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Solving disputes between property partners.

21/05/2011

In Utopia, partners co-operate rationally to acquire, fund, manage  and divest their real estate investments.    Elsewhere, they will often have fundamental disagreements about issues of strategic importance.  Sometimes, one partner may lose financial capacity to contribute its fair share. Human nature being what it is, they may simply fall out with one other.  Hopefully, the investors will make arrangements in advance to predict and deal with those circumstances, but regrettably that is often not the case.  So what can be done to resolve a deadlock?

Its relatively rare for co-investors to enter into a formal and well-constructed partnership or joint venture agreement just because they co-own real estate.   In the absence of any agreement to the contrary, the co-owners are all free to use their property as they wish without paying rent or fee to other co-owners. Co-owners who choose not to use or occupy the property for their own purposes do not have any claim against those that do. There are three obvious exceptions to that rule. First, the co-owners may agree on payment of such a fee or rent. Second, a co-owner who actively excluded its fellows from using or enjoying the advantages of the property will have to pay.  Third, a co-owner who expends money on improvements or repairs for common advantage can claim a co-contribution from the others.

In antiquity, that principle also meant that co-owners who took more than their share of the rents and profits of the land were not accountable to the other co-owners. Co-ownership per se does not give rise to any agency, partnership or constructive trust.  However, the Administration of Justice Act 1705 (Imp)allowed one co-owner to bring another to account for receiving more than “his just share or proportion” of money paid by a third party.  That generally means rent – Henderson v Eason (1851) 17 QB 701.  It did not allow one co-owner to recover part of the profits derived from a business conducted on the land or working the soil – Rees v rees; Squire v Rogers (1979) 39 FLR 106.  The Imperial legislation has been repealed and not replaced in the A.C.T. and New South Wales.

Nevertheless, a claim for an account may also be brought in equity between co-ownersor as an incident to an application for partition–  Strelly v Winson (1685) 1 Vern 297 and Ryan v Dries [2002] NSWCA 3.

Because co-owner all have an share in the entirety of the property, any dealing with it requires the agreement of all co-owners.  They cannot individually sell or deal with separate physical parts of the property.  But an order for partition terminates the co-owners’ right to the whole of the property.  The order allocates  a separate part of the land to each of them  to hold exclusively.  The land is physically divided.  In the modern day, physical division of the land is unlikely to be fair and stringent planning regulations make subdivision impracticable.

Courts also have an express legislative power to order the sale of land if it appears just and expedient for it to be sold. See, for example, section s 66G(1) of the Conveyancing Act 1919 (NSW) and section 38(1) of the Property Law Act 1974 (Qld) which permit the appointment of statutory trustees for sale.

Where the co-owners are deadlocked about the proper management or disposition of the property, a co-owner who seeks an order for the appointment of statutory trustees for sale will be in a strong position.   As Connelly J said in Re Permanent Trustee Nominees (Canberra) Ltd:  “It may be seen therefore that in modern times there are few defences to partition proceedings based merely on the circumstances of the parties. To say therefore that the exercise of the jurisdiction is virtually mandatory is an adequate statement for most cases but it is, in my opinion not strictly the law and should be avoided.”  In practice, the discretion is exercised in all but a few cases.  The applicant only needs to prove that the order is needed to preserve the value of the property. In the case of a wasting asset, the argument for sale is compelling.
In Tulloch v Tulloch [1867] LR 3 Eq 574, for example, an order for sale was made because of deadlock had made the land unproductive.  Some circumstances where a Court may decline to make such an order include:

  • where the property is held in trust and the trust instrument prescribes a procedure for sale
  • where the applicant’s own conduct estops it from pursuing the application;
  • where an order would be inconsistent with a contractual or equitable duty binding the applicantto deal with the property in a certain way.

The order is interlocutory or ancillary.  On completion of the sale, the trustees will be required to pay the net proceeds into court to abide the result of further proceedings.

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