Assembly Bill 2245 – Partition of Real Property What does this bill mean for the way you hold and transfer your real property?

In July 2022, California passed AB 2245, the Partition of Real Property Act, which replaced the Uniform Partition of Heirs Property Act. This bill applies to any actions for the partition of real property filed on or after January 1, 2023. Understanding how the changes introduced in this bill can potentially affect the rights of an undivided interest holder in California and impact the fair market value of an interest is essential for effective estate planning when real property is involved.

HOW DOES AB 2245 CHANGE EXISTING LAW?

The Uniform Partition of Heirs Property Act (UPHPA) was approved in 2021 with the passage of AB 633, and applied to partition actions filed between January 1, 2022, and December 31, 2022. This bill modified existing legal procedures for the partition of real property held as tenants in common by multiple owners in cases where it satisfied the requirements as being inherited or “heir property.” The purpose of the Act was to protect heirs from being forced to sell the property at below-market values by speculators who are able to acquire a percentage of ownership, only to turn around and use that ownership to force a sale through a court action called a partition action. This type of action has been historically available to owners who desire to get out of the property ownership by forcing a sale even when the other owners do not wish to sell. It is an all or nothing proposition, meaning the entire property is sold even when one owner wants to keep it.

Heirs property was defined under the law as real property held as tenancy in common meeting the following requirements: there is no agreement in a record binding all the cotenants which governs partition of the property; one or more of the cotenants acquired title from a relative (living or deceased); and 20 percent or more of the interests are held by cotenants who are relatives, 20 percent or more of the interests are owned by an individual who acquired title from a relative (living or deceased), or 20 percent or more of the cotenants are relatives. The act gave co-tenants who did not request the partition an opportunity to buy out the interests of the party attempting to force a sale, thereby allowing them to retain ownership of the property.

The Partition of Real Property Act expands the scope of the UPHPA “to apply to any real property held in tenancy in common where there is no agreement in a record binding all the cotenants which governs the partition of the property.” Thus, it is no longer necessary for cotenants to meet the requirements of “heirs property” to have protection against a forced sale. The new law was considered necessary to prevent abuse of the prior law.

FAIR MARKET VALUE

Part of the original intent of the UPHPA was to prevent the sale of heirs property by private auction or other means that might result in a price below fair market value. Those protections have also been extended through the new legislation. With the new law, unless all cotenants agree on a value for the property or a method of valuation, or the court finds that the cost of an appraisal outweighs its evidentiary value, an independent appraisal is required to determine the property’s value.

Here’s what this legislation does to protect the people who want to keep the property:

When this value has been determined, the co-tenants who did not request partition by sale have the opportunity to acquire the interests of the cotenant(s) who did. If that is not possible, the court will consider if a partition in kind is practicable and would not result in great prejudice to the cotenants as a group. The determination of “great prejudice” is somewhat subjective, taking into account such factors as how long the property has been held by the cotenant and prior owners, a cotenant’s sentimental attachment to the property, and the degree to which a cotenant would be harmed by not being able to continue their lawful use of the property.

If partition by sale is determined to be the only feasible option, then that sale must be conducted on the open market by a licensed real estate broker, “unless the court finds that a sale by sealed bids or an auction would be more economically advantageous and in the best interest of the cotenants as a group.” In an open-market sale, the sale price must not be lower than the previously agreed-upon fair market value.

THE IMPACT ON ESTATE PLANNING

If you have real property to pass to a group of heirs, it is important to note that AB 2245 applies only in cases where no agreement governing the partition of the property that is binding to all co-tenants exists. This makes it essential to consider a tenant in common or similar agreement as part of your family estate plan if you have specific intentions for co-ownership after the property is passed. There are many other ways to avoid disputes, and a complicated court process, through thoughtful estate planning.

If you’re unsure of the potential impact of AB 2245 on your estate planning and your beneficiary’s continued ownership, schedule a consultation with the professionals at NM Law. Our expertise can help you determine the best means to avoid family conflict and effectively pass on intergenerational wealth.