Real estate litigators are probably aware of New York’s adoption of the Uniform Partition of Heirs Property Act (“UPHPA” or the “Act”) that became effective on December 6, 2019, and is codified at RPAPL § 993. The UPHPA, drafted by the Uniform Law Commission, has been adopted by eighteen states, and is the subject of pending legislation in at least eight additional states. See www.uniformlaws.org for more information.

The UPHPA is designed to protect so-called “heirs property”- defined by the Act as property held by tenants in common, at least one of whom inherited his share of the property from a relative. The New York State Senate Sponsor Memo explained the need for the Act, saying: “In recent years, predatory real estate speculators have taken advantage of New York’s laws governing partition actions by purchasing a stake in a residential property – usually after a number of family members have inherited the property – and then using that owner’s hip stake to file a partition action to dispossess the family of the property through a forced sale, often for pennies on the dollar relative to the actual value of the property.” NYS Senate Sponsor Memo S4865A.

The UPHPA provides an orderly process that, if it does not result in one or more co-owners buying out the co-owner seeking partition, it can sell the property on the open market rather than at auction. The Act contains specific and thorough notice requirements, provides for the parties to bargain “in good faith” at a settlement conference, and requires the court to make a determination of the fair market value of the property, and then offer the defendants to a partition action the option to buy out those seeking partition at a proportional share of the court-determined fair market value. RPAPL § 993.

If the mandated conference does not result in settlement, the court is ordered by the UPHPA to determine the fair market value by conducting an evidentiary hearing. The court may order its own disinterested appraisal if it considers the cost justified, but regardless of whether there is a court-ordered neutral appraisal, the parties may present their own evidence of fair market value. RPAPL § 993(6).

Only partition cases brought on or after December 6, 2019 are subject to the UPHPA in New York. With the litigation delays brought about by the COVID-19 pandemic, these cases are just starting to come before New York’s courts. Given the current tumultuous real estate market in much of New York (as well as the rest of the country), practitioners may wonder how courts are to determine “fair market value” in an unpredictable market. The first substantive order applying the UPHPA to a New York property was issued in April of this year, in 2nd Ave Holding 1 LLC v. Lowenbraun, 2021 NY Slip Op 31276(U)(Sup Ct, NY County 2021)(Supp. Decision and Order on Motion), and is instructive on this subject.

2nd Ave Holding concerned a multi-million-dollar, four-story mixed-use property with residential and commercial units in Manhattan. The plaintiff, who had purchased his one-sixth interest in April 2019, attempted to leverage that interest by bringing a partition action against the defendants, who collectively own the remaining 83.333 percent interest in the property. The action was brought on December 24, 2019, just weeks after passage of the UPHPA, and the court first ordered the plaintiff to show cause why the property should not be treated as “heirs property” under the Act.  2nd Ave. Holding at *1.

Following its determination that the property was indeed subject to the UPHPA, 2020 NY Slip Op 30803(U)(Sup Ct, NY County 2020)(Trial Order), the court, following a settlement conference at which the parties failed to reach an agreement, ordered a neutral appraisal.

At the subsequent evidentiary hearing on fair market value, the court considered the neutral appraisal, competing appraisals obtained by the two sides, as well as various objections to the neutral appraisal from all parties.

All three appraisers gave testimony at the hearing. In its decision, the court evaluated each appraiser’s methods and analysis in great detail, including each appraiser’s assessment of excess development rights, any market adjustment due to the negative market impact of the pandemic on commercial properties in New York, the highest and best use of the property, how each appraiser calculated income capitalization rates, and the use of an effective gross income multiplier sometimes used in assessing apartment buildings. 2nd Ave Holding at *4-12.

The court also discussed whether the Act required it to determine fair market value as of a particular date. While the plaintiff argued for a pre-pandemic valuation to apply, the court found that the Act didn’t require it to assess fair market value as of the date of the petition’s filing, but, rather, that the parties were both “subject to the whims of fortune” and that the court could “exercise broad discretion” in selecting a rational date. 2nd Ave Holding at *15-16.  Accordingly, it selected September 24, 2020, as that was the date used by the court-ordered appraiser. It did so in spite of the relative lack of comparable sales during the pandemic, finding that the definition of fair market value is “the price at which a transaction could be expected to take place under conditions existing on the valuation date.” 2nd Ave Holding at *16.

The three appraisers opined that the value of the property was anywhere from $2.9 million to $10.4 million. The court determined that income capitalization was the preferred method for determining value for this type of property and discounted several of the appraisers’ conclusions based on what it judged to be unwarranted adjustments. It then averaged the three final, adjusted appraisal numbers, and found the property had a fair market valuation of $5.177 million. That number included a 15% reduction of value due to the pandemic, and the court rejected the plaintiff’s argument that the lack of sales during the pandemic demonstrated a consensus among owners that their property was worth more than it would bring in the current market as “pure sophistry.” 2nd Ave Holding at *16.

Under § 993(7)(b), it is now up to the defendants to notify the court whether they intend to purchase the plaintiff’s interest in the property.  While that remains to be seen, 2nd Ave Holding offers an informative view of how New York courts may apply the new UPHPA to the currently chaotic real estate market.

Erin Casey represents businesses and individuals in complex disputes in federal and state courts, in arbitration, and before governmental agencies.