What is a Partition Agreement?
A partition agreement is a legal document that allows cotenants, in other words co-owners or co-tenants, of real property to divide that property into separate portions. We will use the term cotenants in this context to refer to co-owners or joint tenants with regard to real property.
In short, a partition agreement is an agreement that provides for the sale of the property and the division of the proceeds. Tying back to our article on Partition Sales, the cotenants have a right to file a partition lawsuit in aid of partition to force the sale of their property. Why spend the money on a partition lawsuit when the parties can come to an agreement and simply transfer title to one owner? A partition agreement may be preferable in some cases due to the fact litigation in the context of a partition lawsuit can be time consuming and costly . However, all parties must consent to the partition agreement and the agreement should be reviewed by a real estate attorney to make sure that the agreement contains all the necessary terms to become lawfully binding on the parties.
In the context of a partition agreement, ownership in the property after the sale will pass to one party, whether it be joint or equitable ownership is beyond the scope of this section, but for the sake of brevity we will say that sale would likely leave the owners as joint owners of the proceeds. In other words, ownership does not automatically pass to the buyer and the proceeds are divided equitably, as is often the result in a partition lawsuit. Partition agreements are often utilized in real estate ownership for two reasons:
While partition agreements can be very useful in a partition of real property, they can also be useful in other contexts legally. For example, businesses may also utilize partition agreements as an alternative to litigation.
Key Components of a Partition Agreement
Essential to any partition action are the terms of a partition agreement, and those elements typically include the division of property, the legal descriptions of property, the rights of the parties to partition, the manner and method of the partition, and, of course, the financial aspects of the partition. That is to say, what money changing hands will affect the partition.
A partition agreement identifies the property to be partitioned. Real estate is the property most commonly the subject of a partition agreement. The partition agreement may identify one parcel of real estate to be partitioned, or multiple parcels of real estate to be partitioned. The partition of real estate is accomplished by the recording of a deed(s) pursuant to the partition agreement, or, where real estate is to be sold (the subject of a judicial partition action), the procedures to effectuate a sale pursuant to the court’s orders to effectuate a partition.
Other property subject to a partition agreement include bank accounts, vehicles, insurance policies, memberships, personal property, and any other assets owned by the parties who are the subject of the partition. As in a judicial partition action involving real estate, a partition agreement partitioning personal property would effectuate the transfer of ownership of that property from the party(s) to the partition agreement to the other party(s) to the agreement. Unlike real estate, a party to a partition agreement may have to sign a prioritization, indemnity, or similar document in order to vest true ownership of the asset to the other party or parties to the partition agreement.
A partition agreement may include a complete legal description identifying the property to be the subject of the partition agreement, or it may opting for brevity, include a general legal description, of the real estate, without going so far as to only include the county and township. It is also common for a partition agreement to identify the tax identification number, and to reference the deed of record, in order to clearly identify the property.
The rights of the parties to the agreement are typically a reciprocal interest in the property to be partitioned; however, the partition agreement may be a one-way street, such as where the parties are settling their interests in property and one party has no interest in the property. Furthermore, parties to a partition agreement may provide other parties with rights in the parcel to be partitioned, such as a right of first refusal, such that the party whose interest is being severed or consummated may have the first opportunity to purchase the remaining interest that is being conveyed pursuant to the partition agreement.
The manner and method of partition is itself an element. In the case of partitioning real estate it is more common for the parties to convey the interests of parties subject to the partition agreement to other parties. However, more often than not an agreement providing for the partition of real estate results in the sale of real estate by a judge. In the case of partitioning personal property, more often than not parties to a partition agreement need to physically transfer custody of the property to each other as they are able to do, either jointly or independently. While parties may enter a partition agreement to establish pricing to effectuate a sale, sales are more frequently done in a subsequent process and are incidental to the agreement; unlike a residential real estate sale.
While it is easy to consider the financial aspects of a partition agreement simply to mean how one asset is exchanged for another, more often than not the finances of a partition agreement are more comprehensive. For real estate, a selling price is established, if the parties are selling the property, and thereafter, expenses are taken out of the sale proceeds before the proceeds are distributed. Likewise, if the parties are merely changing interests in a parcel of real estate the parties may pay expenses to each other for repairs. Occasions arise where one party simply pays the ongoing expenses of a parcel while the other pays for improvements made to the parcel.
If personal property is partitioned the parties may deal with financing in several ways. The parties may make an in-kind division of all items of property, regardless of value and use. Conversely, for more valuable possessions, such as a business, motorcycles, and boats, the parties may employ a professional assessor to determine appropriate values for each party’s divisible or non-divisible interests. The parties may agree to a reserve value for a possession and may pay each party half of that value, while each party retains possession of the item (often times in the case of retirements, businesses, or vacant land). Alternatively, the parties may establish a monthly or annual pay-out schedule upon the completion of certain conditions subsequent, such as the finalization of divorce or the adjournment of a partition action in equity or law.
Finally, the parties may have agreed to other/remaining forms of compensation to affect a complete distribution of or division of a property; as the purpose of a partition agreement is recognize the concern of both parties to finalize the disposition of the property, whether real estate or personal property.
