Co-Owners' Title to California Real Property

Co-Ownership Options

Ownership of real property in California by more than one person is referred to as co-ownership, co-tenancy, or concurrent ownership. There are four basic options to hold title of ownership of real property, and the best option depends upon the characteristics of each option in relation to the goals of the owners.  The options are tenancy in common, joint tenancy, partnership (or corporation or limited liability company), and community property.

1.         Tenancy in Common

A tenancy in common is created when the deed conveying title specifies that the owners are "tenants in common" or "in common."  If the deed does not specify the type of ownership, a tenancy in common may be created by operation of law.  Any number of persons may own property as tenants in common, and their interests may be equal (50% - 50%) or unequal (60% - 40%), but the interests must total 100%. 

Tenants in common may acquire their interests at different times and from different sources, and they may sell or borrow against their interest without the knowledge or consent of the other owners.  The main characteristic of this type of ownership is that there is no right to survivorship.  Therefore, the ownership interest of a deceased tenant in common passes by testate (e.g., will or living trust) or intestate succession (without a will or trust), and not by operation of law to the surviving cotenants.

Unless they have agreed differently as specified in the deed transferring title, all tenants in common have equal rights to the ownership.  They have equal rights of possession to the property, and neither may exclude the other from any part of the property, even if only one tenant is actually in possession of the property.  In other words, if only one tenant actually resides on the property, that tenant cannot exclude other tenants even if they never reside on the property.

All rents and profits, including the appreciation of the property, are shared among the co-tenants in proportion to their undivided interests.  This sharing also applies to any expenses (e.g., taxes and mortgages), and losses in value of the property.

2.         Joint Tenancy

Another common form of ownership is a joint tenancy, and it requires a single transfer that expressly declares that the form of ownership is a joint tenancy (e.g., "as joint tenants" or "in joint tenancy").  Married persons often hold title as joint tenants. To create a joint tenancy, there must be four unities of time, title, interest (must be equal), and possession.  The joint tenancy can only last as long as the four unities of title exist, and if one of the joint tenants unilaterally conveys its interest, then the joint tenancy is severed, and the remaining joint tenants hold their interests as tenants in common with the transferee.

The main benefit of holding title by joint tenancy is the right of survivorship that provides that upon the death of one of the joint tenants, the title of the deceased tenant automatically vests in the surviving tenants by operation of law, with no need for probate.  Therefore, if the joint tenants want the deceased tenant's interest to pass automatically to the other tenant (e.g., husband to wife, or parent to child), a joint tenancy should be used.  If the joint tenants want to be able to bequeath their respective interests by will or trust to another (e.g., husband wants to leave his share to his son by an earlier marriage), then a joint tenancy should not be used.

3.         Partnership

If the persons are investing in real property as a business proposition, then a form of ownership they could use is a partnership.  A partnership is an association of two or more persons to carry on a business for profit, and the real property is owned by the partnership, and not by the partners individually.  The property can only be conveyed in the name of the partnership, and the partners can only use or possess the partnership property on behalf of the partnership.

A partnership may be general or limited, and a similar type of business arrangement that can be used is a corporation or limited liability company.  A corporation or limited liability  company have the advantage of the corporate shield that may provide protection to the shareholders and members that a partnership may not provide.

4.         Community Property

The fourth form of ownership in California is community property, which is typically property acquired by a married person or registered domestic partner during the marriage or domestic partnership while he/she is domiciled in California.  There is a general presumption in California's family law statutes that all property acquired during marriage is community property, and a written agreement (e.g., pre-nuptial or post-nuptial agreement) is typically used to defeat the presumption and make the interests separate property.  Title can be taken in the name of "Joe Smith and Nancy Smith as community property with right of survivorship".

Regardless of the type of co-ownership, each of the owners typically have an equal right to the possession, use and benefit of the entire property.  One of the misunderstandings of some owners is that they can divide the property into separate parcels by defining the percentage of ownership in the title.  But when property is owned by co-owners, the ownership is to the entire property, in the percentages of ownership specified (e.g., Joe as to 70% and Jane as to 30%), or equal shares if no percentages are specified.  One cotenant has no right, absent an action for partition, to force another co-tenant to change the boundaries of the possessory interest.

The ownership of real property can be complicated and the form of ownership should be carefully considered based upon the unique characteristics of each type, and the goals of the parties. 

Duty Of Disclosure Depends On Knowledge Of Defects

Many buyers have become aware of defects in their purchase after the close of escrow, and wonder if they can sue the seller for failure to disclose material defects.  In California, the duty of disclosure of a seller depends on the extent of  knowledge regarding the alleged defects.

The elements of a cause of action for fraud based on concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.

A real estate seller has both a common law and statutory duty of disclosure.  In the context of a real estate transaction, it is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property, and also knows that such facts are not know to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. 

Undisclosed facts are material if they would have a significant and measurable effect on market value.  Where a seller fails to disclose a material fact, he may be subject to liability for mere nondisclosure since his conduct in the transaction amounts to a representation of the nonexistence of the facts which he has failed to disclose.

However, the obligation to disclose only arises if the defendant had actual or constructive knowledge of the deficiencies.

It is not unusual that there is a lack of direct evidence of a defendant's knowledge, as issues of mind can seldom be proved by direct evidence.  Actual knowledge can, and often is, shown by inference from circumstantial evidence.  Actual knowledge can be inferred from the circumstances only if, in the light of the evidence, such inference is not based on speculation or conjecture.  Only where the circumstances are such that the defendant "must have known", and not "should have known", will an inference of actual knowledge be permitted.

