"A Primer on Partition Law"
DIVIDING THE BABY IN HALF
A "partition" action is a court proceeding to resolve fundamental disputes between co-owners of real property. The co-owners might be voluntary in the sense that they purchased the property together, or involuntary, in the sense that they acquired their interests from different sources as for example, inheritance. The partition remedy is available in any co-ownership context other than between married spouses or between registered domestic partners. Partition actions have been known since the days of Henry VIII in England and are generally available in most states. In most states, any co-owner has an absolute right to partition. Historically, a partition action resulted in a judgment physically dividing the property and that still may occur in some rural areas. However, in suburban or urban areas, physical division is only feasible with undeveloped land where there is no offense to subdivision or zoning laws, or with a multi-unit building that can be lawfully converted into condominiums. Thus, in most contexts, the court will order a sale of the property to the highest bidder. In some instances the court will order one partner to sell his or her interests to the co-owner where the sales price is determined by an appraisal/arbitration process ("partition by appraisal"). However, partition by appraisal is usually the result of a stipulation between the owners and cannot result from a contested partition suit. As part of the resolution, the court will divide the sale proceeds among the co-owners initially in conformity with their ownership interests. However, the court will also resolve any claims by either owner against the other owner(s) that have arisen from and during the period of co-ownership. The right to partition by a current co-owner is absolute unless a co-owner can prove an agreement to waive the right to partition (which usually, but not necessarily, will have to be written). From the filing of the complaint to the order of sale can be a time consuming process, perhaps a year or longer, as a contested dispute may be prolonged pending a full trial resolving all of the parties' claims.
While this article focuses primarily on partition actions in California, it is noteworthy that in some states there is an additional remedy of "partition by allotment" whereby the court can allocate a portion or even all of the property to one of the co-owners and require the beneficiary of that allocation to pay the others a "price" that is also determined by the court on the basis of appraisals. An example of that remedy can be found in an interesting case entitled Zimmerman v. Marsh in the South Carolina Supreme Court which can be found here. HISTORICAL AND CURRENT PERSPECTIVE
In times past, where the wide open spaces typified land ownership and the feuding sons of the deceased ranch owner could not agree on how to manage the ranch, the court, in a fashion worthy of Solomon, would divide the property so as to give each contending party a portion of land of equal value. Typically, the "fight" would be over which portions of the larger property had greater value and how the respective values should be equalized (i.e. who gets the ranch house, where is the water supply). As long as the resulting parcels retained some reasonable utility, physical division was the preferred remedy.
In modern times, partition by sale is the norm. Practically speaking, in the typical urban or suburban environment zoning limitations, minimum lot size requirements and subdivision restrictions prevent physical division and hence "partition by sale" is the only possible remedy. Partition actions are becoming more common as unmarried partners and friends buy property together, as interests in real properties are inherited by former spouses and/or children of deceased co-owners, or arise from other transfers that effectively result in involuntary co-ownership. Often the surviving original co-owners and the legatees have very different notions of how the property should be used and often different emotional attachments to the property as well. These differences can lead to disagreements that resist resolution by negotiation leading one of the parties to sue for partition by sale of the property. If the plaintiff is a concurrent owner -- or a non-owner who claims to have an ownership interest based upon an alleged promise or a contribution of money or labor, there is an absolute right to partition absent an express waiver of that right. How counsel handles the process can dramatically affect the amount of the proceeds, the costs and fees involved, and the pace at which the property is sold. The law and the process will be described below.
THE LAW OF PARTITION
If real property is owned concurrently by two or more persons, or in successive estates (e.g. one or more persons will have an interest in the future but not now), or if a person claims to have a right of ownership based upon an agreement or a contribution of money or labor, then any of the interested parties may bring an action to "partition" the property which, effectively, requests the court to physically divide or, alternatively, order the sale of the property and division of the proceeds. The action is called a Partition Action and for people with concurrent interests (currently existing) who have not "waived" the right to partition, this remedy is an absolute right. A co-owner can be the administrator or executor of an estate, a conservator, or a receiver appointed by the court, even if they do not have a fee interest in the traditional sense. The demand for partition must be granted by the Court to such plaintiffs -- although the details of the order can vary widely. The "order" for the sale is typically an Interlocutory Judgment of Partition by Sale, either issued soon after the lawsuit is filed but sometimes not until all of the financial and legal issues are resolved. The details of that order will be discussed below.
