The modern American family has changed, and with that change, so has how we purchase and hold title to real estate. Now, almost 60% of real estate is owned by more than one unmarried persons. From straight to same-sex couples, to siblings inheriting real estate from a deceased parent—the complexity of how we hold title to real estate in our society has grown in recent times. When a dispute arises in these unmarried arrangements—whether it be a parting of ways, disagreement over management or operation of the property, or otherwise—a divorce action cannot be filed to compel the sale or division of the assets. Instead, we must look for a different remedy. One such remedy which has become increasingly useful in these changing times is a “Partition Suit”.
The “Partition Suit” traces its origin to old English common law. Centuries ago, in the English feudal system, the majority of landowners held their real estate in farmland, with very few permanent building structures. When co-owners of a farm could not come to a mutually agreeable solution for dividing the property, they could petition the King’s Court for relief. The Chancellor (a type of English Judge) then would simply order that the farmland be divided according to the each owner’s particular interest in the property, a process which came to be known as “partitioning” the property. Thus, if two individuals held equal ownership interests in the property, the court would partition the property in half, with one half going to each individual. Likewise, if three individuals co-own a piece of property in equal interests, each would receive one-third of the property in a partition. Although the power to partition is very effective when dealing with the land itself, the same cannot be said in modern times because most real property is covered with houses, apartments, and other permanent building structures, which cannot be so easily divided in equal portions. This difference in the times has led to an added element in modern-day property disputes—the partition by sale. Now, the party seeking partition will petition the court to force a sale of the property and then divide the proceeds of that sale according to each owner’s interest in the property.
A partition by sale is a particularly effective course of action for beneficiaries of an estate who cannot agree on what to do with a house they jointly inherited. Often, a brother and sister will inherit the family house from their deceased mother. Sister had been living with mom for the last couple of years caring for her, prior to her death. Now that mom has passed, sister wishes to continue living in the family home. However, brother, having a family of his own, wishes to liquidate his portion of the inheritance by selling the house. It is a story as old as the parable of the prodigal son. One beneficiary wants to keep and use the family house exclusively, while the other wishes to reduce his inheritance to cash for use as he sees fit.
When applied to this situation, the partition by sale suit is a particularly effective tool for settling the dispute. Under the pressure of the partition suit, the siblings have four options available to them: (1) Sister can buy out brother; (2) Brother can buy out sister; (3) Brother and sister can agree that sister will continue living in the house; and (4) the house can be sold to a third party. If brother and sister cannot agree, he always has the ability to petition the court to force a sale of the house and division of the proceeds.
In addition to a forced sale, the partition suit permits one party to seek contribution from the other for expenses associated with maintaining the property. For example, if sister had been maintaining the property and paying property taxes and insurance on the property prior to its sale, she can make a claim for contribution from her brother for his portion of those expenses, which would then be deducted from his share of the proceeds. Thus, the proceeds can also operate to balance the equities between the parties. Notably, the contribution amount may exceed the value of a party’s interest in the property. For example, assume that the house sold for $100,000 and had an outstanding loan balance of 50k. After the outstanding loan is satisfied from the proceeds, brother and sister would each be entitled to $25,000. However, sister may allege that brother owes $30,000 in contribution for his portion of property repairs, which she incurred prior to the sale. The $30,000 in contribution would exceed his $25,000 equity interest. Thus, assessing the following three factors is imperative when considering a partition by sale suit to settle a property dispute: (1) the value of the property; (2) any debt against the property; (3) the likelihood and amount of any contribution claim by other parties with an ownership in the property. A party considering a partition action should consult with an attorney to develop a strategy and to set out the possible upside as well as the downside in pursuing such a remedy.
Jeffrey D. Katz Esq. is the founding partner in the law firm JDKatz, P.C. Formerly with KPMG’s Mid Atlantic tax practice, Mr. Katz’s practice focuses on tax, estate planning and real estate matters. Mr. Katz is admitted to practice in the State of Maryland, US Tax Court, US District Courts for Maryland and the District of Columbia, and before the United States Fourth Circuit. Mr. Katz routinely lectures on estate and corporate law issues in Washington, DC and suburban Maryland. Mr. Katz lives in Montgomery County, Maryland. He may be reached at 301-913-2948.