Partition Actions: Remedies for Sour Relationships Between Property Co-owners
Question: I own a rental property with a friend, but we’re locked in disagreement on what to do with the property or whether to sell it. What legal remedies do I have?
Answer: Many people acquire investment properties with friends with only the best intentions, but fail to plan for and document an exit strategy. Inevitably, when there is unresolved disagreement about the property, the relationship between title holders can become untenable. Often times, these disagreements can be resolved through an informal negotiations. However, in some instances, parties have no choice but to seek formal resolution of the dispute through the courts. Generally, the type of lawsuit required to resolve a dispute over real estate between deadlocked co-owners is called a partition action. This type of lawsuit usually results in either: (i) the subdivision of the real estate into new parcels owned separately by each property owner; or (ii) the sale of the property.
I. Sale or Subdivision?
Colorado’s partition law encourages courts to consider subdividing disputed real estate into smaller and separate parcels to be separately owned by each party. This type of resolution is referred to as partition in kind. However, where partition in kind is not possible, such as with a single family residence for example, the court has the power to order: (i) the sale of property; and (ii) that the parties split the proceeds of the sale.
Courts are supposed to look to partition in kind first as the preferred remedy. If the court makes a finding of “manifest prejudice,” then it can order that the property be sold and the proceeds split in a partition by sale scenario. Prior to submitting their dispute to the court, the parties to a partition action can also agree on a partition by sale instead of asking the court to decide the appropriate remedy.
II. Accounting: Who Gets the Proceeds (and How Much) After a Partition By Sale?
Often times one investor will invest substantially more money than the other in the acquisition, renovation, maintenance or other aspects of the real estate. In these scenarios, it would be unfair for the court to simply order that the sale proceeds be split equally. For this reason, the courts have recognized that the parties to a partition by sale action are entitled to an accounting and equitable adjustments to the sale proceeds. The Colorado Court of Appeals has come up with a formula for determining the appropriate amounts that each party should receive. Generally, the court should start out assuming equal shares of net equity in the property and then make adjustments based on the evidence of the amounts contributed by each individual party. For example, if one party paid the property taxes for the entire period of ownership, such party would typically be entitled to a upward adjustment to his or her share of the proceeds in the amount of the total property tax payments.
Where one party performed work at the property to improve it, such party may be entitled to a favorable adjustment in the accounting process potentially resulting in a greater share of the sale proceeds. However, generally speaking, such party is not entitled to the value of the labor (or materials), but rather the amount by which the work improved the value of the property. This type of claim can be complicated as often times the dispute between owners arises years after one party performed extensive work at the property. However, the courts should consider evidence of work performed by an owner in the accounting process.
In the accounting process, parties should also understand that generally the debt encumbering title to real estate will be paid first. These types of expenses can include, mortgages, tax liens, and HOA liens, for example. Typically, only the net sale proceeds (after all encumbrances are paid) are subject to equitable adjustment between owners in the court’s accounting process.
A partition action can be a powerful tool when owners cannot agree on the management or disposition of commonly owned real estate. Many owners mistakenly believe that they cannot be forced to sell commonly owned property and are surprised to learn that this is generally not the case. Partition actions can be complicated and involve complex evidentiary issues, sometimes requiring expert witnesses. A party involved in a dispute with a co-owner should consult with a competent and experienced lawyer before proceeding with a partition action or other legal remedy.