DAVID J. WILLIS ATTORNEY
Copyright © 2016. All rights reserved worldwide.
Partition of Texas Property
Remedies When Joint Owners Cannot Agree
by David J. Willis, J.D., LL.M.
A principal subject of our website articles is the structuring the ownership of investment property for purposes of asset protection, including the use of LLCs, trusts, and partnerships. By now the reader will know that this author is inclined to favor LLCs, since they offer an effective liability barrier, while trusts and partnerships do not. There is, however, another important group of issues: transactional efficiency and avoidance of conflict among the interested parties.
Transactional Efficiency and Conflict Avoidance
For purposes of this article, “transactional efficiency” refers to ease of transfer. In the case of an LLC, only one individual—the manager—is usually required to sign documents at the title company. If the LLC has officers, the signing person might instead be the president or vice president. But it is not necessary to obtain the signature of all members of the company and their spouses, even if these other parties disagree with a proposed transaction. This is also true if one of the members of the LLC is now deceased and that member’s heirs oppose the transaction.
Trusts can be a bit iffier. Usually it is necessary only to procure the signature of the trustee who is duly named in a proper trust agreement; but if a title company is wary of the trust for some reason (and they are often wary of trusts nowdays), the closer may demand signatures of others involved.
Partnerships usually require the signature of all persons who are named in the partnership agreement as general partners, whether that is two or twenty people. Spouses will likely be called upon to sign as well, since Texas is a community property state. If the partnership is a limited partnership, then the signature of the general partner is usually all that is required, but the title company may choose to require the joinder of others if there is obvious conflict among the interested parties with respect to the transaction.
If the property is owned by individual joint owners without a written partnership agreement, you can anticipate that everyone interested will be required to sign.
Based on the foregoing summary, which structure do you think is most efficient in consummating a transaction and avoiding the consequences of conflict among the interested parties? The answer is obviously an LLC. And yet real estate attorneys commonly encounter situations where assets are titled in a general partnership in the names of several individuals—the worst possible way to own investment real estate. The parties who were once so friendly about their common business goals now vehemently disagree about a proposed transaction. One or more refuses to sign off. One might become a “hold out” and effectively blackmail the others into receiving more than his rightful share. What then?
What is partition?
“Partition” is the legal term referring to division of real property among joint owners. It may be voluntary, by agreement or partition deed, but that is easy to accomplish and does not concern us here. Our focus in this chapter is on what happens when no common agreement can reached. The disagreement may be relatively amicable, with one or more partners politely refusing to go along, or the partners may literally be at each other’s throats. A spouse of a partner may have decided that he or she will oppose the sale of an asset, perhaps preferring to save it for the children rather than liquidate it now. There are countless reasons for opposition, including sheer spite.
The remedy in such a situation is for one or more of the joint owners to seek a court-ordered division by means of a partition suit. It is also possible to file a “friendly” partition action if the parties desire a court decree that ratifies their agreement. Note that partition is not the appropriate remedy when there is no common title or title is in dispute.
There are two kinds of judicially-ordered partition: partition in kind, which refers to the actual physical division of land by metes and bounds; and a judicially-ordered sale of the property, when partition in kind is not feasible or cannot be achieved fairly and equitably.
The Right to Partition
The right to a partition is absolute so long as the petitioning party is a joint owner of the land to be partitioned and has an equal right to possess it with the other joint owners, subject to any leases. There is no effective defense to such an action that is properly brought by someone who qualifies. Spires v. Hoover, 466 S.W. 2d 344, 346 (Tex.App.—El Paso 1971, writ ref’d n.r.e.). However, the right to partition may be waived or contracted away in the partnership agreement. Dimock v. Kadane, 100 S.W.3d 622, 625 (Tex.App.—Eastland 2003, pet. denied). Barring a valid waiver of the right to partition, Property Code section 23.001 et seq. apply:
A joint owner or claimant of real property or an interest in real property or a joint owner of personal property may compel a partition of the interest or the property among the joint owners or claimants under this chapter and the Texas Rules of Civil Procedure.
Since personal as well real property is mentioned in this statute, the right to partition extends not just to the realty but also the FF&E (furniture, fixtures, and equipment) that may be located on the premises.
No statute of limitations applies to the right of partition. Hipp v. Fall, 213 S.W.2d 732,737 (Tex.App.—Galveston 1948, writ ref’d n.r.e.).
Venue is normally in the district court of the county where the property is located. Tex. Prop. Code § 23.002(a). However, in counties where district and county courts have concurrent jurisdiction (as in Harris County), county courts may also hear such cases so long as the amount in controversy is within their monetary jurisdiction. Eris v. Giannakopoulos, 369 S.W.3d 618, 620-21 (Tex.App.—Houston [1st Dist.] 2012, pet. dism’d).
