Co Ownership of Real Property In California
CO-OWNERSHIP OF REAL PROPERTY IN CALIFORNIA
We are frequently asked to define and explain various “forms” or “manners” in which real property may be owned by two or more persons.
This article is intended to provide basic explanations as to various forms of real property co-ownership; and, is not intended to give the reader legal advice on how co-owners should hold title to jointly owned real property. Many factors including but not limited to: (a) tax planning; (b) estate planning; and, (c) whether the property is owned individually, by a partnership, by an LLC or a corporate entity will have a significant impact on the manner in which co-owners decides to hold title. Consequently, this article is not intended to substitute for the advice of an attorney as to a specific problem or transaction. If you have a specific legal question or need legal advice, you should contact an attorney.
TYPES OF CO-OWNERSHIP
Ownership of real property by two or more persons is commonly referred to as “co-ownership,” “cotenancy” or “concurrent ownership.” There are four traditional forms of co-ownership in California: (a) tenancy in common, (b) joint tenancy, (c) partnership, and (d) community property.
In addition to the four “traditional” forms of co-ownership, co-ownership issues can arise in “common interest developments,” such as condominiums and townhouses.
Absent a written agreement among owners providing otherwise, co-owners have certain rights in the real property they own. These rights include:
– The equal and unrestricted right to use and occupy the entire property;
– The right to sell or encumber their interest in the property, without the knowledge, approval, or consent of their cotenants;
– The right to a share of any profits derived from the property;
– The right of contribution from other co-owners for common operating and maintenance expenses relating to the property; and,
– The right to file a partition action, which is the procedure for segregating and terminating all jointly owned interests in real property.
It is critical to note that co-owners’ rights and obligations can be modified by written agreement. The rules discussed in this article are simply the default rules, ie. the rules that apply absent a written agreement providing otherwise.
TENANCY IN COMMON
Tenancy in common is the default form of cotenancy, meaning that except for married couples or registered domestic partners (who are presumed to acquire all property as community property), individuals who jointly acquire real property own the property as tenants in common unless the conveyancing instrument provides otherwise. Thus, all co-tenancies between unmarried individuals that are not expressly made joint tenancies or partnerships are tenancies in common. The following are a few of the key features of a tenancy in common.
Ownership and Transfer. Unlike joint tenants, tenants in common can own equal or unequal interests in the real property they acquire, and may acquire their interests from different sources at different times. As a result, every tenant in common has the right to sell or encumber their interest without the knowledge, approval, or consent of their cotenants. However, a tenant in common has no right to convey any cotenant’s interest and any such attempted conveyance is void.
Equal Right to Occupy the Entire Property. Although tenants in common can own unequal interests, unless agreed otherwise in writing, all tenants in common have an equal right to possess and use the entire jointly owned property. Therefore, no cotenant can exclude any other cotenant from any part of the jointly owned property. By extension, because all owners have an equal right to occupy and use the entire property, no tenant in common has the right to collect rent from a cotenant.
No Survivorship Right. A key feature distinguishing a tenancy in common from a joint tenancy or community property interest is that a tenants in common interest carries with it no survivorship rights. This means that upon the death of a cotenant, the deceased cotenant’s interest in the jointly owned property passes to their heirs or devises through their estate. This is unlike a joint tenancy or community property interest, both of which feature survivorship rights, meaning that upon the death of a cotenant, the deceased cotenant’s interest vests in their surviving cotenant(s) by operation of law.
Right to Share in Profits. Because tenants in common have an equal right to use and occupy the entire jointly owned property, any rent received from third parties belongs to all cotenants in accordance with their proportionate interest in the property. Similarly, all tenants in common share responsibility for property-related operating and maintenance expenses. However, a tenant in common cannot require his or her cotenants to contribute or reimburse them forimprovements to the property.
Right to Partition. Absent special circumstances, each tenant in common has an absolute right to partition all jointly owned real property. Partition is the procedure for terminating and dividing all jointly owned real property into separate and exclusive individual interests. Partition can occur by one of three methods: (1) sale, whereby the property is ordered by a Court to be sold and the proceeds split in accordance with each owner’s percentage interest in the property; (2) physical division, whereby each cotenant acquires an exclusive interest in a portion of the formerly jointly owned property; or (3) appraisal, whereby one cotenant acquires the interests of other cotenants based on a court ordered appraisal.
Joint tenancy is defined as the co-ownership of real property by two or more persons created by a single transfer declaring the form of ownership to be joint tenancy. To create a joint tenancy, the conveyance must at the same time, convey the same title, to the same interest in property, with the same right of equal possession. A conveyance that fails to convey all four “unities” (time, title, interest, and possession) creates a tenancy in common, the default form of co-ownership. By extension, a joint tenancy lasts only as long as the four unities exist. Thus, one joint tenant’s conveyance of his or her interest, even if to themselves, destroys the joint tenancy as to that joint tenant. This results in the transferring (severing) owner becoming a tenant in common with all remaining (non-severing) joint tenants, each of whom remain joint tenants among themselves.
Another key feature distinguishing joint tenancy from tenancy in common is the right of survivorship. A joint tenancy carries with it a right of survivorship. This means that upon a joint tenant’s death, the deceased joint tenant’s interest in the property held in joint tenancy vests in his or her surviving joint tenant(s), automatically by operation of law. This is a potential advantage and disadvantage – while it allows the deceased’s interest in the property to avoid probate, it prevents the decedent from bequeathing his or her interest in the property upon their death; their interest vests in their remaining joint tenants.
A third method by which real property can be acquired is by “partnership.” A partnership is defined as “an association of two or more persons to carry on as co-owners a business for profit.” Property is deemed partnership property if it is acquired in the name of the partnership, or by one or more partners, with either an indication in the transfer instrument of the person’s capacity as a partner or the existence of the partnership. Significantly, because a partnership is an entity distinct from its partners, partnership property belongs to the partnership and not to any of the partners individually. Thus, the individual owners are not “co-owners” of the property and have no individual interest in the property, but are rather partners in the partnership holding title to the property.
Community property is defined as all property, including real property, acquired by married persons or registered domestic partners, while domiciled in California, unless the property is expressly acquired as “joint tenants” or “tenants in common.”
Like joint tenants, spouses or registered domestic partners have equal interests in all community property. As such, each spouse or registered domestic partner has the equal right to possess, manage, and control the property. However, unlike joint tenants and tenants in common, spouses and registered domestic partners are fiduciaries and therefore owe one another a duty of the “highest good faith and fair dealing.” This includes a duty of care and loyalty in all matters relating to the community property in question.
As is our recommendation for our existing clients and potential clients, legal consultation ought to be employed proactively, ideally before the transaction is consummated, to avoid future problems.
It is critical for individuals to understand their potential duties and obligations BEFORE deciding to jointly acquire real property. However, while the foregoing article was intended to highlight some of the characteristics of a few of the more common forms of co-ownership, it does not begin to address all the issues one must consider before jointly purchasing property, notably tax, estate planning, and liability issues. Lastly, it is important for potential co-owners to understand that the “default rules” discussed above can be, and often are, modified by a written agreement among all cotenants; that is, they apply only in the absence of a written agreement between parties.