Beginning July 1, when an Iowa tenant in common wants to divide jointly owned property, the action will be governed by an entirely new legal framework.
On April 11, Gov. Kim Reynolds signed SF 2175 into law. This new law replaces the current Iowa law governing partition actions. Notably, SF 2175 includes a new partition procedure for “heirs’ property,” making it much less likely that a tenant in common who does not want to sell the family farm will be forced to do so. For many of these properties, a buyout or partition in kind will now be the favored disposition.
A tenancy in common is created when more than one person receives an undivided ownership interest in a parcel of property with no right of survivorship. In other words, if a father gifts a 180-acre parcel of farmland to his four children, they will become tenants in common, each owning a 25% undivided interest in the whole. They each have the right to possess the entire parcel.
This ownership arrangement often leads to disputes. All tenants in common must agree before they can sell or lease the property. In many cases, one or more cotenants wish to sell, and one or more cotenants wish to hold onto the property, often for sentimental reasons. A partition action allows a tenant in common to go to court to seek an equitable division of the property.
Why Iowa’s partition law was revised
Iowa’s partition law, as it applies to family farms, has been in the spotlight since the end of 2016, when the Iowa Supreme Court decided Newhall v. Roll, 888 N.W.2d 636 (Iowa 2016). This opinion illustrated that unlike most other states, Iowa was “unequivocal in favoring partition by sale."
This meant that if one tenant in common demanded a division of jointly owned property, the property would usually be sold, and the proceeds divided. A partition in kind, in contrast, is where the court does not order the property to be sold but divides it into separate parcels corresponding to the ownership interests of the tenants in common. To obtain a partition in kind, a tenant in common had to prove that such division would be both “equitable and practicable.” This proved to be a lofty standard.
The Newhall case involved two siblings who inherited family land as tenants in common. The land included two separate tracts in separate counties. The brother sought a partition by sale of both tracts, and the sister—arguing a sentimental attachment to the “home place”—requested a partition in kind. The Iowa Supreme Court agreed with the district court that the sister was unable to show that a physical division of the properties would be “equitable and practicable.” The tax bases of the properties were different, and the “home place” tract was worth more than the other tract.
Court cases drove legislative action
The court also found that Iowa law did not allow for “owelty,” a cash payment to make a partition in kind division fairer. As such, the court ruled that the property could not be equitably divided. In January, the court again disallowed a partition in kind of a family farm in Wihlm v. Campbell, No. 15–0011 (Iowa 2018).
In Wihlm, the court of appeals had allowed the partition in kind. The Supreme Court, however, reinstated the district court opinion, which had held that the sister failed to prove that the partition in kind would be "equitable and practicable" because “the volatile nature of farmland as affected by the crop prices has made a partition in kind merely guesswork when factoring in the nature and qualities of the land.”
The stage was set for legislative action.
How new law affects family farms
The new law begins with the same premise as past law: Partition is to be an equitable proceeding, and partition by sale is to be the default unless a court determines (in response to a request by one of the parties) that partition in kind is “equitable and practicable.” The new law, however, completely overhauls the procedure for partition actions involving “heirs’ property.”
If there is not a recorded agreement governing a partition of the property, real property held in tenancy in common will be classified as “heirs’ property” if at least one of the owners received the property from a relative and these conditions occurred:
• at least 20% of the interests are held by relatives
• at least 20% of the interests are held by an individual who acquired title from a relative
• at least 20% or more of the cotenants are relatives
The law defines “relative” very broadly to include even distant cousins related to the owners through common great-grandparents.
If one party requests a partition in kind of heirs’ property, the court will allow the tenants in common who want a partition in kind an opportunity to buy out the ownership interests of the tenants in common who want to sell the land. The price for such buyout will be established by the court based upon an appraisal and a hearing.
Court can order property divided
If a buyout does not occur, the court will order the heirs’ property to be equitably divided through a partition in kind unless it determines that partition in kind will result in great prejudice to the cotenants as a group. The factors the court will consider include:
• whether the property can be practicably divided
• whether a partition in kind will apportion the property in such a way that the fair market value of the parcels resulting from the division will be materially less than the value of the property if the property is sold as a whole
• evidence of the collective duration of ownership or possession of the property by a cotenant and one or more predecessors who are relatives
• cotenant’s sentimental attachment to the property
• degree to which a cotenant has contributed the property taxes, insurance and other expenses associated with maintaining the property
• tax consequences
• any other factors the court deems relevant
If the court determines that no great prejudice will result to the cotenants as a group as a result of a partition in kind, the court will order such a division. The new law also allows for the possibility of an owelty payment, which is money paid to a cotenant receiving a less valuable parcel through a partition in kind. Owelty can be useful to make a division more equitable.
If the court finds that great prejudice would result to the group as a result of a partition in kind, it will order a partition by sale.
Transition planning still needed
This extensive rewrite of the partition law will certainly change the way family property is divided in Iowa. It may also result in more settlements and fewer court proceedings regarding heirs’ property once parties understand that a partition by sale is unlikely.
There will no doubt be some bumps as the law is implemented, but this change appears welcome for those wanting to keep the farm in the family. In such cases, however, careful transition planning, rather than relying on a statutory remedy, remains the best option for establishing long-term property ownership and avoiding future family litigation.
Tidgren is an attorney and director of the Center for Ag Law and Taxation at ISU. Contact her at [email protected].