Teresa J Rhyne
When families gather for the holidays this year, there may be a new topic of discussion. The California Heirs Property Partition Act went into effect Jan. 1, 2022.
The act affects any property in California owned by tenants in common when 20% or more of the owners are relatives who inherited the property.
In such a case, certain due process steps must be taken before a partition can occur and the price is set by the court with no discounts taken for minority shares or lack of marketability. This is a substantive change in the law.
What is a partition of property?
Before the Partition Act, if parties owned property together as tenants in common, any one of the owners could petition a court to partition that property. There are three types of partitions:
—Partition in kind: physical division of the property into separate parcels, which allows for continued but separate ownership.
—Partition by sale: a court-ordered sale of the entire property.
—Partition by appraisal: Parties enter into a written agreement where one or more parties acquire the interests of others based on the appraised value.
What was the problem?
Supporters of the new law, including the American Bar Association, found that sales of such partition properties were one of the leading causes of land loss within Black and other minority communities.
Consider a farm or parcel of land with several dwelling units on it, passed down through generations. Let’s say it’s owned by 14 cousins who each receive rental income from the property.
One of the cousins, John, falls on hard times and needs to sell. A partition action could force a sale of the entire property if none of the other owners could afford to buy John out.
Or, say he makes a quick sale to a non-related party — perhaps at a premium price. Then that buyer files for a partition and buys all of the other interests, usually at a discounted rate because each only owns 1/14 (known as a “minority share discount’). It’s also tough to sell a small interest (known as a “lack of marketability discount”).
Suddenly, the family has lost the entire property and the income stream. The discounted purchase is a tactic used by developers to force out families for whom the property may have been the most significant asset.
What does the Partition Act change?
The act was signed into law to little fanfare. But it could have a wide-ranging effect.
It grants heirs who have acquired an interest of such property a statutory right of first refusal to purchase or “buyout” such property in the event of a partition.
It also provides for a mandatory, court-ordered appraisal of the property to determine its value, and it does away with any minority interest or lack of marketability discounts.
Any owner seeking partition by sale is mandatorily subject to a buyout by remaining cotenants. In other words, if the developer who bought John’s share then files a court petition for partition by sale, the other owners have the right to buy the developer’s share in a proceeding overseen by the court.
If the other owners cannot purchase the interest, the court may instead order partition “in kind” in order to preserve the interests of the heirs. In determining whether to order a partition by sale or in kind, the act requires the court to consider seven factors:
(1) whether a partition in kind is practicable;
(2) whether the partition in kind would substantially diminish the fair market value of the property as a whole;
(3) evidence of the collective duration of ownership;
(4) a co-tenant’s sentimental attachment;
(5) the lawful use being made of the property;
(6) the degree to which the co-tenants have contributed their share of property expenses; and
(7) any other relevant factor.
If the property is to be partitioned by sale, the sale must take place on the open market.
As you can tell, the law is meant to preserve the interests of family members.
Who does the act apply to?
The law applies to any property that is “heirs property,” which is defined by four factors:
Property is held by tenants in common (does not apply to joint tenancies or property owned by entities);
No contractual ownership agreement exists;
Some (does not have to be all) co-tenants acquired the title from a relative (during life or at death); and
At least one of the following ownership interests is satisfied:
—20% or more of the interests are held by relatives.
—20% or more of the interests are held by an individual who acquired a title from a relative.
—20% or more of the cotenants are relatives
“Relative” is defined very broadly as an ascendant, descendant or an individual otherwise related to another by blood, marriage, adoption or state law.
What should you do?
If you own property with other tenants in common and one of the 20% interests mentioned above is met, you will be subject to the act (even if you aren’t one of the heirs/ family members).
This could be a problem if you ever have a co-owner not paying their fair share of taxes or upkeep, or otherwise causing problems. There are options if the parties do not want to be subject to the act. Consider:
—A “tenants in common” written agreement that specifies the terms for buying and selling interests; or
—Transferring the property to a limited liability company or a partnership.
Both of these steps will take the property outside the purview of the Partition Act.
Of course, the law also protects the heirs of property, so don’t be tempted by a lowball offer on that 1/20th interest in the farm that your great-grandmother left you. Related Articles
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The California Heirs Property Act is new, so it’s too early to see what the long-term effect will be.
The law has good intentions and may serve to protect family-owned properties, but it may have unintended consequences for tenants in common who may not all be family members.
Knowledge is power, so be aware of the law and take a look at how you hold title to a property — especially inherited property. You may need to make some changes, and isn’t that what the New Year is for?
Teresa J. Rhyne is the principal attorney at The Teresa Rhyne Law Group, a P.C. with offices in Riverside and Paso Robles, CA. Her practice emphasizes comprehensive estate planning, trust administration, and planning for business owners.