Till Default Do We Part: When Joint Owners of Residential Property Can’t Agree

Law Office Of

Joseph A. Velez

480.710.5079

Real Estate & Business Law Attorney

The Law Office of Joseph Velez

Commercial Real Estate & Business Law Attorney

Scottsdale Financial Center

7272 E. Indian School Rd., Suite 111

Scottsdale, Arizona 85251

480.710.5079

form a legal partnership. The answer regarding how to split costs and potential liabilities would be simple if the partners shared equally in the purchase and operating costs, down payments, mortgage payments, etc. But let’s not kid ourselves, these problems are rarely so straightforward. So what happens when the contributions were not equal (e.g.. when one partner puts up a significant down payment, and the other contributes his stronger credit credentials)? Or, when one partner wants to walk away, but the other is not ready to do so. Is there any recourse to the steadfast partner for the inevitable negative credit impact? (the answer to this is almost always no).

Possible Solutions: One solution, especially if the home has equity, is an action for a partition. A partition action can be brought to divide the property into individual shares among the owners. A partition can be voluntarily if all owners agree. However, if they don't, then a judge can order it. But just cutting up the property into separate pieces isn’t always a practical solution (perhaps such a division would drastically reduce the total value of the property). In these situations, the law allows the property to be sold, dividing the proceeds rather than the property itself. Regardless of how it is sold, the proceeds are divided among the co-owners in accordance with their ownership interests.     But what if the property has no equity and one of the two partners wants out? This becomes a more difficult problem to solve, requiring among other things, an analysis of the partners intent when they bought the property. Did they intend to sell it after a certain period of time, or were they silent on this issue? If the partners never addressed when to sell the property, then partnership law (or the similar Arizona LLC laws) says that they can terminate their association at any time. In this case, the steadfast partner is not likely to get a court to order the defaulting partner to stay in a losing venture and continue to make payments. And if this is the case, there would be no recourse for the subsequent harm to the innocent partner’s credit rating. The bottom line is, if the property has no equity, the potential solutions are generally more painful and expensive unless both partners decide to walk away.

Does the Arizona’s anti-Deficiency Statute protect Investment/Rental properties? Generally yes, with a few exceptions. But walking away from a mortgage is not an easy decision to make, and the owners are strongly advised to seek the advise of a real estate attorney and a CPA before making such a decision. Nevertheless, Arizona’s anti-deficiency statute (found at A.R.S. 33-814(g)) applies to original (and most refinanced) mortgages where the property doesn’t exceed 2.5 acres, is utilized as and limited to either a single one-family two-family dwelling. To the surprise of many, this protection also extends to investment properties (but the statute does not protect borrowers of commercial properties, raw land, triplexes, fourplexes and non-purchase money HELOCS). If the co-owners meet this is criteria, then one inexpensive solution may be merely to call it day and walk away.

Conclusion: If there is equity in the property, and the co-owners cannot agree on the management or disposition of real property, they can file an action for partition to have it physically divided. If physical division is not feasible or would result in the depreciation of the property, the court may order it sold and the proceeds divided. If there is no equity, then the available options depend on a myriad of factors, together with consulting Arizona’s partnership laws, real estate laws and contract laws. Finally, if after consultation with a real estate attorney, the joint-owners are satisfied that Arizona’s anti-deficiency statute shields them from all liability, then they may want to consider just walking away and licking their credit wounds. Hopefully these partners will then find comfort in the old maxim, “he who turns and walks away, lives to fight another day”.

Background: “... it seemed like a good idea at the time”: Here’s a familiar problem: two property owners are in a state of distress because together they bought residential property several years ago (expecting that property values would continue to soar). They lament that this investment home is now worth half of what they owe the bank. To make matters worse, because the rental market is saturated with vacancies, they cannot rent it for anywhere near the amount of the monthly mortgage payment. And although one of the co-owners is unsure of what to do under the circumstances (perhaps he’s paralyzed by fear), the other co-owner wants out of this sinking ship ASAP, and may have even stopped making his share of the payments.


The Friction: In time, disagreements are likely to occur between partners of property.  The current and frequent source of disharmony is generally two fold: a.) not being able to rent the property for the amount of the mortgage, and b.) a diminished value in view of the amount owed to the bank. These however, are by no means the only reasons for problems between co-owners. So who’s responsible when one partner pulls up stakes and defaults on his share of the mortgage? What recourse does the innocent partner have? How do we even wrap our hands and minds around this problem so that we can offer constructive advise to the warring clients?

Questions & Issues Involved: The first question asked should always be, was there an agreement between the partners as to what each’s responsibilities are? The second major question is, is there any equity? If there was an agreement, was it in writing, such an LLC’s operating agreement? And in the rare instance that there was a written agreement, was this particular issue addressed? (I seldom see written agreements between joint owners of residential property). For guidance, we must apply these facts to three different sets of Arizona laws (real estate law, partnership law and contract law). What does partnership law have to do with all this? Although the co-owners didn’t officially spell it out, they did

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