When co-ownership disputes arise, parties often prefer to resolve the dispute outside of the courtroom, if possible, through buyout or other settlement agreements. In California, co-owners may modify their rights through written agreements, including their right to partition. Thus, co-ownership disputes are often resolved through buyout or settlement agreements
The Right to Partition
Co-owners of real property have an absolute right to partition, unless they have waived or modified that right through an agreement. (Code Civ. Proc., § 872.710 (subd. (b); LEG Investments v. Boxler (2010) 183 Cal.App.4th 484, 493.)
California courts have long held that “[a]n agreement giving rights of first refusal to the other tenants implies an agreement not to bring a partition action in lieu of a sale to the cotenants.” (Harrison v. Domergue (1969) 274 Cal.App.2d 19, 21.) Thus, co-owners must first offer their interest to the other co-owners at the agreed price before pursuing partition. If the nonselling co-owner then fails to exercise their purchase option within a reasonable time, the selling co-owner may then proceed with partition. (Schwartz v. Shapiro (1964) 229 Cal.App.2d 238.) Thus, in co-ownership disputes involving real property, parties must honor the right of first refusal in any co-ownership agreement before pursuing partition. (Id.)
How to Settle Co-Ownership Disputes
If a co-owner elects to pursue a buyout, co-owners can avoid filing a lawsuit, by reaching a settlement. In this instance, co-owners can negotiate a buyout, by agreeing to a property value, buyout price, before executing an enforceable written agreement to confirm the buyout.
(a) An exact price agreed upon for the value of the property.
Agreeing on an exact price for the value of the property is the starting point for negotiations. To determine a fair value, co-owners typically order a professional appraisal or mutually agree on the price.
Appraisal is a common resolution for co-ownership disputes over property value, when co-owners cannot agree on a purchase price. Under California Code of Civil Procedure section 873.910, partition by appraisal allows co-owners to acquire the interests of other co-owners at their appraised value. (Code Civ. Proc., § 873.910 et. seq.)
Generally, co-owners elect to jointly hire an appraiser to establish the property’s value as a preliminary matter. (In re Marriage of Dalgleish & Selvaggio (2017) 17 Cal.App.5th 1172, 1183-84.) Or, depending on the contentiousness of the relationship, co-owners may opt to each hire their own appraiser and then average the property values to establish an agreed upon amount. (Cheng v. Coastal L.B. Associates, LLC (2021) 69 Cal.App.5th 112, 119-20.) If each party elects to hire their own appraiser, and the appraisers cannot agree, the parties may then appoint a third appraiser to resolve the dispute. (Hooper v. Los Angeles Valve & Fitting Co. (1921) 55 Cal.App. 17, 19-20.)
Alternatively, existing co-ownership agreements may predetermine the property’s fair market value. (Civ. Code, § 1917.120.) Statutorily, co-owners can determine the property’s fair market value through mutual agreement, so long as the price would be agreed upon by a willing seller and buyer, each acting with full knowledge of the property’s purposes and uses, and without compulsion. (Id.)
Moreover, existing co-ownership agreements may require the parties to jointly hire an appraiser to determine the fair market value in a buyout. This occurred in In re Marriage of Dalgleish & Selvaggio (2017) 17 Cal.App.5th 1172, 1182-84.) Here, the court found an implied contract existed for the joint retention of an appraiser based on the parties’ communications and mutual agreement. (Id.)
(b) An exact price offered for the buyout.
Once the agreed upon property value is established, co-owners can determine the buyout price. The main aspect of this dispute resolution stage is calculating each owner’s equity and determining each owner’s share, accordingly.
Equity entitles co-owners, who improve the property in good faith, to recover contributions for amounts exceeding their proportionate share, from other non-paying owners. (Wallace v. Daley (1990) 220 Cal.App.3d 1028.) Other adjustments may be made to addressing outstanding debts or costs, including payments for taxes, the mortgage principal, and necessary repairs. (Id.)
In contrast, maintenance expenses are excluded from the equity calculation because they do not contribute to the property’s equity. (In re Marriage of Nelson (2006) 139 Cal.App.4th 1546.) These expenses include interest payments and insurances. Thus, regardless of whether the property is sold or divided, the parties must calculate their equity before setting an exact price for the buyout.
Once each co-owner’s equity is established, parties should negotiate the buyout price to reflect any outstanding payments between the co-owners. Typically, this involves deducting or adding equitable costs to the ownership share to determine the buyout price.
