Hello everybody. As AOA members know, apartment buildings are frequently owned by two or more persons as tenants-in-common, joint tenants, or partnerships. Upon acquisition, the parties typically have harmonious ideas for the investment. Over time, however, disputes may arise concerning the management of the building, the wisdom of refinancing the property, desirability for its sale or exchange, and so forth.
Sometimes one co-owner or partner believes that another is embezzling funds or otherwise cheating in the operation of the building. One owner may want to sell, whereas the other may not. Income tax consequences of continued ownership versus liquidating the property may also create problems between the owners.
If such disputes cannot be amicably resolved by the co-owners, the Superior Court of each county in California has jurisdiction to offer the parties relief in connection with the sale or division of the property. The technical name for that procedure is “partition.”
Filing an Action for Partition
A partition of real property means that the Superior Court will supervise its physical division, or alternatively its sale, and thereafter order an allocation of any proceeds through an appropriate accounting. The Court’s jurisdiction is conferred by one of the co-owners filing a “Complaint for Partition” which names all other co-owners as defendants. A partner in a partnership may also file an action for partition unless it is forbidden by the partnership agreement.
An action for partition of community property between spouses may not be commenced under the partition statutes. (See: C.C.P. Section 872.210.) However, the court may partition real property during the ordinary course of a marital dissolution, i.e., a divorce.
To initiate a partition proceeding, one co-owner files his Complaint setting forth (1) a description of the property which is the subject of the action, (2) all interests that all co-owners have in the property, (3) a prayer for the partition of the interest therein, and (4) an allegation of facts justifying why a partition is appropriate. The Complaint may seek the partition of both real and personal property in the same action, such as a furnished apartment building.
Immediately upon filing the Complaint, the plaintiff must record a lis pendens with the county recorder so as to give notice to all others who deal with the property or have liens against it that a partition action is underway. If the notice is not recorded, the court may order the plaintiff to record the notice. The notice is particularly important so that creditors, such as existing or future potential lenders, may know that important matters affecting the property’s title are involved.
The plaintiff will then serve the partition Complaint on all other owners of record. Each other owner has 30 days after receipt of the Complaint to file an Answer setting forth the interest that the other co-owners claim in the property, all facts tending to controvert the allegations of the Complaint which the defendants do not wish to be taken as true, and, if the defendants wish to seek a sale of the property, an allegation of facts setting forth why that is appropriate.
During the months preceding the trial of the action, each party may engage in such discovery as is customarily available to other types of litigation. Discovery consists of depositions, interrogatories, production of documents, production of accountings, production of bills and invoices, production of receipt books, etc.
The purpose of discovery is to assist each party to determine exactly what interests the other parties claim, and to also determine the income and expenses of the property throughout the years of ownership. It also permits an owner to determine if any other owner embezzled or misappropriated rents or money generated by the apartment building.
If one party believes another party is embezzling funds or otherwise mismanaging the property, he may seek immediate relief from the court in the nature of a temporary restraining order. The court has the power to issue a TRO to prevent the property from being damaged, destroyed, embezzled or mismanaged. If any party violates the court’s orders, that party can be fined or even incarcerated. The Court may also appoint a referee (much like a receiver) to take over the management of an apartment building, collect the rents and pay the expenses.
Trial and Judgment
At the time of trial, the court is required to determine whether the plaintiff or any of the other parties has a right to partition. As a general rule, the court will order the partition of the property upon the application of any co-owner unless that co-owner had previously signed a waiver of his rights to partition. Except in cases of partnership property or property owned pursuant to a Tenancy in Common Agreement, it is rare that a co-owner would have signed a waiver. On the other hand, partnership and TIC agreements frequently provide for a waiver of that right.
If the court finds that the plaintiff is entitled to partition, it will render at trial an interlocutory judgment which determines the interests of the parties and orders the sale or other distribution of the property. The court also has the power to appoint a referee (i.e. an independent third party) to divide or sell the property as ordered by the court.
