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What Is A Warehouse Between Two Sisters?

Partition actions almost always arise from a condition referred to as "involuntary co-ownership." By "involuntary" is meant that the owners involved in the dispute never jointly purchased the property in question, but came into their ownership interests in another way as, for example, by operation of law, by inheritance, or by the decision to purchase a fraction of the property without adequate regard for who were the other owner or owners. This history involves an ownership dispute between two sisters, each of whom inherited their interest from their father.

Dad had run a moving and storage business for many years. Long ago he purchased a triangular parcel of property and over the years built a number of warehouses. Dad's business prospered because he obtained contracts with a local, large military base to move the military personnel in and out of the base. Dad had two daughters and when he died, he left each a half interest both in the property and in the business. One of the sisters was active in the business and had a son who was the general manager. We will refer to her as the "Inside sister". The other, had a career unrelated to the business and had no interest in getting involved. We will call her the "Outside sister."

Sometime after Dad's death, the Outside sister sold her interest in the business, but not in the real estate, to the Inside sister who, with her son in charge, continued to manage the business. At about this time, the local military base began to close and the mainstay of the business began a process that lead to its ultimate demise. While initially, the base closing generated more business for the company, as the base was deactivated, the military's demand for moving services dissipated. In the meanwhile, even though the commercial property was gaining in value along with commercial properties generally in the area, the Outside sister was receiving no benefit as the company was not paying rent to either sister. Indeed, if rent had been required, the company would have gone bankrupt.

As time went on, business got worse and since the business income was greatly reduced, property maintenance suffered and the value of the property declined accordingly. Soon roofs were leaking, paved parking areas were deteriorating, and numerous typical property management problems arose. The Outside sister noticed this deterioration and became concerned about the value of her half ownership of the real estate. The Outside sister attempted to discuss these issues with her sister but there was no progress and their relationship deteriorated. Further, when the Outside sister requested that she begin to receive rent payment, the Inside sister refused and relations between the two became irrevocably broken.

After awhile, the Outside sister consulted with an attorney, an expert in partition actions, and when negotiations failed, partition action was commenced seeking a forced sale of the property.

To digress a moment, this was a California matter, and under California law, a co-owner of real property has an absolute right to obtain an order of partition by sale. As a practical matter, every dime spent resisting the partition of the property is an absolute waste and the most constructive strategy on the part of the defendant co-owner is to cooperate with the sale so as to maximize the net proceeds. Once a partition action is filed, it is a near certainty that the property will ultimately be sold unless the parties can agree on a settlement whereby one purchases the other's interests at a negotiated price. This problem often becomes more complex when there are more than two owners.

The Inside sister hired a very aggressive attorney who had never had any experience with partition litigation, and who adopted the strategy of creating every possible impediment to the sale. As a consequence, the entire process was unnecessarily burdened by "over-litigation", the disposition was delayed for almost two years during which time the property continued to deteriorate, and in the process, tens of thousands of dollars in attorney's fees were incurred on both sides.

Ultimately, the Court appointed Mr. Pecherer as the Referee in Partition and he proceeded to effect a sale of the property working with a regional commercial broker. Together, they broadly exposed the property to the market and obtained a favorable sales price. The sales process took less than two months after the parties had been battling in court for more than two years. The property was sold to an investor who intends to acquire adjacent parcels and to redevelop the property into high density residential units. If instead of fighting the partition action, the Inside sister had cooperated with an orderly sale of the property, Mr. Pecherer believes that the net proceeds would have been substantially larger, the enormous attorney's fees would have been avoided, and the Referee's fees would have been much lower.

Discussion:

This case illustrates two very important points. The first has to do with estate planning. When real property is bequeathed to more than one sibling, there is always a danger that the co-owners will have dramatically different perspectives on what should happen to the property. This is especially true when one of the siblings is operating a business on the property, for the "inside" sibling is very likely to view the property as an asset of the business, and will have difficulty recognizing the legitimacy of the "outside" sibling's interest. Thus, the testator, when fashioning their estate plan, should take care to minimize these risks either by giving the entire property to one of the siblings, or by creating an independently managed trust that would own the property for the benefit of all siblings. There are other solutions as well.

The second point is that considerable damage can result from unreasonably resisting the inevitable partition order. In addition to incurring excessive professional expenses, there is the additional risk that the property will not be sold in an orderly fashion or that it will have to be sold at a less than optimal time in the market. When a partition action is filed, a "lis pendins" is filed with the recorder in the county where the property is located. A "lis pendins" is notice to the world that the the property is burdened with some controversy or is distressed. There are services which alert potential investors when such a lis pendins is filed. These "vulture" investors will attempt to purchase distressed properties at deep discounts. Also, the existence of the dispute is likely to lead to an adverse reputation for the property in the market generally, and such a reputation can serve to discourage potential buyers. When the market becomes restricted in that fashion, the chances of getting top price are diminished.

Disputes between owners of real property will inevitably occur and may lead to a partition action. However, before either party gratuitously aggravates the dispute, they should carefully consider that the consequences of such adversity can be detrimental to the financial returns that they will derive from the ultimate and inevitable sale.