Partition, Waiver and Tenants-in-Common

By April 2, 2010 Blog, Real Estate Law

I have written previously on the difficulties tenants-in-common face when one or more of them would like to sell the property but the remaining owners do not.  A new decision of a California Court of Appeal has clarified the right of a co-owner to seek partition of the co-tenancy when the other co-owners don’t want to sell, and the agreement between them provides that each has a right of first refusal if the other tries to sell.

In Leg Investments v. Boxler (Court of Appeal, Third App. Dist., 4/1/10), the property in question was a vacation home at Lake Tahoe.  Leg and the Boxlers each owned a 50 percent undivided interest.  An agreement between them provided that if one found a buyer for its undivided interest, the selling co-owner had to first offer the interest to the other co-owner at that price, before selling.  The relationship between the owners was not good, based problems between them over maintenance and sharing of expenses.  Leg found a buyer for its interest, and offered first to sell to the Boxlers for the offered price.  They refused.  When the prospective buyer met the Boxlers, and encountered difficulties, the buyer backed out of the sale.  Leg then demanded that the Boxlers agree to list and sell the property, or purchase its interest.  The Boxlers refused either option.  Thus, one co-owner was seemingly trapped with no way out, other than a court action for partition.

Leg filed the partition action, asking the court to order the property sold, but the trial court ruled against Leg, based on the Boxlers’ argument that their agreement’s right of first refusal was a valid permanent waiver of the absolute, statutory right of a co-owner to obtain partition.  Leg appealed.

Prior California decisions were unclear, but the statute governing partition stated clearly that a right to partition may be waived by a valid waiver.  (California Code of Civil Procedure section 872.710(b))  Courts have found that a “valid waiver” may be either an express or an implied contract. The trial court felt a co-owner needed protection from an “unscrupulous “owner who might “set up a bogus third party sale” and allow the sale to fall through to then force a partition sale for greater profits at the expense of the other owner’s desire not to sell.  Thus, the trial judge interpreted the right of first refusal as an implied waiver of partition.  The Court of Appeal rejected this reasoning, stating clearly that the right of first refusal “merely modifies the right of partition to require the selling cotenant to first offer to sell to the non-selling cotenant on terms as favorable as those offered by the prospective buyer.”  This rule protects the non-selling owner’s interest in controlling ownership and acquiring the other owner's interest for the fractional price, but does not compromise the otherwise free alienation of property.  In addition, the court made clear that if the non-selling owner does not believe the offered price is fair or in good faith, it can be challenged (which the Boxlers did not do in this case).

The court refused to interpret the agreement’s language as an implied, perpetual, and disfavored, permanent waiver of the right to partition.  The court’s decision reminds us that co-ownership agreements must be carefully drafted to avoid unintended consequences and ambiguity.  Often a co-ownership agreement will contain an explicit waiver of partition.   In this case, however, the court would not transform a right of first refusal, without more, into a waiver of that right.

Stephen C. Gerrish, Real Estate Group