Real property is held by two or more people for several reasons: for investment, as a residence for unmarried domestic partners, or as an inheritance from a deceased person. When these co-owners fail to agree on what to do with the property, one co-owner may file a lawsuit for partition, either to physically divide the property (if possible) or to sell the property and distribute the proceeds to the co-owners in accordance with their equity interests. Most co-owners, however, prefer a partition sale to a physical division of property.
A co-owner’s right to a partition sale
There are three forms of co-ownership: tenancy-in-common, joint tenancy with rights of survivorship, and tenancy by the entirety. Only tenancy-in-common and joint tenancy have the right to file a lawsuit for a partition sale. Property owned under tenancy by the entirety, which occurs when a married couple purchases property together, cannot be partitioned through a partition sale. This tenancy-by-the-entirety property can be partitioned in a post-nuptial agreement, legal separation agreement, or divorce settlement.
Because a co-owner can file a lawsuit for a partition sale, a lot of real estate investors would prey on family-inherited property. They would buy a co-owner’s share, and then file a lawsuit for the property’s partition sale. The property would be sold in an auction and purchased by the real estate investor where the price would generally be lower than fair market value. This allows the real estate investor to sell the inherited property for a profit.
The Uniform Partition of Heirs Property Act (UPHPA) process for inherited property
Since New York’s adoption of the Uniform Partition of Heirs Property Act (UPHPA) effective December 6, 2019, inherited property (or “heirs property” as it is called in UPHPA) owned under tenancy-in-common now goes through a different process before a partition sale. This is to prevent the sale of inherited property by real estate investors in an auction at prices below fair market value. UPHPA requires the co-owners to bargain in good faith regarding the sale of the property in a mediation conference. If this fails, the court is required to make a valuation of the inherited property in an evidentiary hearing. Based on this value, the property is offered to the defendant co-owners, who are given the right to purchase the share of the co-owner seeking partition. If the defendants do not exercise this right, property may be sold in the open market (and not in an auction) at fair market value.
Because the UPHPA is a relatively new law adopted in December 2019 and an intervening pandemic occurred in 2020 to 2021 which tolled sales in New York City, courts have not had the chance to interpret the UPHPA’s provisions. However, in 2nd Ave Holding 1 LLC v. Lowenbraun, 2021 NY Slip Op 31276(U)(Sup Ct, NY County 2021)(Supp. Decision and Order on Motion), a real estate investor purchased a co-owner’s 1/6 share and tried to force a partition sale by the court. The court, however, ordered the plaintiff to show cause why the property should not be considered heirs property. After making a determination that it was heirs property under UPHPA, one major contentious issue was the determination of fair market value by the court and at which point in time should fair market value be determined (whether it is from the date the lawsuit for partition was filed or the date the court ordered an appraisal of the property). In that case, the court declared that it had broad discretion to decide the date on which fair market value would be determined. In the end, the court averaged the values of the three appraisers (the court’s appraiser, the plaintiff’s appraiser, and the defendants’ appraiser) to arrive at the fair market value, upon which the defendants would be given the right of first refusal to purchase the share of the co-owner.
When is partition sought
A partition sale is generally sought when there is a disagreement regarding the use of the property. For example, a co-owner is living in the property, while the other co-owner wants to sell. Or one co-owner wants to sell the property, while the other wants to keep it as a rental property. Or an unmarried couple who purchased property has broken up, and one wants to continue living in the property.
There are several reasons why a partition sale may be sought by the owners. The court would consider whether the property could be physically divided (such as a vacant lot) or could only be sold with its proceeds distributed (such as a house). In the case of a vacant lot, there would be partition in kind, while in the case of a house, it would be a partition sale.
Generally, agreeing to partition the property is the most economical option for co-owners who do not wish to stay as a co-owners anymore. This would save the co-owners legal fees and court costs. However, when a co-owner refuses to partition the property, the other co-owner has no other remedy but to file a lawsuit for partition.
In this case, you will need a lawyer, like us, with this type of expertise. If you own property with someone else and you are in disagreement on how to use the property, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.