There are several situations where no right to partition exists. A Tenancy in Common Agreement, which is often used to create multiple ownership of a multiple unit building that is not a condominium, generally contains a waiver of the right to partition, substituting in its stead a procedure allowing one co-owner to be bought out by his or her co-owners or a procedure for sale to a third party. Such waivers may be found in other co-ownership agreements including partnership agreements.
Disputes between spouses or putative spouses involving division of community or quasi community real property are excluded from partition by CCP 872.210 (b). In California, this same exclusion applies to state-registered domestic partnerships as of January 1, 2005, as those disputes are handled as marital dissolutions. Unmarried couples, whether registered as civil unions or under local domestic partnership structures, or those who simply cohabit, are subject to the partition process. The remedy is also available where there is a co-ownership agreement that calls for sale of the property upon breakup of the relationship and one party, typically the party in residence, refuses to cooperate.
Holders of mortgages, deeds of trust, mechanics liens, or other liens have other remedies and are not entitled to partition.
Partition actions must be filed in the Court of Unlimited Jurisdiction in the county where the property is located. Any person with an existing or future interest in the property may bring the action. However, whether the owner of a future interest in entitled to partition will depend upon the particular circumstances. Partition actions by owners of future interests are uncommon. All persons or entities having interests in the property should be joined including lien holders such as mortgagees and deed of trust holders.
Of course, the parties can always reach an agreement to partition a property without resort to litigation, either through negotiation or mediation. Whether a referee should be involved after the parties have agreed to a sale will depend on the degree of amicability. If there are strong, underlying tensions that might interfere with the sale process or which will prevent effective marketing of the property, it may be appropriate to file a friendly partition action and obtain the appointment of a referee. (The role of a referee is discussed below.)
As mentioned, the proper jurisdiction is within the county where the property is located. The court has broad equitable powers to protect the interests of all concerned, to prevent waste and to otherwise protect the interests of the owners. In a significant portion of the cases, one of the parties is in possession of the property, whether residing therein in a residential context or operating a business therefrom in a commercial context. There may be issues of fair rental value, payment of the mortgage, insurance, and maintenance expenses, or preservation and distribution of rental receipts. As each situation is different, it is essential that the parties carefully consider the administrative aspects of the property as well as the marketing and sales requirements so that the Interlocutory Judgment may be appropriately fashioned. The Court is empowered to "order allowance, accounting, contribution or other compensatory adjustment among the parties according to the principles of equity." CCP 872.140. The court may require the parties to contribute funds to the operation of the property, to grant access to the property to various persons including the referee, and to make whatever other arrangements are necessary to preserve the asset and to separate the dispute over the property from the efforts to get it sold. Once the partition action is filed there typically emerges an awareness among all the owners that the property will be sold and it may become possible to obtain agreement as to many otherwise disputed administrative matters. Counsel should restrain their clients from interfering with the sales process or with the performance of the duties of the referee.
Counsel must be aware that while there is a right to obtain a judge's order to resolve these disputes, obtaining that order is neither simple nor cheap, particularly when one of the parties is in denial as to the right of the plaintiff to have the property sold. In some counties it can take two or three months to schedule a court hearing, and the judge may not be willing to grant any immediate orders until some or all of the underlying disputes are resolved by evidentiary hearing. The attorneys fees involved in such a request can easily exceed $2,500 per side, per request. For these reasons, informal compromises are always the better solution.
