TWO BROTHERS, Bill and Tom, inherited an apartment building from their parents. The older brother, Bill, took the reins and oversaw management and accounting – except accounting wasn’t his forte. Bill’s idea of accounting was using a pencil and paper, and over time he stopped sending statements to Tom. Eventually, Tom got fed up with the lack of communication but didn’t know what to do.
It’s common for family members or business partners to co-own residential and commercial property. Unfortunately, it’s also common for them to have a dispute over the property because of disagreements about long-term objectives, accounting, maintenance costs, renovations, mismanagement and much more. Such a dispute might be over the use or management of the property, or it might be an unrelated personal dispute in which co-owners want to go their separate ways. Whatever the cause, parties often reach a stalemate when trying to reach a resolution on their own.
Owners should be aware that they have a right to file a partition action, which requests that the court order the sale or division of the property. The courts employ two types of sales options: partitions in kind and partitions by sale. The judge has discretion regarding which to proceed with, but generally speaking, a sale is the more popular route. If one is dividing up land, such as farmland or a multiacre lot, a partition in kind may be ordered. But a partition by sale is typically the outcome because physically splitting up an apartment building, for example, is impossible. In a sale, the entire asset is sold, and then the proceeds are divided according to what the court has ruled each party should receive.
This process sounds fairly straightforward except that myriad factors come into play when determining how to divide proceeds from the sale. In the opening example, the court will need to determine if Bill adequately managed the property and appropriately accounted for dozens of items, including the following:
• Rent. Did Bill account for all incoming rent? Was the property rented out at market value, or did he rent it at “mom-and-pop” rates?
• Mortgage and property taxes. What was paid out?
• Maintenance and renovations. Were updates made and how were they paid for? Did Bill pay out of his personal funds or the property funds? Have the renovations increased the property’s market value? If so, by how much?
• Cash collections. For example, did the property have a coin-operated laundry room? How much was Bill collecting, and was Tom’s portion distributed?
Because there is no statute of limitations for a partition (assuming one hasn’t waived it), the court will do what’s fair and assess records and information as far back as needed. Often, a designated expert such as an appraiser or forensic accountant will get involved to review records and determine values.
Here’s how a partition proceeds, step by step:
One party files a complaint – yes, a partition is considered a lawsuit. If a co-owner is uncooperative or nonresponsive, the complaint tends to get that co-owner’s attention.
Once the complaint is filed with the court, a lis pendens is recorded with the county recorder’s office and serves as notice of the litigation, placing a cloud on the title. Essentially, potential buyers, lenders and so on are notified of the dispute. A lis pendens also may prevent the defendant co-owner from selling or encumbering the property.
The lawsuit is served, and the other side typically has 30 days to respond.
The lawsuit may settle quickly, with the party being sued saying, “Happy to buy out the other side; let me arrange financing.” But the party suing can also say, “No thanks,” because that party wants to see what the other side has been up to.
If the suing party does turn down the buyout offer, the lawsuit moves into discovery, where an assessment is conducted to determine the status of the financials, including accounting records, receipts, invoices, property tax bills, leases, checks deposited and so on.
At some point, there may be a deposition if either party thinks it is necessary to gain further information or identify misconduct.
If a deeper dive is required, this is when accounting experts step in and conduct their own analysis. Depositions of those experts typically take place in the days or weeks approaching the trial.
Finally, the case goes to trial. Most California courts strive to get cases to trial within one year of the complaint’s filing. That being said, partition actions rarely go to trial because the costs associated with attorneys, court-appointed referees and other items do not justify it, especially when it’s already been determined who owes what to whom. If emotions take over, especially in heated family disputes, the process can of course drag out.
The key to avoiding a property dispute is communication. If one party generally oversees the property, that person needs to communicate with the other parties regularly.
The quality of the communication is also important. Being transparent by providing complete monthly statements, invoices, receipts, cancelled checks and so on goes a long way to reassure the other co-owners.
A written agreement in place from the outset can avoid most potential problems; unfortunately, written agreements in family settings are almost nonexistent. In all co-owned properties, parties should have an agreement that spells out objectives for the property and respective responsibilities.
By John Vukmanovic, co-founder and partner, Delman Vukmanovic LLP, email@example.com.