In recent years, the growth of vacation rentals have driven the rise of purchasing investment properties in highly desirable areas throughout the country. For years, investment rentals were so profitable that many people jumped into the market and purchased properties to get a piece of the action. Unfortunately, in recent years, the sheer number of vacation rentals in these areas diluted the marketplace and made it increasingly more difficult to turn a profit from these investments, and in some cases, have lead to investment losses.
As many people who previously saw the advantages of these investments have recently seen problems the problems with these properties, they have been looking for legal methods to leave these relationships and receive the return of their capital. Frequently, many people find that getting out of these investments is a lot harder than getting in, if they can even find a legal way out. Many cannot. The attorneys at the Underwood Law Firm, however, are well-versed in the legal tools for helping good people get out of these bad real estate relationships.
What are the options for leaving a bad real estate relationship?
For those seeking to leave a bad real estate relationship, there are a few avenues of escape available.
First, parties should discuss their financial concerns with their partners to attempt to settle on a solution that works well for everyone, including potentially an immediate buy-out, or payout over a period of time. Often, however, these buyouts are complicated because both parties are on the mortgage, and a sale of an interest in the property may lead to a stepped-up tax basis for their former partners.
Second, when an informal resolution is unsuccessful and the property is held in a corporate form, such a corporation, it may be worth triggering the buy-out provisions contained in the operating agreement under the Uniform Partnership Act. Under Corporations Code section 16061, a partner can give notice to the partnership of their desire to dissociate and allows for their shares to be purchased.
Third, when there is no partnership agreement, however, then it may be necessary to dissolve the partnership. An “at will” partnership can end whenever the partners want it to end. (Corp. Code § 16101.) Under Corporations Code section 16801(5)(C), a partnership can be dissolved when it is “not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.” In that instance, the court can order the partnership dissolved. (Navarro v. Perron (2004) 122 Cal.App.4th 797, 801.) When a partnership is dissolved, then the remedy is to sell or “partition” the partnership’s property. (Logoluso v. Logoluso (165) 223 Cal.App.2d 523, 530.)
Fourth, when there is no partnership agreement and the property is merely held in the parties’ names, then any owner of record can force the sale of the property through something known as a partition action. A partition action is a judicial procedure whereby the court “segregates and terminates common interests in the same parcel of property” through a sale. (Moorpark Homeowner’s Ass’n v. VRT Corp. (1998) 63 Cal.App.4th 1396, 1404-1405.) In such an instance, the law allows for the non-partitioning property to buy out the other’s interests at an appraised value, or otherwise sell the property on the open market through a realtor.
Generally, a partition of real property occurs in four relatively straight-forward steps. Initially, the court determines that a party is an owner of the property with an absolute right to partition the property. Next, the court permits the non-partitioning owner with the option to buy out the other party’s interest at an appraised price. Then, if the other owner cannot or chooses not to buy the first owner’s interest at an appraised price, then the property is sold as part of an open market transaction through a realtor. Last, following the sale, the court divides the proceeds between the parties through something known as an “accounting.”
“Shawn” and “Julie” are friends who have known each other since college, and decide to buy a house in Lake Tahoe as a vacation rental. The parties own and operate the property for years, profitably, and without any problems. Recently, however, it seems like everyone owns a vacation rental in Lake Tahoe, and with COVID in the rear-view mirror, not as many people need to rent like they used to do for years. As such, the property in Tahoe has been losing money for over a year, and rather than taking money out, Shawn and Julie have been forced to pay the mortgage and other expenses from their own pockets. Even more problematic, Shawn has decided that he won’t contribute any more to the vacation rental, or answer her phone calls any more, which forces Julie to bear the burden for everything, which causes her to have many sleepless nights.
As the parties were such good friends, they simply bought the properties in their own names because they never expected to have any problems. As a title owner of the property, Julie has an “absolute right” to partition the property as a matter of law. After filing the lawsuit, the parties conduct an appraisal and Shawn has the opportunity to purchase her interests at the appraised price. With high interest rates, however, Shawn decides against buying her share. As such, the court orders the sale of the property on the open market, and the Judge appoints a realtor to sell it. The property is sold, and Julie is able to recover all of the money that she spent on the mortgage and utilities above her fifty-percent share. Through the partition action, Julie is able to be made whole and move on with her life.
How the Lawyers at the Underwood Law Firm Can Help
As many parties are finding that the vacation rental game is not all that it was cracked up to be, they are searching for a way out. 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, and 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 us today.