I. Partition Abuse and the Problem of Declining Intergenerational Wealth
Unfortunately, a far too common scenario occurs where the family home passes to the children where the parents decease intestate (meaning, mom or dad did not have a will, trust, or any other estate plan providing for the disposition of the home) and the home must be distributed to the surviving relatives according to law.
Here, the house would go to the children, Abigail, Baxter, and Chuck with each of them holding an equal 1/3 share of the home as ‘tenants-in-common’ or ‘cotenants.’ Generally, under California law, any tenant-in-common can file a partition action in court that seeks to divide the property according to their equity in the real property. Thus, someone having as little as a 1/100 interest in a house can force a sale regardless of the size of anyone else’s share. In a partition, the court usually appoints a third-party partition ‘referee’ who oversees the sale of the house and the distribution of the proceeds among the cotenants.
To complicate matters, suppose Abigail would like to sell her portion as soon as possible due to financial difficulties but Baxter wants to sell the home on the open market using a reputable real estate agent to fetch the highest possible price. Finally, Chuck is living there without any intention of moving elsewhere because he has covered the mortgage, property insurance, and taxes for the last decade. There is no written agreement among them that governs the partition of the property.
One day, Abigail decides to sell her 1/3 share to a company, ‘Distressed Properties, LLC’ (the LLC) at significantly less than the fair market value in exchange for fast cash. Now, the LLC becomes a 1/3 tenant-in-common with Baxter and Chuck. Neither Baxter nor Chuck are thrilled. The LLC then asks Baxter and Chuck if they are willing to sell their remaining 2/3 share for below market value. Obviously, they are not. The LLC then files a partition suit against Baxter and Chuck, neither of which can afford attorneys for litigation and do not want the costs of conducting a partition sale to eat away at the bottom line. The LLC, having purchased its share at significantly below market value, can nonetheless realize a profit even in the event of a forced sale.
Eventually, Baxter and Chuck agree to sell to the LLC as part of a settlement of the partition suit at less than the open market value of their respective interests. Afterwards, the LLC would completely own the property and be free to resell it on the open market. Thus, the equity that mom and dad built over the years in the family home dissipated through abuse of the partition action, which was enacted to ensure the free transfer of property interests, not for opportunistic speculation. “The policy behind a partition action is to permanently end all disputes about property and to remove all obstructions to its free enjoyment.” (LEG Investments v. Boxler (2010) 183 Cal.App.4th 484, 497; Civ. Code § 880.020, subd. (a)(1) [“[R]eal property . . . should be made freely alienable and marketable to the extent practicable”])
II. The Applicability and Procedures of the Act
The Uniform Partition of Heirs Property Act aims to mitigate the above problem of dissipating family wealth through predatory partitions. On July 23, 2021, the Governor signed Assembly Bill 633 into law—the Uniform Partition of Heirs Property Act (the Act), which takes effect for partitions actions filed on or after January 1, 2022. The Act is `meant to enhance opportunities for intergenerational wealth accumulation and transfer, particularly in communities of color that have historically been the target of predatory real estate practices’ and `establishes a set of protections to help families keep land that has been passed down without a will.’ The Act amends section 872.020 of the Code of Civil Procedure and adds Chapter 10 (commencing with Section 874.311) to Title 10.5 of Part 2 of the same statute.
Notably, several procedural protections of the Act insulate ‘heirs property’ from the sheer speed of ordinary partition actions. ‘Heirs property’ is defined as real property held in tenancy in common that satisfy the following:
- There is no agreement in a record binding all the co-tenants which governs the partition of the property;
- One or more of the co-tenants acquired title from a relative, whether living or deceased; and
- 20 percent or more of the interests are held by relatives, or by an individual who acquired the interest from a relative, or 20 percent or more of the co-tenants are relatives.
In our scenario with Abigail, Baxter, and Chuck, at the time of partition filed by the LLC, (1) there was no written agreement between Baxter, Chuck, and the LLC, (2) Baxter and Chuck had acquired title from their deceased parents, and (3) over 20 percent of the interests, or 2/3 total, were held by Baxter and Chuck as relatives; each of Baxter and Chuck acquired an over 20 percent interest, or 1/3 interest, from their parents; and two-thirds of the cotenants, Baxter and Chuck, were relatives.
Thus, the family home qualifies as ‘heirs property’ under the Act, which applies to the partition filed by the LLC.
