Legal Question in Real Estate Law in California

I guess I am confused - why are A and B fighting over a property that has no equity? B did not "pay" for improvements if they were paid for by a loan encumbering the property. Also, how did B obtain loans on the entire property, if B only owns half of the property? To be honest, B needs to retain an attorney. This is not something that can be resolved on a free forum. Partition lawsuits are expensive, extremely complex and not something one should file without proper legal advice.

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Well, here are a few thoughts.

First, the lender must be made a party to the partition action

B's loan probably does not encumber the entire property. B probably did not have the power to encumber A's interest. If there were a partition sale, A's share of the proceeds would be calculated without regard to the obligation of the loan. The loan would be paid off, to the extent possible, out of B's share (after adjustments discussed below), and if there were a deficiency, the lender would be entitled to the usual remedies for deficiency.

I have done some research on the issue of whether the partition sale would be "free and clear" of the lien, or would remain as collateral, the partition sale being "subject to" the balance of the lien. One would think that the California courts would have decided this issue and that standard treatises on real-estate law would so mention. Instead, I found no case on point, and the respected Miller & Starr treatise leaves it as undecided: "The court did not discuss the question of the creditor's rights when the proceeds due the one tenant in common are not sufficient to satisfy the debt, but presumably the creditor is in the same position as any other secured creditor; that is, even though the sale is ordered by the court, the creditor is left with whatever other remedies may be available for the recovery of the deficiency against the debtor co-tenant, unless the debt is a purchase money mortgage."

Thus, the lender will become an unsecured creditor of B, and can sue B for the deficiency.

However, B's share of the proceeds of sale may be enhanced by eligible excess contributions B made to joint-responsibility costs such as principal and interest on any shared-obligation loan, insurance, property taxes, and necessary maintenance. In this situation, it appears that B will be asking for credits relating to improvements, additions, betterments, etc. Since these are optional and not necessary outlays, courts are somewhat less inclined to reapportion improvement expenditures. If the parties agreed in advance to make the improvements, they will be apportioned, and B will be credited for outlays in excess of his proportionate share in the final accounting. If A benefitted, B will also probably be credited. However, A's share will not be tapped for improvements B made without consulting A and which primarily benefitted B. For example, if B were living in the property and A was not, B's expenditure for new granite countertops in the kitchen would probably not result in a reimbursement from A, even if they did add some value.

Note that although partition suits are expensive and often an inefficient way to turn property into cash, the mere filing of the suit sometimes prompts the co-owners to negotiate more realistically, or to agree to an uncoerced private sale, perhaps with arbitration of any remaining money issues.

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