Daily Development for
Monday, May 4, 1998
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
COTENANCIES; DUTIES OF COTENANTS: Tenants in common have no per se duty of disclosure and, therefore, a cotenant may not have to reveal information regarding the terms of an offer to purchase the property, even in the context of negotiations by that cotenant to acquire the other cotenant's interest.
Douglas v. Jepson, 945 P.2d 244 (Wash. App. Div. 1 1997).
In 1975, Douglas, with his wife Barbara, purchased 15 acres of real estate for commercial development as tenantsincommon with Jepson and his then wife, Clare. The real estate was then improved and zoned for commercial development. In 1991, the property was divided into three parcels, Lots A, B, and C.
On January 5, 1994, a potential purchaser contacted Douglas and expressed an interest in buying Lot C for $1.2 million. On that same day, Douglas negotiated to buy Jepson's interest in the property. Jepson ultimately accepted Douglas' offer of $450,000 because he "needed the money to purchase other property that he was interested in." Douglas never disclosed to Jepson that other parties were interested in the property.
Douglas finalized the deal with the third party approximately five months after Jepson sold his interest to Douglas. A few months later, Douglas filed this action, seeking a declaratory ruling as to whether Jepson was entitled to certain monies based on their previous business dealings. Jepson counterclaimed for damages contending that Douglas had breached a fiduciary duty by failure to disclose third party offer.
The trial court found on summary judgment motion that the parties entered upon a joint venture and that Douglas clearly violated his obligation to deal on good faith and in an honest fashion with his partner.
On appeal: held: Reversed. The Washington Court of Appeals found that there were issues of material fact concerning the existence of a partnership between Douglas and Jepson. There would be a fiduciary duty in a partnership, but the mere holding of property in cotenancy does not a partnership make.
Jepson argued that one of the obligations imposed on cotenants by Washington law is a duty of disclosure. The Washington Court of Appeals found that a duty of disclosure can exist where the parties agree to a particular undertaking, or where one cotenant attempts to take an inequitable advantage of another cotenant. The court found that neither statute nor common law imposed a per se duty of disclosure upon cotenants. Indeed, routinely imposing such a duty could prove unworkable. The court found that one cotenant may not even know who other cotenants are. Absent an agreement to sell the property together, there is no duty of disclosure. The court of appeals stated that because there is a question of fact as to whether the parties had an agreement that triggered this duty of disclosure, the court remanded for trial.
Comment 1: Certainly there are a number of cases imposing fiduciary responsibilities upon cotenants in their dealing with the commonly owned property such as the cases holding that cotenants who buy at tax or mortgage foreclosures of the commonly owned properties may have duties to offer their sold out cotenants an opportunity to come back on the title. There are also a number of cases concerning family cotenancies that impose equitable responsibilities on cotenants. The editor is not certain whether the Washington case is consistent with that line of cases. In general, there is not much authority on nonfamily cotenancies, as few nonfamily cotenancies are not also business partnerships (in which there would be fiduciary duties).
Comment 2: Parties frequently try to avoid construction of their landholding relationships as partnerships because they might want to work with their interests separately at some later time such as in the context of a 1031 exchange or other transfer or application of the wealth represented by their interest. Nevertheless, most often when there is a commercial enterprise going on and not just landholding and no family relationship, it is likely that the courts will find a partnership. The editor expects that this is what will occur if this case ever actually goes to trial.
Practice Tip: The obvious lesson from this case is that even if one wishes to avoid characterization as a partnership, when dealing in real estate with cotenants for gain one would be well advised to prepare a cotenancy agreement expressly setting forth your expectations and duties to one another. The question of the fidelity of the coinvestors to the community interest is an important one, and ought to be addressed in such an agreement, even if that requires some fancy footwork to avoid making the cotenancy agreement into a partnership agreement by definition.
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