Detailed Answer
In New York, co-owners who cannot agree to divide real estate may seek a partition sale under Article 9 of the Real Property Actions and Proceedings Law (RPAPL). When the court orders a sale, it also directs how to apply the sale proceeds. Existing mortgages on the property impact both the sale itself and the net amounts each owner receives:
1. Identification and Priority of Mortgage Liens
- Before sale, the court clerk or referee conducts a title search to identify all recorded liens and mortgages.
- New York follows “first in time, first in right.” Mortgages recorded earlier enjoy priority over later liens. See RPAPL § 160.
2. Mortgage Liens Attach Only to the Mortgagor’s Interest
- A mortgage granted by Owner A encumbers only A’s ownership interest, not B’s undivided interest.
- At sale, the entire property transfers free of mortgages, but the clerk must pay off each lien from the gross proceeds.
3. Court-Supervised Sale and Distribution Process
- The referee sells the property at public auction; the sale is “free and clear” of recorded liens (RPAPL § 160).
- The court retains the net proceeds and pays, in order:
- Costs of the partition action (referee fees, advertising, commissions).
- Payment of all recorded mortgages and liens in priority order.
- Real estate taxes and special assessments.
- After satisfying encumbrances, the remaining balance distributes among co-owners according to their respective ownership shares. An owner whose share remains subject to a mortgage receives a net amount, which the clerk’s office forwards to the mortgagee until the debt is paid off.
4. Illustrative Example
Suppose Owners A and B each hold a 50% interest in a $500,000 property. A has a $100,000 first mortgage (recorded January 1) and a $50,000 second mortgage (recorded March 1). At a partition sale:
- Gross proceeds: $500,000
- Pay first mortgage: $100,000
- Pay second mortgage: $50,000
- Subtract partition costs and taxes (e.g., $20,000)
- Remaining balance: $330,000
- Each co-owner’s share: 50% of $330,000 = $165,000
A’s proceeds will be forwarded to satisfy any unpaid mortgage balance, and B receives the full $165,000 if unencumbered.
Helpful Hints
- Order a comprehensive title search to discover all liens and recording dates.
- Confirm ownership percentages before filing for partition under RPAPL § 131.
- Understand lien priority: junior mortgages risk subordination if sale proceeds are insufficient.
- Consult a real estate attorney to verify mortgage payoffs and distribution calculations.
- Review potential tax consequences of a partition sale with a tax advisor.
Disclaimer: This article is for educational purposes only and does not constitute legal advice. Consult a qualified attorney to discuss your specific situation.