Then, once the court determines that a real property in a partition action is ‘heirs property’, unless each of the cotenants agree to exempt the property from the Act, the court must order an appraisal (which must be filed and made public), hold a hearing for any objections to the appraisal, give cotenants a right of first refusal on the purchase of any cotenant who requests a partition by sale, and must provide for an open-market sale of the property in the best interests of the cotenants. The court is additionally required to consider other factors a partition in kind. ‘Partition in kind’ means the division of property into physically distinct and separately titled parcels as opposed to dividing proceeds from the sale of property through a ‘partition by sale’. Factors include the length of ownership or possession of the property by a cotenant, a cotenant’s sentimental attachment to the property, the degree of harm to the cotenant if the cotenant could not continue the same use of the property, and the pro rata share of each cotenants’ contribution to the property.
While these mechanics of the Act rely on judicial supervision and appear technical, that is by design. Delay and procedure seem to be the price of an even playing field between relatives, who may not have the financial resources to resist a sophisticated party adept at partition as a means of speculation. For instance, one innovation of the Act is the deterrence of a nominal cotenant in leveraging their relatively small interest (e.g., a 1/10 interest) in forcing a partition by sale of the entire property. If this nominal cotenant requests such a sale, the remaining cotenants have the first right to purchase the nominal cotenants’ share (§ 874.317, subd. (a).)
III. Strategic Concerns of the Act in Estate Planning and Property Co-Ownership
For parties seeking to hold or holding property in a tenancy-in-common outside the family, the Act deserves special consideration since the it may apply to the property if a cotenant’s share of the property passes to a relative. To avoid the application of the Act and its procedures, a properly crafted waiver or preemption of the Act (and of the right to partition) should be included when entering into ownership as a tenant-in-common.
Given the policy in favor of ‘heirs property’ staying in the family, forming tenancies-in-common in real estate relationships now must be approached with caution. The Act inadvertently leaves an open door for relatives of a business partner to potentially divide income-generating or long-term properties, regardless of a partition waiver made between the original owners. A partition waiver between co-tenants may no longer be sufficient to opt out of the Act with (1) the possibility that the property may later take on the character of the ‘heirs property’ with new co-tenants owing a former partner’s share, and (2) the ambiguous requirement of an ‘agreement in a record binding all the [current] co-tenants which governs the partition of the property’ that may be interpreted to not bind future owners to a waiver.
A. Can a Will or Trust Evade the Act? Unlikely.
Furthermore, based on the text of the Act and its relative recency, it is unclear whether a testamentary instrument (a will or trust) can exempt property from the Act as an agreement in a “record binding all the cotenants which governs the partition of the property” (§ 874.312, subdiv. (e)(1)) despite the stated purpose ‘to help families keep land that has been passed down without a will.’
It is unlikely that a will or trust can evade the Act because even if the property passes via will or trust, its resulting interests could still make the property of ‘heirs property’ if the beneficiaries were relatives (even if they did not receive the interest directly from mom or dad but from a trust). Furthermore, a will or trust would be unlikely considered an ‘agreement’ under the Act (these are usually made unilaterally by the testator or settlor), nor would these instruments be ‘binding’ on the cotenants because they provide for the disposition of property.
B. Is a Past Waiver of the Act Effective Against Current Co-tenants? Unlikely.
A co-owner of property has an absolute right to partition unless barred by a valid waiver. (§ 872.710, subd. (b).) “[T]he right of partition may be waived by contract, either express or implied.” (American Medical International, Inc. v. Feller (1976) 59 Cal.App.3d 1008, 1014.) Yet, it is unclear whether the “record binding all the cotenants which governs the partition of the property” must be between each cotenant at the time the property is determined by the court as ‘heirs property’, or at the time the ‘record’ was made by the predecessors-in-interest of the cotenants. For example, if mom and dad owned the property with uncle and each of them agreed to waive their right to partition under the Act, would that waiver bind the children if they never signed the waiver with the uncle?
The operation and purpose of the Act imply that the current cotenants must agree to waive the act: “In an action to partition real property under this title, the court shall determine whether the property is heirs property. If the court determines that the property is heirs property, the property shall be partitioned under this chapter unless all of the cotenants otherwise agree in a record.” (§ 874.313, subdiv. (b))
With the Act affecting all partitions filed on or after January 1, 2022, current tenant-in-common relationships and pending transactions should be reevaluated for whether any cotenant expects to transfer their interests to family members (or have not provided for those interests as part of estate planning at all). If so, an understanding of the Act can assist with determining whether restructuring any current agreement should limit its application or those of partitions in general. And although the Act’s goal is to preserve intergenerational wealth among family members, the broad scope of the Act could make these members strange and unintended bedfellows in business.
A review of current and proposed ownership agreements by skilled and experienced counsel can contribute to the stability of real estate holdings and ventures, especially where cotenants’ private intrafamily property transfers can lead to the new and unknown territory of ‘heirs property’ years down the road.