In Indiana, and most other states, jointly owned real estate between spouses is titled with rights of survivorship, meaning that upon the death of one joint owner the entire property passes directly to the survivor who now owns the entire interest. Farm and business real estate that is owned between non-related persons is generally titled as tenants in common. When land is titled as tenants in common, the interest of a deceased co-owner passes to that person’s estate instead of the other co-owner. This is a logical way for people to own farm, business, or recreational property, but this form of ownership can also create problems.
One of the key features of co-ownership of real estate is the ability to terminate that relationship, at will. For example, assume that four people pooled their funds to purchase an apartment building with a plan to hold it for the long term and profit from both the potential income and appreciation. A short time later, one of the owners suffers a financial downturn and sees the sale of his interest as a way to resolve some of his debts. He offers to sell his interest to the other owners, but none of them are in a financial position to make the purchase. Because the property is co-owned, he then exercises his legal right to file a partition action, which is a statutory procedure to force the sale of the property resulting in a termination of the co-ownership. The property is then sold at public auction achieving the objective of the partner desiring to sell, but also resulting in the other co-owners being forced to sell their portion, even if it is at a loss.
A better form of ownership under these circumstances would be to own the real estate in a limited liability company or a limited liability partnership. Such a form of ownership provides two benefits. First, protecting each owner’s other assets from liability claims that could arise from the property ownership. Second, a properly written Operating Agreement for the entity will place control of the entity with the majority, instead of allowing one owner to force a dissolution of the entity, as is the case with jointly owned property.
If you have any questions about any type of legal business entity, jointly owned property, or partition actions, please do not hesitate to contact our firm.
By: Eric N. Allen