Partition actions have long been a source of protracted litigation, particularly in cases involving large projects with multiple property owners or developers.
A significant shift occurred in December 2019 with the adoption of the Uniform Partition of Heirs Property Act (UPHPA) in New York, heralding a new era of mediation and expedited resolution in certain types of partition actions, which investors, developers, and all co-owners of real property should be aware of.
What are partition actions?
Partition actions are lawsuits commenced by co-owners of real property seeking to divide their interests in the property. This does not occur when a single LLC or entity owns the property in question, or where varying individuals own varying stakes in the entity. Rather, the risk of a partition action occurs when multiple entitles or individuals own shares of a property itself, as co-tenants. This ownership structure is common in urban areas as well as rural/agricultural properties.
Developers in particular should be aware of the potential of a partition action when a property has this ownership structure. A developer targeting a particular property for redevelopment, where that property is owned by co-tenants, should understand that control over that property relies on the co-tenants agreeing to the sale or the redevelopment. Failing that agreement, a partition is the only way for a change in control to occur. And until recently, those actions could regularly be protracted, costly, and contested, making acquisition of such a property difficult. The UPHPA streamlines at least some of those cases.
Partition actions typically take one of two forms: a partition in kind (physically dividing up a property) or a partition by sale (forcing a sale, with the proceeds distributed among the owners).
Although partition disputes can emerge in various situations, they have historically been most common in cases involving property that has been devised or inherited. A developer seeking to acquire or develop a property that has at some point been subject to an inheritance should be aware of a change in law in New York that occurred at the end of 2019. Partitions in inherited property are no longer treated the same as any other partition.
How UPHPA changed things
In December 2019, New York adopted the Uniform Partition of Heirs Property Act to simplify the process for certain partitions. This legislation, modeled on laws already enacted in other states, requires different treatment of inherited property.
Broadly, the UPHPA encourages mediation and settlement, rather than protracted litigation, when a partition action involves inherited property. And it encourages the parties to negotiate in a fashion that encourages the real property to reach a mediated solution rather than a litigated one. This means that a negotiated sale or change in ownership or control of the property may occur much more quickly and at less cost.
What is heirs property?
The UPHPA only affects “Heirs Property,” defined as property held by tenants in common, at least one of whom inherited his/her share of the property from a relative. The property must also be residential or agricultural, there must be no agreement already binding all co-tenants governing a potential partition, and either 25% of the interests drive from familial relationship or one of the co-tenants lives in the property. If the above criteria aren’t met, this Act does not apply.
What is the new procedure?
The Act requires specific notice procedures to inform heirs and interested parties about partition proceedings. There is also a right to a buy-out. The UPHPA grants co-owners a right of first refusal: the right to buy out the interests of others at fair market value. Unlike traditional partitions, which can (after long litigation proceedings) be funneled into a court-ordered auction/sale, Heirs Property must first go through a mechanism that allows for those wishing to retain ownership to do so without the threat of forced sale.
There is required mediation and dispute resolution. Before almost any motion can be made – and potentially even before a party can be defaulted – the parties are required to participate in a settlement conference procedure with the Court. If the party who commenced the partition is deemed by the Court not to have negotiated in good faith, the partition action may be dismissed.
If settlement efforts fail, the parties must coordinate in seeking appraisals and ascertaining a property valuation. Unless the parties can agree on a valuation, the Court will hold an evidentiary hearing on fair market value, considering an independent appraisal as well as competing appraisals obtained by the parties (and arguments from attorneys). After the Court decides on a valuation, those owners wishing to retain their ownership interest will be given an opportunity of first-refusal to buy-out the interest of the co-owner(s) seeking the partition, based on proportionate share of the court-determined valuation.
When is litigation necessary?
If all of these efforts fail, only then will the case proceed down a more traditional litigation path, including a potential partition in kind or a court-ordered sale. In that latter scenario, the property must be offered for sale at the open market, and cannot be sold for less than the court-determined fair market value. Prospective buyers and developers should be aware that, for this reason, it is likely that sales of Heirs Property in New York will very likely be guided heavily by what the Court determines the fair market value to be, as opposed to occurring at an arms-length transaction.
In sum, on the one hand, if litigation is truly necessary, the UPHPA might ultimately delay a sale to a prospective buyer, or delay ultimate redevelopment of a property, as it creates a number of additional procedural milestones that must occur first. On the other, if mediation is successful, a negotiated acquisition could come much faster and earlier in the process than it ordinarily would.
