News You Need to Know: Preparing for the Potential Pitfalls of Co-ownership of Property
24 Apr 2012
Along with the co-ownership of property by two or more unmarried persons comes special rules that affect how the co-owned property is managed and, in particular, what is done when the co-ownership comes to an end. Danielle C. Babashoff, an Associate in the Litigation Practice, discusses how individuals should prepare for the potential pitfalls of co-ownership.
Overview of Co-ownership of Property
Co-ownership, or ownership in indivision, is a method by which more than one person can own a particular piece of property in Louisiana. Any thing may be co-owned, from vacant land to a brokerage account. Along with the co-ownership of property owned by two or more unmarried persons comes special rules that affect how the co-owned property is managed and, in particular, what is done when the co-ownership comes to an end. (This article does not cover property co-owned by spouses, which is considered to be community property in Louisiana.)
Generally speaking, the co-owned property is managed by agreement between the co-owners and all co-owners have the right to use the property as they see fit. If the property produces any income, that income must be shared between the co-owners per their ownership shares.
When conflict does arise surrounding co-owned property, it is usually when one or more co-owners decide that they do not want to co-own the property anymore. Often, this is due to a dispute about the use and/or management of the co-owned property or some other change in the dynamic between the parties.
Division of Co-Owned Property
A co-ownership regime might be convenient and easy to enter into when the co-owners are getting along and agreeing. However, when it comes time to divide up the property and the owners cannot agree on how it should be done, it is often left up to the courts to divvy the property amongst its owners according to the Louisiana Code articles governing ownership in indivision.
Louisiana law is very clear that a person will not be forced to co-own property with another person against their will, which gives rise to a right to partition. Partition is the dividing up of property, which terminates the co-ownership regime. It can be done by the agreement of the co-owners, but if there is no agreement, it can and will be done by the courts.
The court can decide to partition the property one of two ways: in kind or by licitation. Partition in kind is the division and distribution of the property itself. This only works if the property can be divided up in shares that are roughly equal in value. Some examples of property that can be partitioned in kind are bank accounts (where just money is being divided up) and unimproved property (where all the land is roughly the same in terms of location and value and can be put to the same purpose if it is divided into lots).
When the property cannot be equally divided, the property must be sold and the proceeds split between the co-owners in proportion to their ownership shares, which is partition by licitation. This method is used when the property is incapable of being split and maintaining its functionality, such as when the property is a single family home or a car. The sale ordered by the court may be a public auction, similar to a sheriff’s sale, or a private sale directed by the court.
Other Considerations That Arise During Partition
When co-owned property is partitioned, either in kind or by licitation, the division between the co-owners is proportional to their ownership interest in the property. Therefore, if there were two co-owners who own the property in equal shares, the property or its proceeds would be divided 50/50. But there are certain situations where the division might not strictly follow the shares of the co-owning parties.
If one of the co-owners has spent money necessary on the upkeep and use of the property, to maintain or repair the property, or paid another person to manage the property, that person will be entitled to a partial reimbursement of those expenses from his or her other co-owners. The law assumes that the expenses on the property will be split between the co-owners, and if the judge is presented with evidence that one co-owner took on a particular expense without the contribution of his or her co-owners, the non-paying co-owners will be required to pay back their share of the expenses during the partition of the property. However, if the co-owner who was paying the expenses had the use of the co-owned property, the value of his or her use may reduce the amount he or she is entitled to.
Partitions that are supervised by the courts can often be long, drawn out affairs where detailed accountings are required to make sure that every co-owner has reimbursed and been reimbursed by their fellow co-owners for expenses paid on the property. Also, particularly where there is a partition by licitation that results in a public auction, the property often fetches a smaller price than in the open market, resulting in less money to be divided amongst its owners.
One Way to Avoid the Co-Ownership Pitfalls—Creating an LLC
There is a simple method to enjoy the benefits of co-ownership without the potential for the messy partition process when one person no longer wants to co-own. Placing the property in a Limited Liability Company (LLC), with the former co-owners being members of the LLC, allows the property to be held by multiple co-owners in principle, but grants extra protection by permitting the parties to designate at the outset how the property is to be managed, how expenses are to be paid, and what happens if one individual elects to terminate his interest in the property. This is particularly helpful when property cannot be partitioned in kind and has some special use or value to the co-owners, such that the other parties would like to keep the property when one co-owner wants to terminate his or her interest.
The LLC would be the owner of the property in question, with the individuals, who were formerly co-owners, owning a percentage share of the LLC. In this way, the LLC should then be paying all the necessary expenses on the property so no reimbursement claims would arise and the members of the LLC could terminate their ownership interest by the more flexible rules of LLCs and without having to force the sale of the property itself.
The formation of an LLC requires a bit more work on the front end, in the form of preparing and filing certain documents with the Louisiana Secretary of State, but ultimately provides the potential co-owners with more control over their property and the uncertainties of the future.
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