Division of Proceeds from Partition Sale of Real Estate

When more than one person owns real property with others as joint tenants or as tenants in common, and one or more of the the cotenants disagree on whether the property should be sold, a partition proceeding may be instituted in Superior Court requesting that the Clerk of Superior Court allow a “partition” of the property.  In other words, the court can divide up the property among the cotenants, assuming the property can reasonably be divided.  This situation most often arises with property that has been inherited, and the heirs cannot agree on whether property should be divided or sold, or if sold, how the proceeds of a sale should be divided among the cotenants. In lieu of an actual partition, the cotenant(s) can request that the court order a sale of the property – this route would be more common in the case of a residence with very little real property because “dividing” the real property typically would not be feasible, economical, or fair to cotenants.

If the court orders that the property be sold in lieu of partition, then the proceeds from the sale will be divided among the cotenants following the sale. However, the sale proceeds are not always divided equally. Depending on the facts of the case, North Carolina law allows the court dividing the partition sale proceeds to consider improvements a cotenant has made to the property, property taxes paid by a cotenant, and the fair rental value of the property for the period when a cotenant may have been in possession of the property.

The North Carolina Court of Appeals recently addressed these issues in Harris v. Gilchrist, ___ S.E.2d ____, COA15-437 (N.C. Ct. App. Mar. 1, 2016) (reporter citation not yet available).

Value of Improvements (“Betterments”)

In North Carolina, “a tenant in common who improves property reasonably believing that he is the sole owner ‘is entitled to recover the amount by which he has enhanced the value of the property.’” Harris v. Gilchrist at *3. This equitable remedy allows a cotenant “to receive an allowance for any improvements (s)he makes to property at the time the property was partitioned.” Id. at *2. Importantly, the amount of this credit (or allowance) should be based on the enhanced value the improvements give to the property, not on the actual cost of the improvements. The Court of Appeals compared this equitable remedy to North Carolina’s Betterment Statutes (codified in N.C. Gen. Stat. § 1-340, et seq.).

Fair Market Rental Value

If a cotenant is entitled to a credit for the improvements she made to the property, then the other cotenant(s) may request that her credit be reduced or offset by the fair market rental value of the property for the time the one who made the improvements (or claims credit for them) occupied the property. “Rent, though, which accrues more than three years before the filing, may only be used to offset the betterments allowance (and not to establish a claim for affirmative relief).” Id. at *4. However, in order to be awarded such rents as an offset to betterments, there must have been “an actual ouster by the occupying co-tenant of the non-occupying co-tenants.” Id. An “actual ouster” is “a cotenant’s clear positive denial of another cotenant’s rights in the common property.” Id.

Contributions for Property Taxes and Necessary Expenses

In North Carolina, a cotenant “who pays taxes and other expenses necessary for the preservation of the property ‘will have a lien upon the common property to secure such reimbursement.” Id. at *5. See N.C. Gen. Stat. § 105-363 (a cotenant who pays a greater share of the “taxes, interest, and costs and that was not paid through agreement with or on behalf of the other joint owners shall constitute a lien in his favor upon the shares of the other joint owners”). However, an exception may exist where the cotenant paying the taxes and necessary expenses is in “exclusive possession” of the property. Id. The Court of Appeals specifically noted that “sole possession” is not the same thing as “exclusive possession,” as exclusive possession requires a showing that the cotenant has attempted to “withhold the property” from the other cotenants after the other cotenants have made a demand to possess the property. Id.

If you own real property with other tenants in common or joint tenants who cannot agree on how the property should be divided, sold, or how the sale proceeds should be divided, contact Allman Spry today to speak with an North Carolina attorney experienced in real estate litigation.