California Partition Law Blog
Often, the question of distributing rent earned on a co-owned property arises in the context of cotenants. Cotenants have equal rights to possess their property with their fellow cotenants. This means that no one cotenant can exclude another from the property. One cotenant can, however, assign their right of possession to a third party.
This can happen when a cotenant rents out part of the property to a tenant. In this situation, the other cotenants still have the right to possess the property, but they do not have a right to exclude the tenant. The tenant is also prohibited from excluding the other cotenants from occupying the property.
How can a cotenant lease property they co-own?
Even though a cotenant shares an equal right to possession of their property, cotenants are permitted to lease the property to a third party without the consent of their fellow cotenants. The leasing cotenant – or “lessor” – can lease their right to occupy the property “as fully as such lessor…himself might have used or occupied it.” (Verdier v. Verdier (1957) 152 Cal.App.2d 348, 352.)
This principle seems to contradict the general rule that cotenants are prohibited from acting in a way that is prejudicial to their other cotenants. (See Tompkins v. Superior Court (1963) 59 Cal.2d 65, 69.) Courts have addressed this tension by upholding non-lessor cotenants’ right to occupy the property, even when the lessor-cotenant has leased the property to a third party tenant.
The lessor-cotenant can lease to a third party allowing the third party to occupy the property in the same way the lessor-cotenant has the right to occupy the property. Therefore, the third party tenant’s occupancy is not prejudicial to the other cotenants because the lessor-cotenant is simply transferring his occupancy rights to the third party tenant. If in the lease agreement between a cotenant and a third party tenant, the cotenant grants the tenant exclusive possession, the other, non-lessor cotenants will not be bound by that lease provision. The appeals court in Swartzbaugh v. Sampson stated that lease provisions which “come[] in[to] conflict with the interests of the co-tenants” are void. (11 Cal.App.2d 451, 460.)
For example, Shawn and Julie are cotenants. Shawn then leases the property to a third party, Jack. Jack may occupy the property to the same extent Shawn was able to occupy the property while Julie continues to live there. But just as Shawn could not exclude Julie as his cotenant, Jack may also not exclude Julie. If Jack excludes Julie, Julie could sue Jack to recover “the reasonable value of the use and enjoyment of h[er] share” of the property. (Swartzbaugh, 11 Cal.App.2d at 457.)
Similarly, just like Julie could not exclude Shawn from occupying the property, Julie cannot exclude Jack once Jack is a tenant of Shawn. In fact, if Julie tries to keep Jack out of the property, Julie could be liable for trespass. (See Verdier, 152 Cal.App.2d at 352.)
Who is entitled to the rent proceeds?
Generally, the cotenant acting as a lessor is entitled to collect the rent payments of his tenant under a lease agreement. (In re Knox’ Estate (1942) 52 Cal.App.2d 338, 354.) But the lessor-cotenant is also obligated to share the rent proceeds with his other cotenants “in accordance with their respective percentages of ownership.” (Garcia v. Andrus (9th Cir. 1982) 692 F.2d 89, 92.)
Before allocating his cotenants’ shares, however, the lessor-cotenant may deduct property taxes and other maintenance expenses he incurred during the period when rent was collected. (See Ochoa v. McCush (1931) 213 Cal. 426, 431.) Furthermore, in a partition action, “maintenance or protective expenditures on the common property” made by the lessor-cotenant, like mortgage and insurance payments, may lead a court to offset the value of the non-lessor cotenants’ interest in the property. (Hunter v. Schultz (1966) 240 Cal.App.2d 24, 32.)
The lessor-cotenant is not entitled to management fees associated with the leasing of the property, unless all of the cotenants otherwise agree. (Steeve v. Yaeger (1956) 145 Cal.App.2d 455, 464.)
If you are a co-owner of a property with another cotenant or cotenants, it is important to understand that your cotenants are permitted to lease the property to third parties. It is also important to know that the law does not micromanage how cotenants should occupy their property. These practical decisions must be made by the cotenants.
Similarly, if one cotenant leases to a third party tenant, the lessor-cotenant and his fellow cotenants must figure out whether the non-lessor cotenants will occupy the property during the lease term and to what extent. If the property is not a non-lessor cotenant’s primary residence, the cotenants might agree that the third party tenant will lease the entire property so the cotenants will earn the most rental income from the lease.
But if the non-lessor cotenant intends to live in the property, this cotenant cannot exclude the third party tenant. And as discussed above, the third party tenant may also not interfere with the occupying cotenants’ rights to use and enjoy the property.
An Example
Consider cotenants Shawn and Julie and Shawn’s third party tenant, Jack. If Shawn and Julie both own a 50% interest in the property, then they are both entitled to 50% of whatever rent payments Shawn collects from Jack. But if Shawn owns 90% and Julie only owns 10%, Shawn will be entitled to 90% of the rental proceeds. Furthermore, if Shawn spends money on routine maintenance, property taxes, and necessary repairs during the course of Jack’s lease, those expenses can be deducted from the rent proceeds before he distributes the rest to himself and Julie.
How the Underwood Law Firm Can Help
If you or your cotenant have decided to lease your jointly owned property, it is helpful to understand how the rights of each party may be affected. It is important that you are aware of your and your cotenants’ ownership percentages and that each cotenant is entitled to be paid a portion of a third party tenant’s rent. The knowledgeable and dedicated attorneys at Underwood Law Firm, P.C. can help ensure that your property rights are protected if you or your cotenant chooses to lease your jointly owned property. Contact us today.