(c) An explanation of where the money will come from
Next, the co-owner buying the property must demonstrate how they will finance the purchase. The buyer’s ability to secure financing is highly dependent on the surrounding circumstances, including their financial resources and creditworthiness. (WYDA Associates v. Merner (1996) 42 Cal.App.4th 1702, 1716.) As such, providing an explanation of where the money will come from can vary from providing evidence of the funds in your bank account, or securing financing from a lender.
In some instances, purchasers without personal funds can show readiness and ability to pay by producing evidence of loan arrangements; however, this showing must include evidence that the lender is legally bound to advance the funds and has the financial ability to do so. (Am-Cal Inv. Co. v. Sharlyn Estates, Inc. (1967) 255 Cal.App.2d 526, 539-40.)
(d) Proof of mortgage qualification
Similarly, proof of mortgage qualification is crucial when refinancing. At this stage, the co-owner must show they are pre-approved for a new mortgage that is large enough to cover the existing mortgage on the property and the co-owner’s buyout price.
If a dispute arises regarding the validity of the mortgage qualification, the party asserting the validity of the mortgage must prove its validity. (Williams v. Belling (1926) 76 Cal.App. 610.) As such, producing documents that comprehensively establish the mortgage qualification and terms is crucial to proceeding in the buyout process, and avoiding additional disputes.
(e) A deadline for when you can expect to receive payment
When setting deadlines, parties should ensure the agreement specifies a clear and enforceable timeline to avoid any complications in the settlement process. However, if parties fail to include a timeline in their agreement, California law allows a reasonable time for performance. (Civ. Code, § 1657.)
In the context of real property transactions, a “reasonable time for performance,” depends on the transaction’s specific circumstances, agreement terms, and the co-ownership situation. (Kersch v. Taber (1945) 67 Cal.App.2d 499, 506-507.)(finding the parties’ situation and nature of the transaction are critical factors when determining a reasonable time.) As such, a “reasonable time for performance” can vary significantly.
For example, in Henry v. Sharma, the court affirmed 63 days was a reasonable time for the buyers of real property to perform under a residential property sale contract. ((1984) 154 Cal.App.3d 665.) Here, the court found time was not of the essence per the contract’s terms and instead allowed for discretionary time extensions. (Id.) The California Supreme Court has since upheld this principle, affirming that a reasonable time for performance is implied in a real estate contract when the contract does not otherwise specify a time, but instead deems the purchase price payable upon delivery of the deed. (Patel v. Liebermensch (2008) 45 Cal.4th 344.)
(f) An email or letter putting all of this in writing and signed by the other side
To finalize the dispute settlement, co-owners should execute a written agreement that specifies the buyout’s terms, highlighting the price, payment method, and timeline. Like any agreement involving a real estate transaction, the writing must comply with the statute of frauds. (Civ. Code, § 1624.)
The statute of frauds requires written agreements involving real estate transactions to include: (1) a description of the real property; (2) the purchase price and other essential terms; (3) identification of the parties; and (4) the writing must be signed by all parties against whom the contract is being enforced. (Id.) Additionally, the material terms of the agreement must be certain and definite. (Id.) As such, a written agreement, whether a letter, email, or formal contract, including all these terms, is enforceable if the other party signs the writing.
What is an Example?
“Shawn” and “Julie” are a couple, who recently broke up, and no longer want to own their house together. For the last two years, Julie had made all mortgage, property tax, and property related payments without any help from Shawn. Shawn has not lived in the property since they broke up and wants to sell the house. Julie lives in the house and prefers to buy Shawn’s interest.
Eventually, Shawn and Julie agree to hire an appraiser, who determines the property’s value is $500,000.00. Julie then calculates the entire sum of payments she’s made in the last two years; Julie’s payments total $50,000.00. The shared mortgage totals $350,000.00.
Using the appraisal, and Julie’s contributions, Shawn and Julie agree Shawn’s buyout price is $50,000. Julie then shares a copy of her mortgage qualification alongside a statement documenting where the funds will come from. Then, Shawn and Julie both sign a written agreement, stipulating payment will be made within 30 days of signing. 30 days later, Julie is the sole owner of the house and has avoided a lawsuit.
Conclusion
Co-ownership disputes vary in complexity and can change entirely in an instant. Understanding how to navigate a dispute without pursuing a lawsuit, can help protect your co-ownership interest and reach a quick resolution. If property ownership is a point of contention, partition may be a solution. At Underwood Law, our partition attorneys can help you navigate your action efficiently and with care. Contact us today.