Different Types of Partition Agreements
Trade or voluntary partition agreements are common in communities where there are multiple property owners, such as a condominium association. This type of agreement is entered into on a voluntary basis and the owners agree to divide the property among each other without utilizing a judicial procedure. Trade partitions have the advantage of eliminating the expense of a full-blown partition lawsuit. When parties have no intention of reselling the property separate partitions of the property may be in their mutual interests.
Involuntary agreements are made when partition becomes necessary. For example, joint owners may make an involuntary agreement if they suffer a disagreement regarding the property and have no option other than to realize the value of the property through partition. When a person dies and his estate passes to his heirs, this also results in the creation of a co-ownership and the opportunity for an involuntary partition agreement between the heirs.
Traditional or judicial partition refers to a court-ordered partition. Partition suits are somewhat different than partition agreements – in that as an alternative to selling parcels to third parties, a court will literally divide the property among the owners (as opposed to subdividing the property from the rest). A court in this instance finds that the property can be divided into parcels that are able to be assigned and sold separately by parcel. This can only be done when certain conditions are met. For example, the property must be physically divisible or separable and capable of being conveyed or devised by will. In addition, the partition must be fair and equitable as to each co-owner. Finally, all owners must have written notice of the proposed PARCEL partition, and, once a decision has been made, each party has the right to appeal the decision to an appellate court.
Legal Context and Enforceability
Partition agreements are part of the legal process called "partition". Partition is a legal remedy in which either co-owners (or co-tenants) of a property can seek from the court to have the property sold and have the proceeds, or payments, divided up between the owners in accordance with their respective interests in the property. A legal partition can be ordered whether or not there is an existing, written partition agreement.
In Ontario, partition agreements are enforceable under section 3 of the Partition Act RSO, 1990, c P6, which states:
3. Where two or more persons are seised or possessed as joint tenants or tenants in common of any land or water,
(a) any one of them, or any one of them with any number of them, or any number of them may, subject to such conditions solely affecting his or their interest as the court may impose, apply to the court for a partition or sale and distribution, and
(b) the court, on the application being made, may order partition to be made, and direct the mode in which partition shall be made so far as partition can reasonably be made, and unless the parties interested agree to a partition, distribute the shares thereof among the parties interested, or may make such order for sale and distribution and such other order as justice requires, and may, when a sale is ordered, direct a partition or separation to be continued until the period of redemption has elapsed.
Therefore, partition agreements are enforceable by the court as long as these agreements do not, or cannot at a later date, infringe upon the rights of any party that cannot be restricted by the agreement. For example, an agreement can restrict a party’s right of first refusal to acquire the property, but cannot restrict the co-owners’ rights against any adverse possession claim after ten years of continuous possession by one owner. This is what is meant by "conditions solely affecting his or their interest as the court may impose". If an agreement between the co-owners does infringe upon the rights of a co-owner that cannot otherwise be restricted by the agreement, then the agreement will be enforceable only to the extent that it does not infringe upon those rights. Therefore, even though an agreement states that a party waives his (or her) right to the proceeds of the sale to that property if this is done, it is unenforceable if the right of the party to the proceeds cannot be restricted by way of an agreement.
A practical example of this where a partition agreement is enforceable but only to the extent that it does not infringe on the rights of the parties is found in McCarthy v McCarthy (1999) 43 R.F.L. (4th) 378 (ON CA). In that respect, the Court of Appeal held that:
A partition agreement is valid and enforceable except to the extent that it cannot, within the law, affect the right of the parties. Where an owner pays out more than his proper share of the maintenance costs, he is entitled to have that amount charged against the share of the other owner in due course of administration: See McCarthy v. McCarthy; McCarthy v. McCarthy; Re Racz, [1979] 2 W.W.R. 1 (Man. C.A.). I am satisfied, in the case before us, that the respondent, by the partition agreement, has waived his right to the accounting, but he has only done so for the purpose of assisting the appellant in paying off the mortgage … [pages 379-380].
Given the above legal framework, there are many remedies that can be claimed in a partition action, including:
1. An application for a vesting order — that is, an order which has the same effect as a conveyance of land; or
2. An order for money judgment against a co-owner that has received more than their fair share of the net proceeds of sale of jointly owned land (for example, the applicant could claim a proportionate share of the renters’ rights to the security deposits held by a residential landlord, if one co-owner collected security deposits from his tenants without transferring a proportionate share of those security deposits).
Scenario – Can a Partition Agreement be used to Rid an Owner of Other Owners’ Claims? In Thomson v Christmas Creek Capital Inc., 2016 ONSC 6628 (CanLII), the applicant applied for a vesting order under section 3(3)(a) of the Partition Act, RSO 1990, c. P.6. By doing this, the applicant was seeking a vesting order that would void the interest of all parties other than himself. That is, the applicant was seeking to rid the property of the other owners’ claims to the distributions from the sale of the property in order that he would not have to share the sale proceeds with the other owners.
In that case, the applicant was unilaterally attempting to change the agreement without the consent of the other owner and without following the requirements of the Partition Act, specifically section 3(4), which states that the co-owners have a right of first refusal over the sale, subdivision, mortgage or lease of the former matrimonial home.