The real fight in many partition cases is about the pro rata shares of the parties and whether or not the property should be partitioned in kind or sold. Generally speaking, the law favors partition in kind over a forced sale. “If the property can be divided in kind without materially impairing its value, a sale will not be ordered, but when dividing the land into parcels causes its value to be substantially less than is value when whole, the rights of the owners are substantially prejudiced.” Cecola v. Ruley, 12 S.W.3d 848, 855 (Tex.App.—Texarkana 2000, no pet.). Clearly, a 100 acre farm may lend itself favorably to partition in kind while a single-family residence on a lot and block may not.
Rule 756 et seq. of the Texas Rules of Civil Procedure
The other statutory law applicable to partition actions can be found in Rule 756 et seq. of the Texas Rules of Civil Procedure. Rule 756 and the rules that follow set forth the procedure necessary to accomplish a fair and equitable partition. Other than the specific requirements contained in Sec. 23.001 et seq. and Rule 756 et seq., partition cases are governed by the same rules and procedures as other civil cases, including entitlement to a jury trial. All parties with an interest in the property must be joined in the litigation.
Rule 761 provides that if the property can be fairly and equitably divided into separate tracts, then the court shall appoint three or more “competent and disinterested persons” to act as commissioners in designing a plan to divide the land, arrive at an estimated value of each share, and allot the shares among the various owners. The commissioners are appointed by means of a “Writ of Partition” that is issued by the clerk of court and accompanied by the court’s order directing that the property be partitioned. The Writ of Partition may also appoint a surveyor to assist the commissioners. A commissioners’ report is then prepared and submitted for the court’s approval. The parties to the suit have 30 days to file objections to the report. If objections are filed, the court must hold a trial on the objections. The court then enters a judgment that may be appealed as in other civil cases, but the appellate court is directed by Rule 781 to give preference on its docket to an appeal of a partition judgment.
If the partition is “in kind,” the final judgment results in the parties obtaining exclusive use and possession of their respective tracts along with the power to dispose of same as they see fit, without consent or involvement by the previous joint owners. The judgment, however, does not create any warranties of title that did not exist before.
Sales of property are conducted by the sheriff or the constable as in other executions upon judgments. If the property is sold at public auction, the sheriff is required to notify the parties of the date and time of sale. Gibson v. Smith, 511 S.W.2d 327, 328 (Civ.App.—Tyler 1974, no writ). Alternatively, the court may direct that a receiver be appointed to sell the property at private or public sale. Any party to the suit may bid on the property along with other members of the public. The proceeds of the sale are returned to the court for distribution.
Damages and Costs
Although a partition action does not generally contemplate monetary damages (except in the event of waste to the property), auxiliary relief such as an accounting for rents and profits may be requested. Contribution and reimbursement issues may also arise as to taxes paid, improvements made, and expenses incurred in connection with the property.
Costs in a partition action are paid by each party pro rata according to the value of that party’s partitioned share. However, the considerable expense and delay involved in meeting the procedural requirements of a partition suit are a powerful incentive for the parties to settle. If a receiver is appointed, the cost (paid for by the sales proceeds) can be substantial, even disastrous. A surveyor and appraisers are often employed as well. Additionally, since sheriff sales do not as a rule obtain the best possible price for real property, the parties should carefully consider the advisability of reaching a settlement that avoids court involvement and provides for private sale of the property at the best available price.
Caveat for Partition of Heirship Property
In 2017 Texas adopted the Uniform Partition of Heirs’ Property Act which makes partition among heirs a special case not subject to the ordinary rules. If at least 20% of the aggregate interest in property is held by persons related to one another, then Property Code sec. 23A.003 et seq. will govern any attempt to force a sale. The law was designed to avoid loss of family property and homestead wealth among poor and minority communities who have been historically less likely to execute wills or do estate planning. The result could be numerous heirs holding ownership in widely varying percentages, only some of whom might live on the property. Others might be difficult or impossible to locate. Investors would take advantage of this situation by acquiring a small ownership stake and then asking a court to force a partition, resulting in a sheriff sale at a price that was usually well below market.
The UPHPA provides an opportunity for heirs to be able to buy out the interest of the cotenant who is attempting to force the sale. If this approach fails, a court may evaluate the circumstances surrounding the property and who resides there in light of relevant sentimental, cultural, and historical factors—and then determine whether partition in kind or partition by sale is the appropriate remedy. If a sale is eventually ordered, the property must be listed with a real estate broker for its fair value, rather than going to a sheriff’s sale which usually results in a fire sale price. As a result, investors pursuing forced partition of heirship property as an investment strategy now have more hoops through which to jump and are more likely to wind up paying a sum that is closer to the property’s true market value.
Information in this article is provided for general educational purposes only and is not offered as legal advice upon which anyone may rely. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.
Copyright © 2018 by David J. Willis. All rights reserved. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com.