The Financials Behind Tenancies in Common

Underwood-Blog-Images-4-300x300Co-owning property as tenants in common is the favored form of joint ownership in California. (Wilson v. S.L. Rey, Inc. (1993) 17 Cal.App.4th 234, 242 (S.L. Rey).) Yet, property held in tenancy in common brings with it a unique set of potential issues that are not present in the other forms of joint ownership recognized by the state. (see California Civil Code, § 682.) 

Different ownership interest percentages between co-owners can affect one’s responsibilities for common expenses and levels of disbursement on a sale. A fiduciary relationship between joint owners can disrupt a co-owner’s ability to acquire an encumbrance. Payments for improvements to the property may not be recoverable in an accounting action if deemed “unnecessary.” These are just some of the issues we will attempt to address in this post about the financials of tenancies in common. 

Developing Co-Owned Property

At the outset, it is important to note the key features for holding title as tenants in common. A “tenancy in common merely requires, for creation, equal right of possession or unity of possession.” (S.L. Rey (1993) 17 Cal.App.4th 234, 242.) In essence, “all tenants in common have the right to share equally in the possession of the entire property.” (Kapner v. Meadowlark Ranch Assn. (2004) 116 Cal.App.4th 1182, 1189.) 

But because equal possession is the only requirement, this means that tenants in common can hold title in different ownership percentages. (see Donnelly v. Wetzel (1918) 37 Cal.App.741 [tenants in common held a one-third and two-thirds proportion of ownership, respectively].) For an in-depth discussion on the differences between tenancies in common and joint tenancies, please see our prior post on the topic.

If each tenant in common has the right to possess the property, does that mean each is equally responsible for improvements? The answer is no. “Neither cotenant has any power to compel the other to unite with him in erecting buildings or in making any other improvements upon the common property.” (Higgins v. Eva (1928) 204 Cal.231, 238.) 

Consent to improvements, however, does not affect a final accounting in a partition action. “Even though one cotenant does not consent to the making of the improvement… a court of equity is required to take into account the improvements which another cotenant, at his own cost in good faith, placed on the property which enhanced its value.” (Wallace v. Daley (1990) 220 Cal.App.3d 1028, 1036 (Wallace).) 

Enhancement to value is a noteworthy term. Case law suggests that ordinary expenditures, like those for maintenance and repairs, are unrecoverable in accounting actions if made by and for the benefit of the cotenant in possession of the property. (see Gerontopoulos v. Gerontopoulos (1937) 20 Cal.App.2d 261, 265.) Therefore, while a tenant in common can freely spend on such ordinary expenditures, even without the consent of co-owners, they may not be recoverable. 

Financing Property Development

There is also a question of how a cotenant may finance developments to co-owned property. Suppose two tenants in common acquired a mortgage in the process of purchasing real property. But subsequently, one of them acquired a second encumbrance on their interest for further improvements. 

This is the exact situation that occurred in Caito v. United California Bank (1978) 20 Cal.3d 694. There, there were two liens encumbering the property. The cotenants, the Caitos and the Caponis, were both liable on the note secured by the first trust deed on the property. However, without the knowledge or consent of the Caitos, the Caponis secured certain notes by placing a second trust deed on the Caponis’ interest in the property.

The court held that “when a cotenant has separately encumbered his interest in the property and, as here, such encumbrance is one of the subordinate liens, it attaches only to such cotenant’s interest.” (Id.) In essence, one cotenant may encumber his interest in the property, but that encumbrance affects his interest only. (Schoenfeld v. Norberg (1970) 11 Cal.App.3d 755, 765.)

Selling Property as Tenants in Common

As a general rule, each cotenant may sell their interest in the property without approval or consent from the other cotenants. (Wilk v. Vencill (1947) 30 Cal.2d 104, 108-109 [“One joint tenant may dispose of his interest without the consent of the other”].) But a tenant in common may not sell the whole property without the consent of the other co-owners. “A cotenant has no authority to bind another cotenant with respect to the latter’s interest in common property.” (Linsay-Field v. Friendly (1995) 36 Cal.App.4th 1728, 1734.) 