In response to the application by the applicant, the Court held that the application, on its face, was "an abuse of process". Given that the applicant was not seeking to enforce a partition agreement that gave rise to a right of first refusal, rather he was seeking to rid himself of this obligation, he could not succeed with the vesting order.
The above scenario illustrates that even if the parties have entered into a partition agreement that a court can enforce to the extent it does not interfere with any other owner’s rights, this does not mean that a party can unilaterally change the partition agreement to the detriment of the remaining parties. Moreover, a partition agreement cannot nullify the rights of any co-owners under the law and, particularly in this case, the Partition Act.
Pros and Cons
When entering into a partition agreement, a party is benefitted by certainty in ownership and use of the property. In addition, both parties save on the costs of obtaining a court-ordered partition. If the parties can agree, they have saved themselves the costs of litigation, including the cost for an appraisal, the survey, the lawyer and the appraisers. Where the parties agree to partition the property through a private sale, if either party feels that they would be treated unfairly in the distribution of the sale proceeds, they can attempt to negotiate an equitable division before they sign the agreement .
A disadvantage of entering into a partition agreement is that the terms of the agreement are binding. If a party does not like the net cash amount for which the property is to be sold, that party cannot allege that the sale price was unfair. To overcome unfairness, the party must show fraud or unconscionability, which is a high legal burden to prove. So a party who is considering a partition agreement should carefully review the terms and conditions of the proposed agreement before agreeing. The parties may want to obtain a co-titleholders agreement with provisions for private sale, in lieu of partition.
How to Prepare a Partition Agreement
When drafting a partition agreement, there are several important steps in the process to keep in mind to drafting such an agreement. First and foremost is talking about it with the other owners of the property. Sometimes the discussion leads nowhere and you need to take step two – finding an attorney to help in the process. Many attorneys will charge a nominal consultation fee to determine the scope of the consultation and the time and cost. The time, cost and process will be subject to help of the client and willingness for other owners to discuss and agree to the terms of the agreement. Other cost considerations are mediation or arbitration to resolve property division. This option, when utilized, may reduce the cost of litigation by expediting the dispute resolution. In the end, either the partition agreement is created or court action is necessary to establish partial partition by any method allowed under state law.
Common Pitfalls to Avoid
There are several pitfalls that people encounter when they draft or execute partition agreements. Often times, they just plow ahead and do something without stopping and thinking it through. The most common mistakes I see made when executing a partition agreement are:
- allowing the parties to alter the agreement. If the parties want to make changes to the agreement, they should do so in writing. However, it is better to set the parties expectations and obligations at the time they execute the agreement than risk them coming back later and saying "hey, we didn’t really mean it" or trying to recapture what they really wanted.
- not recording the agreement with the County Clerk’s office as soon as possible. My advice is don’t run to court to have the agreement approved before you record it – deposit it with the County Clerk. This way there are no procedural arguments over whether the agreement is enforceable or was properly executed or whether there were any "purported" alterations.
- not having the agreement reviewed by counsel. While this is not always a must, it is advisable to have someone with experience review the agreement to ensure that the legal rights of the parties are adequately protected. It is very easy to overlook something as straightforward as encroachments.
Practical Examples and Case Studies
A partition case involving a mother and two of her children. One of the two children (the child who was not joined in the partition) sued for partition and sale of the real property. The matter was defended by the joint owners who denied the right to have the real property sold. The matter proceeded to trial and was ultimately decided by a judge of the Court of Common Pleas who followed the process set forth in Pennsylvania Partition law.
The real property was ordered to be sold at private sale to a third-party purchaser for a price set by the Court. A master was appointed by the Court (a master is just a lawyer or a judge who is asked to look at the evidence and provide assistance to the Court). Upon sale of the real property, the Court, upon application of the parties, permitted the master to deduct the costs for associating with the sale of the real property. Once those costs were determined to be $8,000, the balance of the sale proceeds was allocated in accordance with the ownership percentage interests.
A partition case involving 3 siblings. Two of the siblings owned undivided one-third interests in real property in Pittsburgh, Pennsylvania. The third sibling was an owner by virtue of a deed which authorized all three to act as joint owners . The third sibling, apparently having little interest in the sale of the real property, refused to join in the petition to have the real property sold. Although it was argued that the third sibling was "ousted" from the enjoyment of the benefits of ownership, found by the Court to make for an appropriate partition circumstance.
In this case, a contrasted the position of the joint owners with the position of the plaintiff. The plaintiff sought an award for his costs (and attorneys fee) associated with the petition. The Court found that under the law of partition, the plaintiff had the burden of proof to show that an allowance for his costs was appropriate. The Court concluded that the plaintiff failed to do so, and denied relief.
In this case, two siblings were involved in the ownership of real property. One sibling moved away. The sibling who moved away wanted the real property to be sold. The other sibling did not, and refused to join in the petition. Ultimately, after determining that he made no efforts to hire out his duties as a joint owner, such that he had to perform the duties personally, the Court awarded the other sibling all of the value of the real property minus the cost of the real estate commission.