The War on A Decedent’s Real Property: The Uniform Partition of Heirs Property Act to the RescueFebruary 24, 2023 | |
Many individuals are considered “house rich, cash poor,” meaning that their biggest asset is their house. While some of these individuals have an estate plan in place, many do not and are unaware of the consequences. Without proper estate planning, heirs inheriting a house can find themselves in a precarious situation. Fortunately, a provision in New York’s Real Property Law helps to remedy the situation.
Take the following scenario: Mom died intestate and was survived by four children. The most valuable asset she owned at her death was her house. Under New York’s intestacy law, the children inherit Mom’s house. By operation of law, the house passes to the children as tenants in common. One of the children no longer wants to be involved with the house and sells his interest to an unscrupulous third-party real estate investor.
The real estate investor, who really just wants cash, brings an action for partition, asking the court for an order to force the sale of the house so he or she can have the cash in hand. Prior to the enactment of New York’s “Uniform Partition of Heirs Property Act” (the “Act”) in 2019, when the court granted partition and issued an order to sell the house, the house was frequently sold at auction and resulted in a sale at a below market price, sometimes to the real estate investor. Obviously, the children who continued to own an interest in Mom’s house got the short end of the stick.
In an effort to protect a decedent’s heirs and provide them with reasonable basic safeguards, the Act was put in place. The Act is found in Section 993 of Article 9 of New York’s Real Property Actions & Proceedings Law (“RPAPL”). The example discussed above is not an uncommon situation in decedents’ estates, although the Act is located in the real property law, rather than in statutes addressing decedents’ estates. The purpose of the Act is to preserve a family’s wealth, including the value of Mom’s house, for the next generation and to provide due process protection for the heirs of a decedent from a potential forced partition action and resulting below market sale.
In order for the Act to apply, the court must determine whether the house qualifies as “heirs property” as defined by the Act (RPAPL §993(2)(e)). Essentially, heirs property means real property held as tenants in common where at least one of the co-tenants inherited his or her share from a relative. If the court determines that the house is heirs property, then the Act applies, unless the co-tenants agree otherwise. If the court determines that the house is not heirs property, then the division of the house is commenced through a “regular” action for partition under RPAPL §901, rather than a partition proceeding under the Act.
Similar to a partition action under RPAPL §901, a partition action of heirs property under the Act also provides for notice of the action to all the parties. If a co-tenant plaintiff seeks an order of notice by publication, RPAPL §993(4)(b) sets forth guidelines for a visible physical posting of the notice of the partition action on the heirs property itself while the partition action is pending before the court. There are some key differences between the two partition actions, which are addressed below.
One key difference between the two partition actions occurs where the parties cannot reach a mutually agreeable resolution among themselves. In that case, the Act mandates a settlement conference, usually in the presence of a referee or judicial hearing officer. This prevents a party from jumping right into a partition by sale. See RPAPL §993(5). The goal of the settlement conference is to encourage the co-tenants to negotiate in good faith. See RPAPL §993(5)(e).
The settlement conference is scheduled by the court within 60 days after the date when a request for judicial intervention is filed, or on an adjourned date as agreed by the parties. See RPAPL §993(5)(a).
While overseeing the settlement conference, the referee or judicial hearing officer makes a report to the court based on the findings of fact, conclusions of law, and recommendations for relief relating to any co-tenant’s failure to negotiate in good faith.
If the court determines that at least one of the co-tenant plaintiffs negotiated in bad faith, the partition action will be dismissed. See RPAPL §993(5)(f). Interestingly, the statute appears to be silent on whether the action is dismissed with prejudice or without prejudice.
Another key difference between the two partition actions is that, under the RPAPL, the court determines the fair market value of the heirs property by appointing an independent real estate appraiser, unless one of the following situations apply: (1) the co-tenants agree to the value of the property or to another method of valuation, or (2) where the value of the appraisal is outweighed by the cost of the appraisal, the court holds an evidentiary hearing to determine the fair market value and sends notice of the court determined value to all of the parties. See RPAPL §993(6)(a)-(c).
If neither of the above situations apply, the court will order that an independent appraiser be appointed to determine the fair market value of the house.
Once the appraisal is complete, the appraiser files it with the court and the court sends notice of the appraisal to all of the parties no later than ten (10) days after the filing of the appraisal with the court. See RPAPL §993(6)(d)-(e). The court then conducts a hearing to determine the fair market value of the house no sooner than 30 days after notice of the appraisal is sent to each party. See RPAPL §993(6)(f). A party has no more than 30 days after the notice has been sent to file objections to the appraisal. After the court-ordered hearing, the court will determine the fair market value of the heirs property and send notice of the value to the parties. See RPAPL §993(6)(g).
The last key difference between the two partition actions is that the Act affords a decedent’s heirs the right of refusal of the proffered purchase price and the opportunity to buy the house instead. Among other things, RPAPL §993(7) sets forth a deadline of forty-five (45) days after the notice of the value of the heirs property is sent for a co-tenant to exercise the right to purchase the interests of all of the co-tenants who requested the partition by sale.
Assuming none of the co-tenants want to purchase the house, the court may order a partition of the parties’ interests in the house and direct a sale through the open market. If the court orders an open-market sale, the parties may agree on a real estate broker to sell the house. If the parties cannot agree, the court steps in and appoints an independent real estate broker instead. In either scenario, the court also determines the reasonable commission for the real estate broker. The real estate broker must offer the heirs property for sale in a commercially reasonable manner. In other words, the heirs property should not be sold at a price lower than the fair market value established by the court. See RPAPL §993(10).
In certain situations, the court may order a partition in kind (a division of the property itself), rather than a partition by sale, unless it results in “great manifest prejudice” to the co-tenants as a group. To determine whether a partition in kind results in “great manifest prejudice,” the court considers, inter alia, the following: (i) whether the heirs property can be divided among the co-tenants practicably, (ii) whether the heirs property as a whole renders it more valuable than the aggregated value if sold in a partition in kind, (iii) whether there is a sentimental value of the heirs property to a co-tenant, and (iv) whether there is any harm if a co-tenant with the lawful use of the heirs property could not continue the same use. See RPAPL §993(9).
Ultimately, the goal is to ensure that the co-tenants are given the greatest financial advantage in a partition action where property inherited from a relative is involved.
Due to the closing of the courts during the COVID pandemic, the courts are now beginning to see more partition actions relating to heirs property. Therefore, it is imperative that Trusts & Estates attorneys familiarize themselves with the Act, since many estates involve real property inherited by heirs.
Reprinted with permission from the February 24, 2023, issue of the New York Law Journal©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
- Patricia C. Marcin
- Karen Eng