Imagine the following.
You decide to buy an office building with three other acquaintances through a tenant-in-common (TIC) agreement. The four of you like the idea that the TIC structure will allow you to choose a beneficiary to which your share can pass to, if you die.
Then, one of your co-tenants passes away, and Nate Smith, her heir and beneficiary, receives her share of the office property. But Nate doesn’t want to own real estate. He’d rather have the cash. He approaches you and the other co-tenants about selling the office building. The three of you put your collective feet down and tell Nate that, under no uncertain terms will you agree to sell. You think that’s the end of the issue. Until you receive a notice, indicating that a judge could compel the sale of your office building.
At this point, you figuratively scratch your head and wonder if, indeed, someone can force you to sell. The answer is: Yes. You’re in receipt of a petition to partition. And yes, you can be forced to sell that office building.
TICs and Partitions
A tenant-in-common relationship is one in which two or more people get together to share real estate ownership. Co-tenants can sell their interests, but not the underlying property. Nor can they force other owners to sell, at least, not without legal assistance. A petition to partition is that legal assistance, and generally takes two forms.
Partition in Kind. Sometimes known as “actual partition,” the partition in kind severs the individual interest of each co-tenant, and divides the physical real estate between them. While this is workable for land, a partition in kind isn’t effective when it comes to buildings. This is why Nate Smith likely called for a Petition by Sale. . .
Petition by Sale. This is also known as “partition by lactation” or “partition by succession.” It’s accomplished by a court-ordered sale of the property, with the proceeds divided among the owners.
A Partition’s Disadvantages . . . And Benefits
By this point, you are furious with Nate Smith. All you are seeing are disadvantages in a forced sale. And, you are absolutely correct. A partition dispute is time-consuming, lasting anywhere from six months to a year. And, at the end of it, you and your co-tenants will have to pay court costs, not to mention attorney expenses.
And when all is said and done, you’ll probably lose the building. There is no law compelling property ownership, so it’s likely the judge will agree with Nate Smith and move for a forced sale. In some states, the judge can order a receiver to handle the sale, through a real estate agency. However, in others, the property is sold through auction, with a sheriff overseeing the process from the county courthouse steps. Either way, your office building could sell at a substantially reduced rate.
But before you begin gnashing your teeth at the injustice of it all, keep in mind that a petition to partition could also yield some benefits, one of which is that it’ll force you to sit down and actually talk to Nate Smith. Many times, the partition demand can bring co-tenants into the same room to work through any difficulties, and hopefully resolve the issue. Through this process, you could, perhaps, understand Mr. Smith’s point of view, and focus on solutions to benefit all co-tenants.
Worst-case scenario, the partition petition can help you recover the typically unreimbursed costs. If you’re the one bearing the burden of ownership by investing thousands in the building’s repair and maintenance, you likely won’t receive recompense when the asset is sold through typical channels. However, depending on the judge’s call, a partition-forced sale could reimburse you for that outlay.
Avoiding it All
The best way to avoid a partition lawsuit is to prevent it from happening in the first place, and building a settlement agreement into the TIC arrangement. Such an agreement outlines a property’s hold period and conditions of sale. Qualified and experienced TIC sponsors will automatically include this type of agreement among co-tenants. However, participants in non-syndicated TICs (those without sponsors) might not know to do so.
As you are involved with a non-syndicated TIC in which no settlement agreement was outlined, you have the following options to avoid a court-ordered sale.
Buy out Nate’s interest. You and your other co-tenants can get together and agree to buy Nate Smith’s share. This gives Nate the cash, and you can keep the building.
Hire a mediator. A mediator can help you work through the issues, without the time, hassle, and expense of going through the courts. Mediators are trained to ensure that a compromise is palatable to all sides.
The moral of the above is that, while TICs offer many benefits, one large downside is that co-tenants could be forced to sell the real estate by a beneficiary that doesn’t want to be a real estate owner. As such, you should check with an attorney before participating in any TIC, to ensure that you won’t end up with a petition to partition on your hands.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.