When the family home passes to the children where the parents die without a will, trust, or any other estate plan providing for the disposition of the home, the home must be distributed to the surviving relatives according to law. The surviving relatives then become “tenants-in-common” or “cotenants.”

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.

Suppose one cotenant (cotenant 1) would like to sell their portion as soon as possible due to financial difficulties but another cotenant (cotenant 2) wants to sell the home on the open market using a reputable real estate agent to obtain the highest possible price. Finally, assume a third cotenant (cotenant 3) lives on the property without any intention of moving elsewhere because he has covered the mortgage, property insurance, and taxes for the last decade. Further, assume there is no written agreement among the cotenants that governs the partition of the property.

Cotenant 1 decides to sell her 1/3 share to a company, ‘Will Buy Fast and Cheap, 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 cotenants 2 and 3. The LLC then asks cotenants 2 and 3 to sell their remaining 2/3 share to the LLC for below market value. Cotenants 2 and 3 refuse to sell. The LLC then files a partition suit against the cotenants, neither of which can afford attorneys for litigation and do not want the costs of conducting a partition sale to eat away at the value of their interests. 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, the cotenants 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. Thereafter the LLC would completely own the property and be free to resell it on the open market. Consequently, the equity that mom and dad built over the years in the family home is dissipated through abuse of the partition action.

The newly enacted Uniform Partition of Heirs Property Act (the “Act”) attempts to mitigate this practice of dissipating family wealth through predatory partitions. The Act which takes effect for partitions actions filed on or after January 1, 2022, 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.”

“Heirs property” is defined as real property held in tenancy in common that satisfies the following:

• There is no agreement in a record binding all the cotenants which governs the partition of the property;
• One or more of the cotenants 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.

The scenario described above would mean, under the Act, the family home qualifies as ‘heirs property’ and would apply to the partition action filed by the LLC.

Under the Act, once the court determines that 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 and 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.

The Act relies on judicial supervision to provide the cotenants with delay and procedure to even the playing field between relatives in order to resist a below-market sale by a sophisticated party adept at partition as a means of speculation. One portion of the Act provides 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.

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.

Based on the text of the Act it is unclear whether a testamentary instrument (a will or trust) can exempt property from the Act. It is unlikely to be exempt because even if the property passes via will or trust, its resulting interests could still make the property an ‘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 nor would these instruments be ‘binding’ on the cotenants because they provide for the disposition of property. The operation and purpose of the Act imply that the current cotenants must agree to waive the act.

With the Act affecting all partitions filed on or after January 1, 2022, current tenant-in-common relationships and pending transactions should be reevaluated. A review of current and proposed ownership agreements by legal 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’ after death of the grantors.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.