All current co-owners and all persons with existing or future interests in the property must be named as parties to the action. If the property is subject to a lease, the tenant should also be named, although it is common to obtain a stipulation from the tenant that they do not have to become actively involved in the litigation. The presence of the lease generally means that the property will be sold subject to the leasehold and that can affect valuation in either direction, particularly when the rental rate differs from the market standard or the lease has peculiar provisions that affect the value of the tenancy. The presence of a leasehold may preclude an owner-occupier purchaser, who often is willing to pay a higher price than an investor who is more focused on the rate of return represented by the rent flow.
It is a statutory requirement that a Lis Pendins be recorded when commencing the proceeding. And, it is also a requirement to name as defendants all of the lenders, which has the potential of triggering an immediate calling of the mortgage loan. More typically, however, the lenders enter into a stipulation that allows them to sit out the litigation, so long as the mortgage loan is kept current while the case is pending. Some parties deliberately avoid bringing the lender into the lawsuit to avoid any loan acceleration problems. If a referee is appointed, normally the referee is the only person thereafter authorized to sign a deed or to act in a fashion that would encumber the property. Recording a memorandum of the Interlocutory Judgment would serve the purpose of third party notification and prevents further encumbrances during the pendency of the action.
The Interlocutory Judgment of Partition must incorporate the court's determination of the status of all claimed owners, the status and priority of all liens on the property and the various rights to the property of the owners. See CCP 872.630(a). It should also contain detailed instructions to the referee who is usually appointed by that order upon the nomination of the parties.
Waiver is a matter for court determination. Partition of future estates is rare and is only allowed if in the interests of all parties. Courts should determine the intention of the grantor, the expenses and burdens attendant upon partition, changes in circumstances that may have arisen since the estate was created and the needs and interests of both present and future owners. The court, sitting in equity, has broad discretion in making this analysis. As future interests have uncertain values and are not readily marketable, courts are very reluctant to order them partitioned. Partition must be distinguished from an action for waste by the holder of a future interest.
Because the right to partition is the absolute right of a concurrent owner, the court must order this relief even if it results in economic detriment to the remaining owners. In some instances, compensation for this detriment may be considered in allocating the sale proceeds. In those rare cases where a property can actually be physically divided, the court may rely upon the referee to assist in determining whether physical division is appropriate and how it should be accomplished. This determination may involve civil engineers, surveyors and the like.
THE REFEREE
In many respects, the role of the referee is similar to that of a receiver and special master. The referee is a "quasi" judicial officer whose responsibilities are, in effect, an extension of the court. The referee is a neutral party and does not represent either side of the dispute even if his or her appointment is the result of the nomination by one side, as is usually the case. Creative use of the referee can often save a great deal of money and may result in higher proceeds from the sale. Ideally, the referee should have both solid litigation and real estate experience. The interlocutory judgment specifies the referee's authority over the property. The referee may be instructed to investigate and report back to the Court such matters as the value of the property, the likelihood of environmental issues, the suitable approach to carrying out a sale, and any of a myriad of other issues that can arise in this context. The referee will be instructed to list the property for sale if an independent broker is desired and the commission rate is usually specified. The referee is generally empowered to collect rents and pay appropriate bills pending the sale. Counsel should carefully consider instructions to the referee as these may serve to avoid disputes while the sales process is proceeding. If the referee is a licensed real estate broker who is familiar with the market in which the property is located, it may be possible to designate the referee as the listing agent, with the commission serving as compensation to the referee in lieu of hourly fees. This is often an economical result.
The referee must remain neutral in the performance of his duties and should have access to and cooperation from counsel for all parties. The referee is responsible for supervision of the sales process. As noted, it is not uncommon for the referee, if properly licensed, to serve as the listing broker in the sales transaction so long as the parties consent. In such an instance, the referee should not be compensated both from the sales commission and separately for services as the referee. Where the referee is separately compensated, and the property listed with a third party broker, the referee's fees may be paid, in part from the listing commission in lieu of the referral fees that are typical in the real estate industry. A referral fee is typically 25% of the listing commission.
