Partnership problems? Solve them by filing using a partition action
Every so often, business partners need to go their separate ways. Most of the time they do it voluntarily, but in unusual instances, for instance, when there is no written agreement, an involuntary dissolution of the partnership needs to be put in place. This is called a “partition.”
This could be the dissolution of real estate (real property) or personal property and is typically available to partners who are joint tenants or tenants in common. This remedy may not be available to owners who hold title as community property or quasi-community property, such as in the states of California, Nevada, Washington, Idaho, New Mexico and Arizona, but partition actions under different scenarios may be available in those states as well.
Why partition?
We had a client who had a multigenerational “handshake” partnership. The father passed away and left his real estate to his son, the son passed away soon after, and the daughter inherited the family’s 25% of the partnership in two buildings. The majority owner wanted to sell one of the buildings and the minority partner did not want to cooperate. Unfortunately, the 25% interest had not been probated in either estate.
The majority partner ended up doing the work for the daughter and then used the partition process to sell one of the two buildings. This forced her to form an LLC to stand across from him in the other LLC. Many years later she agreed with the majority partner to sell the second building. Because they had gone through the legal processes earlier, they could take their shares and complete a 1031 exchange, or just take the cash. In this case, the minority owner was temperamental and difficult to deal with, and the partition was warranted.
In another instance, four siblings inherited a 50-acre parcel of land. They did not get along, ever. Over time, the property value grew, and they received an offer for the property. Three of the siblings wanted to reduce the proceeds for the fourth sibling. He resented this and went to his attorney to protect his interest by filing a partition action, and to signal to escrow that they had to allocate the proceeds equally, as was intended by the parents when they deeded the property to the kids.
His attorney explained to him that when a case like this goes to court, there are typically three possible options:
The court can force a sale and split the proceeds (as the court sees fit) by physical division, or appraisal, for example, to establish a value.
The attorneys manage to get the separate owners to the table in a negotiated settlement that the court then can approve. This process becomes expensive.
Much like in the biblical story where Solomon threatened to cut the property in half to find the correct mother, the court can split the property into equal portions.
The fourth partner insisted they move ahead, and they managed to negotiate an agreement where all four would get an equal share of the estate. As you can see, most cases are between family members who co-own property without an agreement, owners who were formerly in a romantic relationship but not legally married, and others who did not properly document their co-ownership of a property/ies business.
How to establish a partition action
The partition process usually involves legal representation on all sides. The partition complaint is filed and served upon all of the established partners (defendants).
The partition action proceeds like a civil lawsuit, except there is no right to a jury trial. The judge typically makes a decision after reviewing the facts of the case and hearing from the attorneys as well as the partners. A judge may also appoint a referee to make recommendations and oversee the partition process.
Partitions are typically not cut and dry. There are issues that arise, such as when one owner has paid for all of the operating expenses of the family cottage, or when one owner has caused damages or a depreciation of value, such as mining a property without sharing the benefits with the other owners, or a farming contract, or landlord/tenant relationship with a home or plex or commercial property that one or more of the owners has been benefitting from and excluding one of the other owners. These issues, coupled with non-documented multigenerational ownership, can often cause problems.
Costs
Costs vary from region to region. It is best to discuss costs with your experienced attorney. Typically costs will include the cost of a title report, legal fees, referee costs, and filing costs. They may also include surveying and appraisal fees, and potential geotechnical surveys and reports if mineral values are at stake. Legal fees escalate when the partition action is contested, or involves additional issues between the parties (as is often the case when someone has passed away without any planning for their death).
Summary
A partition usually commences because the owners are not in agreement regarding issues at the commonly owned property and there is no partnership agreement in place. This can be an emotional process, driven by parties who know they are right and don’t want to give in, between people that have been related to each other, married, or done business with each other for a long time. Often times, this involves multigenerational ownership of a property, where one of the grandchildren wants to keep the property in the family because of memories of “grandma and grandpa,” but the others do not. As we illustrated, partition is a judicially-driven tool that can help co-owners find a way to dissolve their partnership. It’s not a perfect tool, but hopefully better than cutting the baby in half.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
