As was noted previously, the court shall order an appraisal of the property once it determines that the parties are entitled to partition. (CCP § 874.316.) But how does that appraisal process work?
Once the court orders the appraisal, it needs to appoint a disinterested and licensed appraiser to value the property as if only one person owned it. This is because properties with multiple ownership interests typically sell for less. Once the appraisal is complete, the appraiser must file it with the court. After this is done, the court must conduct a hearing to determine the property’s fair market value 30 days after notice of the appraisal is sent to each party. (CCP § 874.316 (f).)
After the hearing, the court shall then issue a decision/order/decree where it conclusively determines the property’s fair market value, giving notice to the parties. There aren’t any published cases discussing the contours of this process. But that’s primarily due to the clarity with which the statute outlines the appraisal process.
What is the Cotenant Buyout under the Partition of Real Property Act (CCP § 874.317.)?
This is, by far, the biggest change to the law of partitions in California. The Partition of Real Property Act and UPHPA basically allow the other parties to the lawsuit to buy out the plaintiff as a first option, instead of proceeding directly to a sale where the other parties could try to buy the property on their own (whether parties may make bids is usually a matter resolved when the court sets the terms of sale).
As the NCCUSL frames it, “this Act includes a mechanism for the buyout of interests as the first preferred alternative to partition by sale to promote judicial economy.” Under the NCCUSL’s view, “private tenancy-in-common agreements, whether for family property or commercial property, virtually always provide that a cotenant that wishes to exit ownership must first offer his or her interest for sale to other cotenants.” (UPHPA Final Act with Comments (2010) p. 18.)
Thus, this provision can be considered a statutory right of first refusal. Before the plaintiff can get the court to sell the whole property, they must first offer their interest to the other co-owners. The sale can proceed only if they refuse to agree to the buyout.
The implications of this statute are endless. The “glass-half-full” perspective is that it’s beneficial, because it allows for negotiation among co-owners using a court-set valuation of each party’s interest. It also allows for parties to keep property within the family, so to speak, providing a mechanism by which property interests can be consolidated.
As one commentator put it, “a successful buyout under the UPHPA of the interests of those in a particular case that petitioned a court for partition by sale will itself result in a tenancy in common that is more consolidated.” (Mitchell, Reforming Property Law to Address Devastating Land Loss (2014) 66 Ala. L. Rev. 1, 53.)
On the other hand, the cynical view is that the buyout does not mention calculating for credits and offsets, which is a crucial portion of any partition action in California. Suppose the parties own the property in equal, 50/50 shares. The Defendant, “Julie,” wants to pay for the plaintiff’s “Shawn’s” interest. But what if Shawn is the one who has been paying the mortgage, utilities, and property taxes? Alternatively, what if the home was only purchased because of Julie’s good credit? Is the statutory purchase price offset because of that fact?
These are questions presently unanswered by the courts in any jurisdiction. As such, though this Act seeks to avoid additional litigation, it will likely have the opposite effect.
How does the cotenant buyout work under the Partition of Real Property Act?
The first aspect of this statute is that the buyout is triggered only if the plaintiff requests partition by sale. (CCP § 874.317.) If that is the case, though, the court will notify the other parties to the action that they may request the buyout of the plaintiff’s interest.
Within 45 days of receiving said notice, any other co-owner can inform the court that they wish to buy the plaintiff’s interest. And the purchase price of that interest is the value of the entire parcel, as previously determined under CCP § 874.316, multiplied by the cotenant’s fractional ownership of the entire parcel.
Let’s start with an easy example by returning to Shawn and Julie, each with a 50% interest in the property. Suppose the house’s value was determined by the court to be $100,000. For Julie to buy out Shawn’s interest, she would have to pay: 100,000 (entire parcel value) x (50/100) (Shawn’s fractional ownership) = $50,000.
What if, though, the property is owned by three brothers, and a sister, and the sister wants to get bought out, and all three brothers each separately want to buy her interest so it doesn’t go to the others? How would that work?
This is where things can get tricky. Assume all four siblings own the property in 25% shares, and the property is valued at $100,000. Sister filed the partition, so she obviously cannot participate in the buyout. All three brothers submit notices to participate in the buyout, but they all want to purchase Sister’s entire interest. Under the statute, they’re out of luck.
Instead, the way it works is that the total percentage interest in the property of all potential purchasers who gave notice is 75% (all three brothers own 25% interests). So all three have a right to purchase 25/75ths of Sister’s interest. None of them can buy out more than the others.
Continuing with the example, Sister’s interest in the property would be 100,000 x 1/4 = $25,000. Each brother would then have to pay $25,000 x (25/75) = $7,500. Once the purchase was complete, each brother’s ownership interest would go from 25% to 33%.
What if a cotenant fails to deposit the buyout price under the Partition of Real Property Act?
Just because the parties submit notice of intent to participate in the buyout, does not mean the buyout process is over. To put it simply, life happens. And it’s certainly imaginable that a party would be willing to participate in the buyout, only for their source of income to fall out from under them. Surprisingly, the code provides for a procedure in this situation.
Recall the example above with the brothers and sister. All three brothers told the court they wanted to participate in the buyout. Under the code’s provisions, the court sets a date at least 60 days after the initial buyout notice period ends, by which each participating co-owners must deposit their buyout price to the court.
But suppose that Brother A, the eldest of the three, never deposits his $7,500. What happens then is that the other two brothers may elect to buy the interest that Brother A was going to buy. In other words, 25/75ths (one-third) of Sister’s 25% interest is still available for purchase by either of the other two brothers.
In order to participate in this second buyout round, both brothers need to deposit the entire $7,500 that Brother A would have paid. If they do, then the math works out as follows:
Each may pay a 25/50ths (numerator is each brother’s original share, and the denominator is the total interests of the cotenants who timely posted funds in both buyout rounds) share of the portion that Brother A failed to timely buy. So, each may pay $3,750 to receive one-half of Brother A’s one-third share.
Once the purchase is finished, Brother A will retain a 25% interest in the Property. But the other two brothers will both have 37.5% interests. Again, if multiple parties participate in the buyout, even a second buyout, the court will not prefer one over the other.
Want to learn more?
Find more of the Complete Guide to the Partition of Real Property Act here:
How the Lawyers at the Underwood Law Firm Can Help
While the courts and lawyers attempt to figure out the operation of the Partition of Real Property Act, litigants may feel stressed at the prospect of undertaking a partition governed by a relatively new law. These situations can be stressful, and difficult, especially when the way out is not entirely clear. Fortunately, the lawyers at the Underwood Law Firm specialize in partition actions and solving difficult co-ownership problems through civil litigation, helping good people end bad real estate partnerships. If you have found yourself in one of these situations, then please do not hesitate to contact the Underwood Law Firm.