Sometimes deficiencies in a structure are only discovered during the process of demolition.  In the recent case of RSB Vineyards, LLC v. Bernard A. Orsi, the appellate court affirmed summary judgment in favor of the seller because the defects in the house would have been apparent only to a professional who was familiar with structural engineering and commercial building code requirements.  In order to create an inference of actual knowledge, circumstantial evidence must suggest that the defendant "must have known" of the matter to be disclosed.  In the absence of some evidence that defendants had reason to know of the defects, their sheer numerosity does not allow an inference of knowledge.

In California, case law and statutes place important and significant limitations concerning the circumstances under with the principal is chargeable with and bound by the knowledge of his agent.  Not all contractual relationships in which one person provides services to another satisfy the definition of agency. 

An agent is one who represents another in dealings with third persons.  If a service provider, such as a contractor, simply furnishes advice and does not interact with third parties as the representative of the recipient of the advice, the service provider is not acting as an agent.

Any knowledge acquired by the defendant's construction professionals about the renovated residence is not necessarily imputed to the defendant unless there is evidence to suggest those professionals were acting in the role of agent when they acquired that knowledge. For example, an architect preparing plans and specifications acts as an independent contractor, and ordinarily only acts as an agent and representative of the defendant when he is performing supervisory functions with respect to a building under construction.

In RSB Vineyards, the court held that any knowledge acquired by the seller's construction professionals about the renovated residence is not imputed to the seller because there is no evidence to suggest those professionals were acting in the role of agent when they acquired that knowledge.  Because the seller offered evidence that he had no knowledge of the various deficiencies in the building, the seller could not be held liable for nondisclosure in the absence of evidence that he had actual knowledge of the facts to be disclosed.

Lessons:

1.         Buyers need to be very proactive in investigating a residence before purchasing it.

2.         Buyers should not assume that sellers will be held liable for any defects the buyer learns about after the escrow closes because it may be difficult to prove the sellers, or their agents, had actual knowledge of the defects.

Notice of Pendency of Action aka Lis Pendens

Many misunderstand the effect of recording a notice of pendency of action, which is also known as a lis pendens, and a typical inquiry is whether the claimant can record a lis pendens to "stop a sale".  Although recording a lis pendens often has the effect of preventing the closing of a sale, it is because of its practical effect on title companies and buyers, and it is not a legal prohibition on a sale.  It is simply a notice that a legal action is pending, and of course, a legal action must be filed before a lis pendens based upon the action can be recorded.

In California, recording a lis pendens simply gives constructive notice that a legal action has been filed affecting title or right to possession of the real property described in the notice.  Any taker (i.e., buyer or lender) of a subsequently created interest in that property takes his interest subject to the outcome of the litigation.  It is this uncertainty that has the practical effect of discouraging any purchase or loan after it is filed.

In order to record a lis pendens, the legal action must assert a real property claim, such as a quiet title or partition action.  Other legal actions such as a divorce or partnership dispute involving real property can support a lis pendens.

A "court shall order" expungement of a lis pendens if the pleading on which the lis pendens is based does not state a real property claim, if the claimant fails to establish the probable validity of the claim on which the lis pendens is based, or if the giving of an undertaking (i.e., bond) would secure adequate relief to the claimant. 

If a party alleges that a lis pendens is "void and invalid" (under Code of

Civil Procedure § 405.23) because of defective service, the party may move the court to expunge it.  Any notice of pendency of action shall be void and invalid as to any adverse party or owner of record unless the requirements of Code of Civil Procedure § 405.22 are met for that party or owner, and a proof of service in the form and content specified in Code of Civil Procedure § 1013a has been recorded with the lis pendens.  I have reviewed lis pendens recorded by licensed attorneys that do not include a proof of survive, or the proof of service is defective.

Section 405.22 requires the claimant filing a lis pendens to serve the parties to whom the real property claim is adverse and to all owners of record of the real property affected by the real property claim as shown by the latest county assessment roll by registered or certified mail, return receipt requested, at all known addresses.

If the county assessor lacks a known address for a party or owner, the claimant may file a declaration to that effect in lieu of the mailing that would otherwise be required.   Service shall also be made immediately and in the same manner upon each adverse party later joined in the action.

In the recent decision of Rey Sanchez Investments v. Superior Court (PCH Enterprises, Inc.), the appellate court held the subject lis pendens was void and invalid because (1) no proof of service was recorded with the lis pendens, and (2) noncompliance with section 405.22 occurred  because after the petitioner  became a party to the action, service of the lis pendens was not made in the same manner as required by 405.22, and it was not made immediately upon the petitioner.

A lis pendens that is void and invalid under section 405.23 does not need to be expunged in order for it to be void and invalid, as that status exists ab initio, in those cases where no proof of service is recorded or the service is defective.

In my experience, the typical defect in the service is service by regular mail, and not by registered or certified mail, return receipt requested, at all known addresses, before the lis pendens is recorded.

Lessons:

1.         A lis pendens can be very effective at clouding title, and discouraging a purchase or loan

2.         A lis pendens requires a filed legal action that asserts a real property claim

3.         Service of the lis pendens is very important to prevent it from being void and             invalid