PARTITION ACTION WITH A LENDER INVOLVED

Partitions With Lenders and Mortgagors Can Be Complicated Procedures

When there are multiple owners of a property, and the owners no longer wish to reside together, work together, or co-own property together, one or more parties can seek partition. A partition divides property that is owned by two or more persons. It usually divides the property either physically (so that each party is the sole owner of a physical portion of the land) or by sale (so that the property is sold at auction and the co-owners split the proceeds). Sometimes, the owners agree about how to divide the property, and sometimes the partition is a forced sale that is ordered by a judge.

When there is a partition action, all owners of the property must be notified of the partition action, because they are what the law calls “necessary parties.” For example, if three people own the property, and one person seeks a partition, they must include both of the other co-owners in the petition. But are banks necessary parties? What about lien holders and mortgage holders? In a partition action, a lender is a necessary party to the action. The lender must be notified of the action in court, because they have an interest in the home.

 

The type of interest in the home that the lender has depends on whether the state where the property is located adheres to title theory or lien theory of mortgages. Title theory holds that the lender holds title to the property with the owners in what is called a deed of trust. In a partition action, the trust deed holder must be notified of the ongoing partition action by being named as a party in the partition action lawsuit. Lien theory states that the mortgage holder does not have title to the property, but rather has a lien on the property for the outstanding mortgage amount. In lien theory states, the outstanding mortgage amount must be satisfied before the property can be divided, transferred, or before the parties can profit from proceeds of the sale. While it depends on the state law, in most circumstances, one necessary party is a lender in a partition action.

In a partition action, a lender may be a necessary party. However, that does not mean that a lender has a right to a partition. If a lender and a homeowner co-own a property in a title theory state, the lender cannot force a sale of the home through a partition action. If the homeowner defaults on their mortgage, the lender may have the option of pursuing a foreclosure action against the homeowner, but the remedy of partition is primarily reserved for parties such as spouses, housemates, business partners, or devisees who inherit property jointly. Furthermore, a partition action does not rid the homeowners of their mortgage obligations. Before a property can be partitioned in kind or by sale, the co-owners must make arrangement with the mortgage companies to ensure that the mortgage is continually paid during the process.