What Happens when a Partition By Appraisal Fails?

Underwood-Blog-Images-1-2-300x300Partitions by appraisal are a unique way to resolve a partition dispute. In essence, they are buyouts that the parties contractually agree to, allowing one party to remain on the jointly-owned property in exchange for purchasing the other co-owner’s interest at an appraised value.

This seemingly middle-of-the-road option, however, is one of the options available for inherited property under the Uniform Partition of Heirs Property Act. Specifically, the Act permits the non-partitioning party to purchase the other party’s interest at the appraised value, which can allow the property to remain in the family. This effectively grants the non-partitioning property an option to “partition by appraisal.” When a party agrees to buy the property at the appraised value but then cannot ultimately find the money for the purchase, what happens when a partition by appraisal fails?  

What is a Partition?

Partitions are court-ordered actions where a property owner forces the sale of jointly owned real estate. Essentially, the partition action exists to allow people who own real estate together to take their share of the equity in the property and go their separate ways.

Normally, there are two main methods of seeking partition: partition by sale and partition in-kind (a physical division of the property into parcels for each owner). Courts and legislature prefer partitions in kind because it allows parties to keep portions of the property.

In the modern real estate landscape, however, partitions often result in a sale of the property at issue. And while the idea may be to get the highest value possible for the parties involved, it nonetheless results in both individuals losing whatever piece of real estate to a brand new buyer.

What is a Partition by Appraisal?

A partition by appraisal is an alternative to the usual partition by sale or physical division of property that involves the court forcing those outcomes to occur. Under the alternative appraisal process, one or more parties may acquire the interests of the other co-owner(s) in the property at the appraised value of those interests. (Cummings v. Dessel (2017) 13 Cal.App.5th 589, 598.)

The statute authorizing partition by appraisal states, “when the interests of all parties are undisputed or have been adjudicated, the parties may agree upon a partition by appraisal pursuant to this chapter.” (CCP § 873.910.)

In other words, a partition by appraisal is a buy-out, leaving one party with the property and the other with cash in hand. In approving this method of partition, the California Law Revision Commission explained that buy-outs were intended to address situations “where physical division would be inequitable or impossible, and sale would result in unwanted tax liability or in loss of property which one of the owners desired to keep.” (13 Cal. Law Revision Com. Rep. at 411.)

That said, the buy-out is not always available in partition actions. On the contrary, the unambiguous language of the partition by appraisal statute requires an agreement among the parties. (CCP § 873.910.) Thus, this method of partition is only available when the parties agree to it and put that agreement into writing. (CCP § 873.920.)

Thus, if any of the parties to the partition do not want to utilize a partition by an appraisal, it is unavailable as a matter of law.

What happens if the Appraisal Agreement is Broken?

Once a partition by appraisal agreement is signed between the parties, it becomes a binding contract. Thus, if a party defaults on the agreement, the aggrieved party is entitled to specific performance of the agreement by further judicial proceedings and may pursue any other remedy available in law or equity. (CCP § 873.970.)

For example, “Shawn” and “Julie” are former domestic partners now embattled in a partition action over their former home. Because they both own equal 50% shares in the house, Julie proposes that Shawn buys out her interest. Their attorneys draft up an agreement and submit it to the court.

Months later, when it comes time for Shawn to pay up, he balks because he’s tight on funds. Julie can thus sue to have the court force Shawn to pay, or she can abandon the agreement altogether and sue for breach of contract.

What Happens if the Parties cannot agree to a partition by Appraisal?

If the parties are unable to make any headway on a buy-out agreement, then partition by appraisal becomes an unavailable avenue to resolving the dispute.

Even though the appraisal buy-out process is an expeditious and effective means of terminating the differences between the co-owners, while at the same time allowing one to retain the property without the expenses of sale and without the imposition of undesired tax liability, it nonetheless requires a written agreement. (Cummings, 13 Cal.App.5th at 598.)

In the absence of an agreement, then the parties must proceed through a regular judicial partition by sale or division in kind. A judicially-enforced buy-out is not an option. This is an unfortunate outcome for parties hopeful of keeping their property.

This is especially so because the partition by sale procedure, for instance, is lengthy and expensive. First, the parties need to settle their interests in the property, usually through a summary judgment motion or trial. Then, the parties need to pay for a partition referee, the referee’s report, and any other expenses associated with listing the property and preparing it for sale.

Judicially Mandated Buyouts are on the Horizon

Some individuals, lawyers included, may look at the appraisal statute and see an unjust outcome. Even if a party has enough money to buy out the other property owner and wants to stay in the home, a buy-out cannot be effectuated unless the other party agrees. This is not an uncommon occurrence. In the world of litigation, emotions run high, especially when a previously shared property is involved, leading some to refuse a buy-out purely out of spite.

The California Legislature has acknowledged these concerns and earlier this year passed the Partition of Real Property Act (“PRPA”). The effects of the statute do not take place until 2023, but when they do, they will bring the buy-out option to all co-owners of the real property involved in a partition action.

Under the new Code of Civil Procedure section 874.317, if a co-owner wants a partition by sale, the court must notify the other co-owners that they have the option to buy out the interests of the other co-owners that requested the partition. This way, parties can keep the property if they have the funds to make it happen.

How can the Attorneys at Underwood Law Firm Assist You?

Partitions are fairly common in California, particularly among unmarried couples and former business partners. Once litigation begins, however, things can get out of hand quickly. Emotions boil over, and reaching any kind of settlement can seem almost impossible.

As each case is unique, prospective litigants would be well-served to seek experienced counsel familiar with partitions and skilled in negotiation. At Underwood Law, our knowledgeable attorneys are here to help. If you are concerned about whether you should accept a partition by appraisal agreement, attempt to organize a buy-out yourself, or if you just have questions, please do not hesitate to contact our office.

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