Co-owning
real estate by relatives, friends, or mutual investors can be a lucrative
financial investment, as they can pool their credit and funds to buy real
property, and hold it as joint tenants or probably more appropriately, as
tenants in common. Eventually, one of the co-owners will decide that they need
to sell the property, and the other may refuse, typically because they are
living in the property.
In California,
a co-owner of property has an absolute right to sue for partition (i.e., division
of value of the property among owners by sale under specified terms), unless
barred by a valid waiver. This means
that although one owner who lives in the property and may or may not be paying
any portion of the mortgage opposes the other owner who wants to sell the
property to avoid foreclosure or to liquidate the equity, the selling owner can
file a legal action to obtain the Court's judgment for a sale.
The judgment
of partition will require the property to be sold to the highest offer under
specified conditions. Such conditions
typically include the identity of the listing broker, escrow and title company,
procedure for deciding amount of list price and acceptance of offers, and
related decisions concerning price and terms of the sale.
In a
representative case, two brothers decide to purchase a single family residence,
and jointly live there and share all expenses, including the mortgage. They fail to prepare a written co-ownership
agreement. Thereafter, disagreements
occur related to living conditions and one of the brothers stops paying his
share because he was not sufficiently employed to bear his share of the
costs. The other brother moves out, but
continues to pay all of the mortgage and property taxes to avoid a tax lien or
foreclosure. Eventually, the paying
brother wants to sell the property so they can divide the equity of $300,000,
and the brother residing at the house refuses because he will have to move and start
paying rent somewhere else.
The paying
brother files a legal action for partition, to which there is seldom a good
defense, or than to argue credits and debts to change the normal equal
split. The opposing brother soon
realizes that not only is he paying his attorney to resist the action, but he may
eventually be responsible for one-half of the attorney's fees for the paying
brother. So in effect, if he resists the
partition action, he may increase the amount of the attorney's fees that may be
paid out of the equity in the house, and he may end up paying 75% of the
attorney's fees and costs. Protracted
litigation can potentially off-set the entire amount of the equity, leaving
both brothers with no net gain from the sale.
Reasonable
people quickly realize after the lawsuit is filed that a settlement for either
a buy-out or a sale is the best economic decision. Settlement of a partition action can include
interim stipulations (i.e., express written agreements, typically approved by the
court), that provide for a continuance of the trial, and a specific procedure
to list and sell the property and keep the net proceeds in an escrow. Thereafter, the parties can proceed to trial
of the claimed credits and debts.
However, after the funds are liquidated and on deposit in a trust
account and available for distribution upon the court's approval and signing of
the judgment, the parties often become more reasonable and motivated to make a
deal that provides for them receiving distribution checks.
The
settlement should include terms for resolution of the attorney's fees and costs
incurred because a legal action was made necessary by the opposing party. Unless there is an agreement, statutory costs
are apportioned among the parties in proportion to their interests, or the
court can make such other apportionment as it determines may be equitable. Attorney's fees that were incurred for the
common benefit in the action are required to be apportioned among the parties
to the action under Civil Code § 874.010, et seq.
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