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Common Uses for Partition Actions

John R. Yates

John R. Yates

Partition actions are useful in many situations. The common denominators are disagreements among co-owners that reach a deadlock, or the desire of one co-owner to “cash out” his or her investment by causing the sale or division of the jointly owned real property. Following are four repeating factual scenarios:

  • Siblings can’t agree on use of inherited real property. Brother and sister inherit their parents’ home. Sister lives in the home and refuses to move out, but pays no rent or pays a nominal amount of rent. Brother wants to sell, but sister refuses. Brother wants to raise the rent to the market rate for similar homes, but sister refuses to pay that rent. Brother files a court action seeking partition and fair share of past rent that could have been obtained had parents’ home been leased. The partition action will result in sister being removed from the home, the home being sold, and the sale proceeds distributed to sister being reduced to compensate brother for his share of lost rental income during the time sister prevented the home from being rented.
  • Ownership changes over time and current owners can’t agree on best use of real property. Three families purchased approximately equal shares of 1000 acres of farmland in Ventura County in 1948. For the next 60+ years, the land is rented to farmers in the area. Over time, the original purchasers all died and left their ownership interests to their children. In 2014, there are a total of 23 heirs of the original owners with an ownership interest in the property. One owner wants to buy the others out and use all 1,000 acres as his own farm, but is not willing to pay current market value for the property. Some owners want to sell all 1,000 acres to an outlet mall developer. The remaining owners would sell 300 acres to the developer, but prefer that the remaining 700 acres slowly be retired from active farming and turned into a nature reserve.

Multiple meetings of the owners over an 18-month period do not result in any agreement about what to do with the land that is acceptable to all of the owners. Finally, one owner with a 2% ownership interest files a court action seeking partition. Depending on land use and zoning regulations governing subdivision in the area where the land is located, and the nature and extent of any easements existing on the property, the result of the court action could be sale of the entire 1,000 acres at market price with division of the proceeds according to ownership interest. Another result could be the division of the land in kind, if the division could be achieved by awarding 23 parcels of approximately equal value according to each owner’s interest, without terminating any rights enjoyed by the holders of recorded easements. The more likely result is sale followed by distribution of proceeds.

  • Original owners reach deadlock on future use of developed real estate. Three investors purchase and develop five acres at the corner of a busy San Fernando Valley intersection. After development, the site contains a chain grocery store, a chain drugstore, a branch of a nationwide bank, five smaller units suitable for niche retail, and a 180-space parking area. All investors own equal shares, but one actively manages the property while two are passive investors.

Twenty-five years pass. Over this time, the investors start to quarrel regarding the future use of the parcel. The managing investor and one passive investor favor redevelopment into 100 condominiums with a pool, gym and other amenities. One passive investor doesn’t want the two-year termination of cash distributions that would be created by destruction of the existing improvements and redevelopment into condominiums. That investor thus favors keeping the development “as is” with modest investment in improvements for the existing tenants.

Both passive investors come to believe that the managing investor is not accurately reporting the rental income earned from the tenants and is shorting the passive investors on their twice a year distributions. Because the operating agreement signed by the three investors requires a unanimous vote for any course of action, the three co-owners soon reach a deadlock concerning the future use of the property. The managing investor files a court action seeking partition. As developed, this five-acre parcel will be impossible to divide into three sub-parcels of roughly equal value. Therefore, the result of the partition action will be the sale of the property as currently developed, with the proceeds distributed equally to the three investors.

  • One co-owner needs to “cash out” his or her investment for personal reasons. Two best friends purchase a small parcel on which they build, and operate, a liquor store, a small grocery store, and a coin laundry. After ten years, one of the friends wants to move to another state and the other can’t afford to buy that friend’s 50% share of the land and businesses. The friend that is staying also doesn’t want to be an equal partner with a stranger, and for that reason is not eager to seek purchasers for the 50% share of the friend that plans to move. At the same time, the friend intending to move learns that the value of his 50% share in the property and businesses on them is significantly less than 50% of the value the land and businesses if sold as an undivided whole. The friend intending to leave California files a court action for partition.

The result of the action will most likely be the sale of the property and the businesses as a whole package. Another possible result is the sale of the entire property, with the friend who is remaining in California purchasing the departing friend’s 50% of the businesses, while also reaching a lease agreement with the purchaser of the real estate. Either result means that the friend that wishes to leave the state cashes out his interest in the property and the businesses operating there.