The referee is typically required to post a bond once the property has been sold. This serves to protect the owners from referee negligence or defalcation. Because in California a sale by partition will inevitably be accomplished through an escrow held by a title company, the bond premium, which can be considerable, can be avoided by agreement if the title company is instructed to retain the sale proceeds pending a distribution order from the court. That instruction should be contained in the Interlocutory Decree of Partition by Sale. Most title companies are willing to serve this function for a reasonable period. With this arrangement, the referee never takes actual possession or control over the sales proceeds. It may be appropriate to require a bond with respect to the handling of rents and the amount of such bond is subject to negotiation between the parties.
The normal procedure is for the referee to either list the property through his firm, or to list the property with another brokerage. Once the property has been marketed and an offer has been received, the sale is subject to court confirmation and the overbid procedure in the same fashion as is a trustee's sale. (The parties can waive the overbid process, but great care should be taken in that decision.) It is not uncommon for the referee to provide bidding rules in writing for prospective bidders and it is quite common for overbids to occur. The sale is advertised in the appropriate legal newspapers. A broker bidding on his own behalf is not entitled to a commission on the sale. The buyer who successfully overbids must promptly confirm their financial ability to complete the sale within the normal thirty day period if the property is a residence, or within a longer, appropriate period if the property is commercial or industrial. The referee may impose commercially reasonable conditions on the winning bid. If there is any doubt as to the winning bidder's ability to close, the referee should accept a backup bid. A referee sale is on a true "as is, where is" basis without warrantee. The referee is not required to make the kinds of disclosures that would be required in an ordinary transaction even if the property is a residence. However, depending upon the circumstances, the referee might encourage the owners to make those disclosures as a matter of general prudence.
The most common reason why some parties waive the confirmation process is that it allows a real estate agent to sell the property just as if it were a private sale. This may avoid the "stigma" of a forced sale, as it allows a buyer to have certainty about the purchase, without having to go through an overbid and confirmation process in court. However, waiving the confirmation process only makes sense where the parties have a high degree of trust in the referee and the agent, the valuation of the property can be readily ascertained, and the market is active enough to attract multiple offers. If such a private sale is contemplated, the parties are well advised to provide all of the disclosures that would ordinarily be required or appropriate.
The proceeds of the sale remain under the control of the court and under the above suggestion, are retained by the title company pending a distribution order. In some instances the court will order that the proceeds be placed in a blocked account in a local bank. Once the sale has been completed and the claims among the parties resolved, in consultation with counsel for the parties, the referee should prepare an order of distribution to be approved by all parties or their counsel. CCP873.820 specifies generally the order of distribution. There are often costs and expenses that should be taken into account that are not specifically addressed by that section. For example, if there is a need for funding while the action is pending as, for example to pay mortgage installments or real property taxes, and one party advances those funds, the distribution order should address that reimbursement. Likewise, the costs of the proceeding, attorney's fees incurred by various parties, referee's fees, real estate commissions, etc. are all addressed in the distribution order. It is good practice for any brokers involved in the sale to receive their commissions not when the transaction closes, but pursuant to the distribution order and this should be specified in the listing agreement. As the proceeding is equitable in nature, the court has broad discretion to allocate professional fees among the parties if deemed appropriate. However, courts are not inclined to allocate fees and costs in a punitive fashion, and thus it is rare for the court to order one party to pay all of the fees of both parties. However, if one party's behavior causes the costs of sale to be unreasonably increased, or if the parties had a written contract that provided for allocation of fees, the court may allocate the fees and costs accordingly. Once the distribution order is obtained, a certified copy is provided to the title company and the proceeds of the sale are distributed accordingly. Occasionally, the distribution order is the result of a contested hearing.
