March 1, 2018
By: Massimo F. D’Angelo
When joint owners of real property are unable to get along with each other, they are armed with a very powerful legal remedy, that of the partition. Any joint tenants or tenants-in-common who no longer desire to hold property in common with their fellow co-tenants, may maintain, as a matter of right, an action to divide the property, and to ultimately force its immediate sale at a public auction where the property is unable to be physically divided without substantial prejudice.
The partition’s omnipotence comes from its extremely low burden of proof, which in many cases, is merely perfunctory. All that needs to be demonstrated to prevail in a partition case and to subsequently force a sale, is that the plaintiff co-tenant jointly owns the property, and that physically divvying it up is impractical or by doing so, it will result in greatly reducing its market value.
Given the unique and special nature of real property, dividing it often proves to be unfeasible, which typically results in courts compelling a sale, whether it be the shares appurtenant to a cooperative apartment, a residential brownstone, a large mixed-use building, or even vacant parcels.
Consequently, the only real offensive measure in a partition case is to assert that one of the co-tenants breached their fiduciary duty to the other co-tenants, whether by failing to adequately maintain the property, make essential repairs, or distribute rents that should have been realized had the property been operated properly. As fiduciaries, co-tenants are charged with acting for the benefit of their fellow co-tenants, and owe them the duty of good faith, trust, confidence and candor. Moreover, co-tenant fiduciaries must exercise a high standard of care in managing their jointly held property.
In addition to accounting for lost income that should have been gained from the property, an offending co-owner may also be liable to account for the reasonable value of the property’s managerial and maintenance services while an out-of-possession co-tenant neglected those duties. These costs include, inter alia, payment of attendant carrying charges, repairs, landscaping, and management fees, which may be quite considerable, depending on how long the services were provided or paid for, and the scope of those services.
Thus, although little, if anything, may be done to stop an ultimate forced sale in partition cases, co-tenants can assert breach of fiduciary duty and demand an accounting for sundry reasons, including the value of the services that they provided to operate property and for its upkeep while other tenants blatantly ignored such duties. This, however, is a double edged sword since co-tenants may conversely argue that the co-tenant operating the property breached their fiduciary duty in failing to realize the property’s full income potential, or failed miserably in maintaining it, and to have the breaching co-tenant account for the damages that flow from those breaches.
Until very recently, Courts in the First Department were grappling over whether co-tenants asserting breach of fiduciary duty needed to have a formal written agreement as a precondition to raising it. The First Department has now definitively spoken on this issue holding that tenants in common owe each other an explicit fiduciary duty with regard to property they commonly hold, even in the absence of any formal agreements between them.
Pichler v. Jackson
In an important decision issued several weeks ago by the Appellate Division, First Department, the Court ruled that co-tenants in partition cases have a quasi-trust or fiduciary relation with each other. The Court went further holding that even absent this common law obligation, a statutory duty between co-tenants to account to each other arises on equitable grounds under RPAPL 1201.
In Pichler v. Jackson, ___ N.Y.S.3d ___, 2018 WL 283387 (N.Y.A.D. 1 Dept.), the Appellate Division reversed the Supreme Court’s order denying the branch of a co-tenant’s summary judgment motion seeking an accounting because co-tenants who did not have a specific agreement with each other did not owe each other any fiduciary duties.
Upholding Fiduciary Duty Obligations of Co-Tenants
In Pichler, two first cousins devised an undivided 50% interest in the underlying property as tenants in common from their respective parents. In or around 2015, the co-tenant plaintiff moved for a declaration that she was entitled to her proportionate share of the property’s rental income from the defendant co-tenant who was in exclusive possession and operating the property.
Additionally, the plaintiff sought an accounting for the difference in the rents that should have been generated by the property during the time of defendant’s alleged mismanagement, along with a judgment for the rental income under RPAPL 1201, on the grounds that co-tenants owe each other a fiduciary duty. However, by order entered on August 18, 2016, the Supreme Court (Nancy M. Bannon, J.) found that where co-tenants fortuitously hold property together as tenants in common without a partnership or joint venture agreement, they do not owe each other a fiduciary duty.
The Appellate Division reversed, relying on two nearly one hundred-year-old decisions from the Court of Appeals to support their finding that co-tenants do indeed owe their fellow co-tenants a common law fiduciary duty. Beyond this, the Appellate Division ruled that even if co-tenants did not have a common law duty to act as fiduciaries with respect to on another, which they do, they nonetheless maintain a similar statutory duty to account for any profits, or potential profits from operation of the property.
As the partition case law further develops, it will be interesting to see whether the other Departments follow suit in applying Pichler.
Pichler has provided co-tenants with a powerful weapon to extract monies rightfully owed to them from other co-tenants notwithstanding whether any formal contract was entered between them. Furthermore, it requires co-tenants to maintain and operate the property as quasi-trustees or fiduciaries, with the highest standard of care, meaning that they could be liable to account to the other co-tenants for, among other things, income that should have been gained had the property been run properly or even for failure to maintain or make necessary repairs. This may also make some co-tenants, particularly those who have obfuscated their obligations with respect to the property, think twice before initiating a partition case. From a best practices standpoint, practitioners should advise clients holding property in common to have their clients’ respective duties reduced to writing in order to minimize their potential liabilities to other tenants, and to create a corporate form to handle operation and maintenance of the property where every co-tenants’ role is particularly spelled out. Co-tenants that are charged with managing jointly held properties should be extremely wary of their obligations when delegating their duties, as those obligations may have far-reaching liability consequences for them. Ultimately, the rationale from the Pichler ruling incentivizes co-tenants to maximize their property’s income while minimizing property waste and disrepair.