If, however, a cotenant feels the whole property needs to be sold, then they could bring a partition action. By statute, a co-owner of personal property is authorized to commence and maintain a partition action. (CCP § 872.210.) 

Moreover, this right is absolute. (Lazzarevich v. Lazzarevich (1952) 39 Cal.2d 48, 50.) And “such right exists even where the property is subject to liens, and whoever takes an encumbrance upon the undivided interest of a cotenant must take it subject to the right of the others to have such a partition. (Lee v. National Collection Agency, Inc. (N.D. Cal 1982) 543 F.Supp. 920, 922.)

Accounting

At the end of every partition action, the court conducts an accounting. “Every partition action includes a final accounting according to the principles of equity for both charges and credits upon each cotenant’s interest. Credits include expenditures in excess of the cotenant’s fractional share for necessary repairs, improvements that enhance the value of the property, taxes, payments of principal and interest on mortgages, and other liens, insurance for the common benefit, and protection and preservation of title.” (Wallace, 220 Cal.App.3d 1028, 1036-1037.)

These credits are taken out of the net proceeds before the sales balance is divided equally. (Southern Adjustment Bureau, Inc. v. Nelson (1964) 230 Cal.App.2d 539.) 

“When a cotenant advances from his own pocket to preserve the common estate, his investment in the property increases by the entire amount advanced. Upon sale of the estate, he is entitled to his reimbursement before the balance is equally divided.” (Nelson, 230 Cal.App.2d, at 541 citing William v. Koyer (1914) 168 Cal.369.)

Can Unequal Contribution Payments Affect Accounting?

Yes. The most important feature of an accounting is that its inevitability forces the ownership percentages of the property to be put at issue. In a suit for partition, “all parties’ interest in the property may be put in issue regardless of the record title.” (Milian v. De Leon (1986) 181 Cal.App.3d 1185, 1196 (Milian).) “The deed… [is] only one item of evidence to be considered by the court in connection with other probative facts.” (Kershman v. Kershman (1961) 192 Cal.App.2d 23, 26.)

If two co-owners claim to hold title to the property as joint tenants, the court “may consider the fact the parties have contributed different amounts to the purchase price in determining whether a true joint tenancy was intended.” (Milian, 181 Cal.App.3d at 1196.)

A tenancy in common is different in this regard. Ownership interests are not presumed to be equal, as the unity of interest is not a requirement for its creation. (CCP § 685.) “If a tenancy in common, rather than a joint tenancy is found, the court may either order reimbursement or determine the ownership interests in the property in proportion to the amounts contributed.” (Milian, 181 Cal.App.3d at 1196.)

This was the case in Kershman. There, two former partners had purchased a home for $16,000. The wife put up $8,000, while the husband put up only $1,000 of his own money and borrowed the rest with a mortgage. The agreement seemed to grant both parties ownership of the property in equal shares of 50%. Yet, this was not to be until the husband paid off the mortgage, which he never did. 

On that evidence, the trial court reduced the husband’s alleged ownership share to 6.7% based on his actual amount contributed being only $1,000. “This testimony amply supports the implied finding that the plaintiff and defendant had agreed that their interests were not to be equal until the defendant had paid his share and that their interests were to represent at any given point of time the contemporaneous proportion of their respective contributions in relation to the total.” (Kershman, 192 Cal.App.2d at 27.)

Thus, a cotenant’s unequal down payment may affect their ownership interest in the property, provided no oral agreement or understanding between the cotenants provided otherwise. 

How can the Attorneys at Underwood Law Assist You?

Partition actions get quite complicated when ownership interests become an issue. An agreement can negate unequal payments, mortgages can affect distributions, and lengthy accounting procedures can balloon litigation costs.

As each case is unique, property owners would be well-served to seek experienced counsel familiar with the ins-and-outs of partitions. At Underwood Law, our knowledgeable attorneys are here to help. If you are concerned about the title to your property, what expenses might be recoverable, or if you just have questions, please do not hesitate to contact our office.

 

Contact Information