Partition or Partnership Dissolution?
Laine Wagenseller participated in the Tough Mudder in northern California—a “spirit crushing obstacle course.” The 7-mile race at high altitude included 18 obstacles, including water obstacles, fence climbing, log carrying and more. (The mystery obstacle was a shot of hot sauce before running through the fire obstacle). The course is designed with camaraderie and the world’s toughest race courses in mind, not to mention some input from the tough guys themselves, the British Special Air Services. Needless to say, everyone got an ample serving of a spirit-crushing, stamina-testing mental challenge of a lifetime.
Real Property Partition v. Partnership Dissolution
Unless you are a real estate attorney, you may not know whether the fight you are having with your ‘partner’ over the commercial property that you both own should be solved through a partition lawsuit or a breach of partnership contract lawsuit. Are you and your family members who jointly own an apartment building or industrial warehouse really ‘partners’ in the eyes of the law or ‘co-owners’? What is the difference and how will that affect what type of real estate lawsuit you would file?
The easiest way to understand the distinction between partners and co-owners is in the way that title to the real property is held. Co-owners or ‘tenants-in-common’ are each individually on the property’s title. In the case of an inherited property, for example, title may be held in the name of ‘John Smith, Mary Smith and Allison Smith’. Each of these three co-owners has a one-third interest in the actual property. A dispute between the co-owners in which a co-owner wants to get out of the property will be addressed through a partition lawsuit.
Partners often hold property in the name of the partnership. If, for example, the same three individuals—John Smith, Mary Smith and Allison Smith—decided to form a partnership to hold their property, the title to the property may be held by the ‘Smith Family Partnership’ or ’150 Main St., LLC’. Under California law, none of the three individuals actually owns an interest in the property and none of the individuals is on title. Instead of a real property interest, they have a personal property interest in the partnership or the limited liability company, which owns the real property. Any dispute between the partners will be addressed through a breach of contract (partnership agreement or limited liability company operating agreement) lawsuit, a breach of fiduciary duty lawsuit, an accounting or a partnership dissolution.
Anytime co-owners own a property together, the co-owners are entitled to file a partition action. A partition lawsuit does not necessarily mean that one of the co-owners breached a contract or embezzled money. It simply means that one of the co-owners wants to end his co-owner relationship and sell the property. In family partition actions, family members who have inherited partial ownership of a commercial building with their siblings often end up filing partition actions because they either need money or they are having an unrelated argument with their brother or sister.
Partners in a partnership (or ‘members’ in a limited liability company) where the partnership or LLC owns the property would not be entitled to file a partition lawsuit. The partners or members are not co-owners and are not on title to the property. Instead they would need to file a lawsuit for breach of contract, breach of fiduciary duty, accounting, dissolution or other related partnership action.
A partition lawsuit is typically straightforward in that there is a process set forward in the law as to how the lawsuit will proceed and how the action will be resolved. This usually involves a determination of the ownership, an appraisal of the property, and an accounting of the income and expenses. In the end one of the co-owners usually buys out the other or the property is sold and the proceeds are distributed.
A partnership dissolution lawsuit or breach of partnership contract lawsuit, on the other hand, looks to the terms of the partnership agreement as to how disputes should be resolved. The court will not substitute its own judgment for that already agreed upon by the partners in the partnership agreement (unless the agreement violates the law or public policy). The partnership agreement may set out certain procedures as to how a partner may enter or exit the partnership. The court will enforce those procedures.
A partner seeking to get out of a partnership does not have the ability to force the sale of the partnership’s assets—properties, buildings or land—because the partner is not a co-owner of the property. Instead the partner only has an interest in the partnership. Unless the partnership agreement gives the partner the ability to force the sale of the partnership property, he or she would not have that power otherwise.
While some may refer to their co-owner situation as a ‘partnership’, there are distinctions between co-owners and partners in the real estate litigation context. To make it more complicated, several partnerships or limited liability companies could own property together as co-owners. One of the partnerships could file for partition just as an individual would and the partition action would not necessarily involve partnership issues. If you are going to own property, it makes sense to learn the benefits and downsides of owning the property as co-owners and partners.
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Meet Our Friends…Mike Wegge & Hiu Chan
Mike Wegge (far left) is a Financial Advisor at Northwestern Mutual. Mike provides specialized, expert recommendations to secure your financial future while concentrating on your business needs and retirement plans. You can contact Mike at (213) 243-7168 or firstname.lastname@example.org.
Hiu Chan (far right) is the Vice President of Investments at the Long Beach office of Marcus & Millichap. Hiu offers real estate investment clients the opportunity and assistance in buying and selling all types of commercial properties. He can be reached at (562) 257-1200 or email@example.com.
Wagenseller Law Firm specializes in real estate and business litigation throughout Los Angeles and Southern California. We handle real estate litigation, business litigation, corporate litigation, partnership litigation, breach of contractand lease cases, real estate and business fraud cases, and other commercial litigation. We also draft and review commercial leases for both landlords and tenants.
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