition action. So for instance, if a co-owner owns 25% of the property but pays 100% of the taxes, then he or she may be entitled to a credit of 75% of the tax payment. It is important to note that the expenses must be for the benefit or protection of the property, such as making necessary repairs or paying taxes, insurance, mortgages, etc.
It is best for co-owners of real property to have a comprehensive written co-ownership agreement incorporating the owners’ rights and obligations concerning the property. In such case, the agreement would probably dictate how to handle any co-owner dispute. When there is no controlling agreement and a dispute arises, the owners should make best efforts to informally attempt to resolve their differences. If they cannot do so, then they do have a legal remedy – a partition action. A partition action can be time consuming and expensive and will likely result in sale of the property. But under some circumstances, it may be the only viable option.