Family Ownership Disputes-A Cautionary Tale
This is a cautionary tale about family ownership disputes. The names have been changed to protect the innocent, although no one in this story is particularly innocent. The facts are all true. No one could make up a story like this. There, but for the grace of God, goes anyone who owns property as a tenant in common with their sister, their brother, their aunt or some other family member.
This is the story of two sisters, each in their mid-50s. That is to say, grown-up, mature adults. Let’s call them Mary and Barbara. Back in 1996 the two sisters joined together and bought a five unit multi-family building. The two sisters would each live in a unit while renting out the other units.
Saving money on attorneys, the sisters did not have a written agreement. Barbara had a bankruptcy on her record while Mary received government assistance. Therefore neither one put their name on the title. A family friend and Mary’s son held title as co-tenants. The sisters did not have a written agreement with the friend or the son either.
Later, the son transferred his half ownership interest to his aunt (Barbara) and her name was then placed on title.
However, trouble was brewing between the sisters (for reasons unknown) and Barbara ended up filing a lawsuit against her sister. In the lawsuit Barbara claimed that she owned the entire property, that her sister had no claim of ownership, and that her sister was breaching an oral contract between them by failing to convey the property to her. The complaint asked the court to find that Barbara was the sole owner of the property.
Mary’s attorney called Barbara’s attorney and suggested that the parties and their attorneys all sit down to discuss the matter. Mary’s attorney pointed out that the property was owned fifty/fifty and that the parties should agree to split half of the expenses and half of the income.
The attorney outlined the two possible outcomes of this dispute: (1) the sisters could agree to split everything now and settle the case quickly and inexpensively, or (2) they could engage in two years of litigation after which the court would split everything, but only after subtracting the costs of a referee, an accountant, an appraiser and perhaps a broker. And last but not least, the attorneys would have to be paid for their two years of work.
This being a family dispute, the sisters did not agree to settle and the litigation began. Mary’s attorney challenged the complaint not once, but three times, until the court finally dismissed the complaint. A legal concept called the statute of frauds prohibits oral contracts to convey real property in most situations, including this one. Mary won a judgment against Barbara for her costs in defending the litigation.
Barbara tried again. This time she filed a lawsuit for partition—a request that the court determine their separate interests in the property, order the property sold and divvy up the proceeds. In her action Barbara asked for an accounting of the money each sister had put into the property. Barbara wanted to examine all of the income and expenses from the property and hired a bookkeeper to investigate.
Mary retaliated with a malicious prosecution action against Barbara, based on the first lawsuit which had been dismissed. Mary also filed a wage garnishment against Barbara to collect on her earlier judgment.
The court ordered mediation between the parties. A mediator appointed by the court scheduled a mediation but Barbara and her attorney cancelled at the last minute.
Eventually Barbara agreed to sell her interest in the property if the sisters could agree on an acceptable appraiser and Barbara would be reimbursed for the money she put into the property. The sisters proceeded with the appraisal. Once the appraisal was finished, Barbara changed her mind and refused to sell. Barbara now insisted on buying out Mary.
Unfortunately there is no happy ending to this story. Mary and Barbara have still not agreed on a settlement. Two of the three lawsuits are still pending. The attorneys are still billing. And, unless the sisters agree to a mutually agreeable buy-out price, the court will proceed to refer this matter to a referee.
The referee will hire his own appraiser and his own bookkeeper or accountant, all at the sisters’ expense. Like a divorce, the sisters will end up spending much of their gain in the property on lawyers, brokers and accountants. And while both sisters wanted to end up with the property, neither may end up with it.
How can you avoid this situation? Make sure you have a co-ownership agreement setting forth how the property income and expenses will be split and who has what responsibilities. Also include a provision on how disputes will be settled. The money spent on a good agreement is less than one day of litigation. If you do get into a dispute, consider early mediation with a qualified mediator who can try to broker a settlement before you spend two or three years in expensive litigation.