When a relationship breaks down between two or more co-owners of a property, any party has a legal right under the provincial Law of Property Act1LPA at s. 27. (the “Act”) to apply to the Court to terminate the co-ownership of the property.
“Property co-owners” can include adult interdependent partners/matrimonial co-owners (in the domestic and matrimonial law context), family members, as well as business co-owners of property. This post will focus on the commercial aspect of what happens when a business relationship breaks down between two or more co-owners of property.
LEGAL REMEDIES PROVIDED FOR IN THE ACT
Under section 15(1) of the Act, a co-owner can apply to the Court for an order to terminate the co-ownership of the property at issue (a “Section 15 Application”).
In a Section 15 Application, the Court must order one of three legal remedies available under the Act:2Ross v McRoberts, 1999 ABCA 227; Decock v Alberta, 2000 ABCA 122.
- Partition: an order to physically divide all or part of the property between the co-owners; or
- Sale to a third party on the open market for fair market value: an order to sell all or part of the interest of the property at issue and distribute the proceeds of the sale between the co‑owners; or
- Sale to the other co-owners: an order to sell all or part of the interest of one or more of the co‑owners’ interests in the property at issue to one or more of the other co‑owners who are willing to purchase the interest.
An order under section 15(2) of the Act is mandatory: upon hearing a Section 15 Application, the Court must make an order for either partition or sale of the property to a third party or to the other co-owners.
Consequently, a Section 15 Application will affect all co-owners, and hiring an experienced real estate litigator is extremely important for both applicants and respondents in this process.
HOW DOES THE COURT DETERMINE WHICH REMEDY TO ORDER?
Interestingly, there is no guidance or language included in the Act stating which of the remedies of partition and sale the Court should order upon hearing a Section 15 Application. As such, the Court has discretion to determine which remedy is most appropriate (and equitable) in the circumstances of each case and will consider such factors as: what remedy is most reasonable, the sufficient weight to be given to relevant considerations, and the law.3LPA at s. 15(2).
If the Court orders a sale of the property to third parties under section 15(2)(b) of the Act, the sale and the distribution of the proceeds of the property are to be made under the direction of the Court.
Likewise, if the Court orders a sale of the property to other co-owners under section 15(2)(c) of the Act, the value of the land and the terms of the sale are to be determined by the Court. In making an order to other co-owners (and determining the value and terms of the sale), the Court will consider principles of fairness, reasonableness, practicality and equality.
Often, the Court will make adjustments to equalize contributions by co-owners during the time they owned the property together. For example, if one co-owner paid all the utility bills, the Court may order that co-owner to be reimbursed by the other co-owners.
An experienced real estate litigator can assist you in this process to determine whether you should be seeking adjustments in your favour during a Section 15 Application.
TERMINATION OF CO-OWNERSHIP DUE TO UNDUE HARDSHIP
In determining a Section 15 Application for co-owned business property, the Court may consider whether the continued co-ownership of the property will cause an undue hardship to one (or more) of the parties.
Under section 27 of the Act, the Court can make an order for partition or sale to terminate the co-ownership of the property if the continuance of the co-ownership will cause an undue hardship to one or more of the co-owners, despite any agreement between the co-owners.4Law of Property Act, RSA 2000, c L-7 [LPA].
Some examples of circumstances considered by the Courts to be “undue hardship” under section 27 include:
- Co-owners being unable or unwilling to co-operate in their ownership of property;
- Co-owners being unable to ever obtain a pay-out on their investment in a property;
- Co-owners being forced to sell their interest in a property only below fair market value; and
- Co-owners being effectively vetoed from selling their interest in a property for perpetuity.
Undue hardship typically stems from the financial burdens of owning a property or the co-owners being unable to make joint decisions regarding the property.
THE IMPORTANCE OF AN ACCURATE AND CREDIBLE VALUATION OF THE PROPERTY
One of the most important steps that co-owners of property can take is to obtain an accurate and credible valuation from an accredited appraiser of the fair market value of a property at the time of purchase. The Court will require this evidence so that it can make a fair determination of the value of the property. Competing appraisals will often be submitted to the Court by different parties in a Section 15 Application; in this case, each party’s lawyer will need to convince the Court of the accuracy, reliability and credibility of their appraisal and why the Court should accept it.
In cases where an applicant is requesting the physical partition of property, appraisal evidence should also be obtained and submitted to the Court valuing each of the proposed partitions (and, in some cases, a subdivision plan for the property and/or planning approval for a subdivision). Further survey work may also be required in this scenario.
Carscallen LLP’s real estate litigation expertise
Our commercial litigation group includes experienced real estate litigators who can assist you if you currently co-own or are considering co-owning property as a business venture. If you are in a co-ownership dispute, our team will help you understand your rights and to achieve a fair resolution of any co-ownership dispute.
Carscallen’s team of experienced litigators has successfully represented clients at all levels of court and before tribunals in Alberta and Canada. If you are interested in speaking with one of our lawyers about issues with property co-ownership, please contact Nicholas M. Ramessar or Aron R. Balakrishnan with any questions you may have.
- 1LPA at s. 27.
- 2Ross v McRoberts, 1999 ABCA 227; Decock v Alberta, 2000 ABCA 122.
- 3LPA at s. 15(2).
- 4Law of Property Act, RSA 2000, c L-7 [LPA].