In some instances, the court may feel that a division of the property would be more equitable than a sale of it. For example, if the parties own two side-by-side identical twelve-unit buildings, the court may vest title of one in the first co-owner, and the other in the second co-owner. Or, if two adjacent vacant lots are owned by the parties, each may be awarded one of the two parcels.
If physical division is not possible, as in the case when there is one building and a single lot, then the court will order the sale of the real property and distribution of the profits upon a subsequent accounting. The sale may either be public auction or private offer solicitation, depending on which method the court feels would be the more fair and just one.
At the discretion of the court, the sale may be for all cash, or on credit. The court may also approve and prescribe the terms of security to be taken upon the sale, including the manner in which title to the security is to be taken. The parties themselves may bid at the sale and attempt to purchase a 100% interest in the property.
Proceeds Following Sale
The proceeds of the sale are applied in the following order: First, to the payment of the expense of sale; second, to the payment of the costs of partition (including attorneys’ fees paid by a party for the common benefit of all); and third, to the payment of liens on the property in order of priority, except liens which, under the terms of the sale, are to remain on the property. Thereafter, the court (upon an accounting) will order the distribution of the balance of the residue among the parties in proportion to their share as determined by the court.
Three Types of Partition
There are three types of partition in California, namely: Partition by Division, Partition by Sale and Partition by Appraisal.
Partition by Division, sometimes referred to as “Partition in Kind,” is favored since it does not compel a person to sell property against his will or disturb an existing form of inheritance. In general, forced sales are disfavored in California and the burden of proof to compel a liquidation rests with the party endeavoring to force the sale. If the Court is able to partition the property by physical division, it will do so, rather than order its sale.
As a practical matter, Partition by Division is not available with an apartment building because one single building (whether or not on a single lot) cannot be physically divided.
While Partition by Division is favored by our courts, Partition by Sale is far more frequently ordered. There are two types of property which typically justify a Partition by Sale rather than by Division. The first is property which is so situated that a division into sub-parcels of equal value cannot be made. That is the case with an apartment building. There is no way to physically sever the tenement, and to do so would likely constitute an illegal splitting of a single lot.
The second type of property which supports a partition sale rather than division in kind is one where the economics of it would injure the value of the resisting owner’s interest. For example, if the particular situation of certain land and the physical division of it would substantially diminish the value of a party’s interest, the Court will order the property to be sold collectively rather than divided up in pieces. (Attorneys reading this discussion may contact me for further information concerning the preference of Partition by Sale and the seminal 1982 Court of Appeal decision setting forth the parameters.)
A middle ground between Partition by Division and Partition by Sale is Partition by Appraisal. This method empowers one party, with the other party’s written consent, to petition the Court allow a buy-out of that other party’s interest at its appraised market value.
If the Court finds that Partition by Appraisal would be fair, it will then approve that procedure and supervise it through the completion of the buy-out.
An action for partition of real property is generally a remedy of last resort. The parties should always first try to reach agreement on what to do with the property. Failing that, filing for judicial partition is indicated as partition is almost always allowed by the court.
One non-judicial method often used for resolution is a procedure whereby two co-owners each appoint an appraiser to value the property. Also, the two appraisers might jointly select a third appraiser. Through a variety of techniques, the appraisals may be averaged or weighted so as to determine a fair value.
A co-owner may then have the right to buy out any other co-owner based on the appraised value, or else have the property placed on the market for sale at that value or listed for an amount not less than the appraised value.
Only in the event that the parties absolutely cannot agree should they consider filing a Complaint for partition. Nevertheless, the court remains ready, willing and able to assist if partition litigation is necessary.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 37 years. He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association. He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.
Mr. Alberstone has been awarded an AV rating from Martindale-Hubbell. An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity. You may Google “Dale S. Alberstone” for further background.
The foregoing article was authored on October 1, 2014. It is intended as a general overview of the law and may not apply to the reader’s particular case. Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.
Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1900 Avenue of the Stars, Suite 650, Los Angeles, California90067. Phone: (310) 277-7300.