By Stephen B. Fainsbert, Esq.
You and your spouse decide to purchase a vacation home with a couple who are your best friends. You have always had a wonderful relationship with them. How do you protect yourself if for some reason having this couple as friends is not the same as having them as co-owners of a vacation home where you have to decide on how you determine schedules on use of the vacation home, furnishings, cost of upkeep and maintenance? A well written tenancy in common agreement (“TIC Agreement”) agreed to by you, your spouse and the other couple is essential. To an extent this may protect you legally, but may not prevent the emotional differences which may be encountered in this sharing arrangement. The case of LEG Investments versus Thomas and Donalee Boxler (the “LEG-Boxler case”) decided by the California Court of Appeal on April 1, 2010, illustrates these difficulties.
In 1976, Thomas and Donalee Boxler (the “Boxlers”) and Carl and Judith Bumpass (the “Bumpass’”) purchased a lakefront vacation home in Lake Tahoe, California. Each couple owned a fifty percent undivided interest in the property as tenants in common which essentially gives each owner the right to use all of the property in conjunction with the other owners. In 1993, the Bumpass’ transferred their one-half TIC interest to Raymond and Sharon Schwerdtfeger (the “Schwerdtfegers”). The Schwerdtfegers and the Boxlers signed a TIC Agreement which was intended “to establish their rights and duties with respect to each other as tenants in common.” Thereafter in 1998, the Schwerdtfegers conveyed the property to LEG Investments, a general partnership (“LEG”), who is the other party in this legal action with the Boxlers.
Among other provisions, the TIC Agreement had a provision that if one party wished to sell their TIC interest, the selling TIC party had to present a bona fide offer from a third party to the other owner and the other owner shall have the right of first refusal to purchase the selling owner’s interest in the property on the price and terms provided in the bona fide offer from a third party. If the other party refused to purchase the other one-half of the property, then the selling party would have the right to sell the property to a third party at the price and terms no less favorable than that set forth in the notice of the offer given to the other owner. The TIC Agreement also had the provision that the agreement would be binding on subsequent owners of the property.
Almost immediately after LEG bought the one-half TIC interest from the Schwerdtfegers, the general partner of LEG, Eppie Johnson, determined that there were disputes and problems with the Boxlers in cooperating in the cleaning, landscaping, maintenance and repair of the property. Sometime in 2003, LEG offered to sell its TIC interest in the property or purchase the Boxlers interest for $750,000. The Boxlers declined both offers. Thereafter, in 2005, C.R. Gibb (“Gibb”), an experienced real estate investor in Lake Tahoe, California, offered to purchase the interest of LEG in the property for $1,400,000, subject to the approval of the Boxlers as co-tenants. The Boxlers declined to exercise their right of first refusal to purchase the interest of LEG on the same terms as Gibb was willing to purchase LEG’s TIC interest. After a meeting with the Boxlers, Gibb determined that the Boxlers were unwilling to contribute to renovations and repairs. Therefore Gibb would not approve the Boxlers as co-owners and withdrew his offer to purchase the Boxlers’ one-half interest in the property.
In March 2006, LEG demanded that the Boxlers agree to list the property for sale or purchase the interest of LEG in the property. The Boxlers refused to list the property and the Boxlers were not able to work out a purchase price with LEG. LEG thereafter filed a partition action to divide the property.
A partition action is a legal action which has its roots in common law in England going back several centuries. It is essentially used in the situation where two or more parties jointly own property and they cannot agree on the operation and maintenance of the property or have other disputes. The court has a right to divide the property. This is realistic if it is a property that is easily divisible such as when it is a large tract of land. Where there is a building such as a house on the land, division of the property is not a viable alternative and therefore the remedy is to have the property sold and the proceeds divided. LEG contended in its complaint that the relationship between the parties had so deteriorated that partition was the only available remedy since the Boxlers have “refused to pay for and provide reasonable and necessary maintenance, cleaning and repairs and otherwise pay for the reasonable expenses incident to the ownership of the property.”
In the lawsuit the Boxlers argued that LEG had waived their right to partition since the original intent was to purchase the property for a long term vacation home. The Boxlers further contended that LEG had acquired their TIC interest in the property at a discount because of the fact it was a TIC interest in the property. (Historically, a partial interest in a residential property is sold for proportionally less than the sales price on 100% of the property.) They further argued that an action for partition of the entire property at a non-discounted value could result in a windfall to LEG and be unfair to the Boxlers since LEG purchased their TIC ownership interest at a discounted price because it was a partial TIC interest which they purchased.
In addition, the Boxlers argued that there was a waiver of the right of partition because of the unfairness indicated above and also argued that the right of first refusal constituted a waiver of the right to partition the property. Ultimately, the Appellate Court determined that there was no waiver of the right to partition although the Appellate Court ruled that before the property could be sold, it was necessary to first reopen the right of first refusal offer to the Boxlers.
What this case illustrates is the importance of having a well thought out and drafted TIC agreement when you buy a property with another party. This applies to the acquisition of both residential and commercial properties. Whether there should be a right of first refusal included in the TIC Agreement depends on the circumstances or desires of each of the parties. There is always the right to bring an action to partition the property. The best remedy may be if the property can be reasonably divided, such as when there is significant acreage. Even then you may not be able to divide the property because of zoning considerations. Therefore, the property may be ordered to be sold and the proceeds divided or the court may provide that one party should have a right to purchase the property at a fair market value of the property, i.e., the person who does not want to sell the property. A right of first refusal can present a marketability problem because of the fact that the right of first refusal dampens the purchase price of the property since a buyer may have to expend a considerable amount of money and time on due diligence to determine the price that the buyer is willing to pay for property. Then the buyer will have to wait to see if the non-selling co-tenant would exercise his or her right to purchase the property at the same price and terms as the prospective purchaser. Therefore you have to build in a provision that once your tenant in common refuses to purchase the property, that you have a right to bring a partition action or sell the property at the same price and terms as offered to a third party.
In summary, buying property with others can be complicated whether in the form of a partnership, limited liability or tenancy in common arrangement. Each has their advantages and disadvantages but whatever the form of entity, it is critical that the documentation is well drafted.
Stephen B. Fainsbert is a partner in the West Los Angeles law firm of Fainsbert Mase & Snyder, LLP. Mr. Fainsbert has practiced law in the real estate and real estate exchange area for over forty years and has extensively written and lectured on these subjects both for the real estate industry and for attorneys through the California Continuing Education of the Bar program. Mr. Fainsbert is co-author of Real Property Exchanges, Second Edition, Continuing Education of the Bar, June 1994, which was published by the University of California Press and is recognized as the leading book on this subject. Mr. Fainsbert has been designated one of Southern California’s “Real Estate Super Lawyers” in both Los Angeles Magazine and Southern California Super Lawyers magazine every year since 2004. If you have any questions concerning this article or any other related matter, Mr. Fainsbert may be contacted at (310) 473-6400, by fax at (310) 473-8702 or “E” Mail at
Statements and opinions expressed in this article are solely those of the author, may not represent the views of this publication and may not be relied upon as legal advice – if you desire or need legal advice, you should retain an attorney for that purpose.