SELECTION OF THE REFEREE
The referee is typically designated in the Interlocutory Judgment of Sale by Partition although the court may appoint a referee earlier in the proceedings if investigatory work is required. Usually, the individual is appointed upon the nomination of one of the parties or by agreement although in some instances, the court will appoint a person with whom the court has had prior experience. A party proposing to nominate a referee should obtain a resume and a statement of experience which are attached to the petition, and should attempt to obtain agreement with opposing counsel as to the nomination. There are a few people who perform this function on a regular basis and this is one instance where experience counts, particularly if there are unusual complexities. It is helpful to discuss the performance of the referee with counsel who have nominated them in other cases. Once a candidate has been determined, it can be very helpful to discuss the case with them in advance of the motion for appointment so that appropriate instructions can be formulated and practical, administrative issues can be resolved. An experienced referee can be very helpful in this regard..
The referee is generally given plenary power over the property with the specific instructions to carry out a sale and to manage the property until such time as the sale closes. Specific instructions as to such matters as repairs, maintenance, distribution of rents and the like are very important and a good referee will help formulate such instructions which are also incorporated into the Interlocutory Judgment. When commercial property is involved, it may in some instances be prudent for the referee to arrange for a Phase I environmental review. The referee might also audit rental histories, confirm that existing leases are being adhered to and obtain estoppel certificates from tenants. The referee may be required to report back to the court and counsel on various matters. As each case is different, providing the referee with detailed instructions in the interlocutory judgment serves to avoid later controversy.
Depending on the particular situation, in some instances it can be useful to appoint a retired judge as a referee, especially if the judge is authorized to issue rulings that are immediately enforceable. This is particularly true where you have a very recalcitrant co-owner, who may need to be ordered to comply with the preparation of the property for sale, or to move out of the property so it can be sold. The referee is empowered to apply to the court for instructions. Counsel should encourage their clients to support and cooperate with the referee's efforts as courts will impose sanctions for behavior that subverts the object of the Interlocutory Judgement. Remember that the right to partition is nearly absolute and dilatory defenses are not favored.
It is useful to recall that the purpose of the appointment of the referee is to remove the sale process from the underlying dispute. This serves many objectives not the least of which is the likelihood that a higher sales price will result. The attorneys for the parties are well advised to allow the referee to proceed with his duties without interference or micromanagement. An experienced referee should know how to manage the sales process and in particular, the steps necessary to prepare the property for sale, to ascertain the pertinent facts necessary to support the sales process, and most importantly, how to keep that process moving. A good referee will keep counsel informed as to progress and will involve counsel in decisions such as the selection of a listing broker so long as those decisions remain removed from the underlying dispute.
Some referees are both attorneys and licensed real estate brokers affiliated with larger brokerages. In appropriate cases, they may be willing to participate as the listing broker in lieu of receiving separate referee fees. While this arrangement may not be suitable in all instances, it can substantially reduce the cost of the partition sale to the litigants and can result in a more efficient and effective sale process. Referees who agree to be compensated in this fashion often have relationships with title officers who understand the complexities and issues generally relating to a partition sale. It is very important that the title officer fully understand the nature and complexities of the sale and it is generally the referee's responsibility to make sure that occurs. This is very important, for the typical title officer has seldom, if ever seen this type of proceeding. Likewise, most real estate brokers are unfamiliar with partition sales and simply do not understand that they must be handled in conformity with the statutes. The appointment of an inexperienced broker or sales agent could be a costly mistake. As an example of the differences between a partition sale and an ordinary escrow, the real estate commission in an ordinary sale is paid from the escrow and at the time that title is transferred. In a partition sale, payment of the commission should await the distribution order. Similarly, in a conventional sale, once the parties are in contract and the conditions are fulfilled, the matter proceeds to closing without concern for third parties. In a partition sale, the buyer's broker often can be displaced during the confirmation process by an overbid buyer who is represented by another broker, and if so, the escrow process begins anew. Remember that all claims between the parties must be resolved before the proceeds are distributed.
Courts are becoming increasingly familiar with partition actions because there are many partial interests in real property that are resulting from intergenerational transfers, either by deed or by estate administration. While the structure has very old antecedents, it is sufficiently flexible that it can be made responsive to the great variety of co-ownership disputes.
Thanks are extended to David Nemer, Esq. and to Frederick Hertz, Esq. who were gracious enough to review this article.
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