In my experience, people tend to buy and sell real estate in connection with major life events. One of the most challenging life events that impacts real estate is when a couple decides to separate. This can be an extremely emotional time in their lives, and they frequently bring those emotions into their real estate transactions. As many real estate agents know, there are several things to keep an eye out for when you are involved in a transaction where any of the parties are getting divorced.
For starters, assets that are acquired during the course of a marriage are deemed to be “marital property.” In terms of property, the fact that one of the parties to the marriage is not on title in and of itself does not always mean that it is not marital property. In order for an asset owned prior to a marriage to remain non-marital property, it needs to be maintained completely separate and apart from any marital property. No funds from the marriage can be used towards upkeep, paying loans, etc. Once an asset becomes marital property, it is included in the ultimate distribution of assets amongst the parties at the time of a divorce. The distribution of assets can be done in two different forms, one as a judicial determination made by the Court, and the other is by agreement between the parties, which is then confirmed by the Court as part of the divorce. With a judicial determination, the Judge, based upon the evidence presented in the divorce proceeding, determines the split of the marital property. This decision is then memorialized in a Judgement of Absolute Divorce the entry of which gives little ability to modify the order’s terms absent a formal petition to the Court. Rather than have the Court determine the distribution of assets, many parties choose to enter into a Marital Settlement Agreement (“MSA”) in which the parties themselves dictate the distribution of personal as well as real property which the Court then incorporates into a final order. An MSA is freely modifiable with the mutual agreement of the parties.
Both an MSA and Judgment of Absolute Divorce have binding effects on the disposition of real property, and a title company is required to adhere to the terms set forth in an order or an MSA. In some instances, there is a monetary judgment that must be paid to one of the parties. In others, it dictates who will be appointed as the real estate agent to sell the property as well as the methodology as to the calculation of the list price of the property, or the sale amount that must be accepted by the parties. We also see many MSAs that contain very complicated provisions on how to calculate the distribution of the proceeds between the parties considering things such as contributions towards property improvements, mortgage payments made by one of the parties and even accounting for the value of furniture that one party may be keeping.
We frequently encounter situations where it becomes readily apparent that the parties are not in agreement with either each other, the terms of the sale, or the sale itself. Sometimes, these situations require an escrow agreement that permits the parties to come to an arrangement regarding the distribution of the proceeds after the sale has been completed.
Divorces can also result in some unintended consequences. When a Judgement of the Absolute Divorce is entered, it severs the tenancy on any real property not yet sold and results in the parties owning the real property as tenants in severalty as compared to their prior status as tenants by the entirety. This change can subject the property to any creditor claims that were against either of the parties individually, amongst other potential liens. If the property is sold prior to the divorce being finalized, those same judgments may not have attached to the property.
We recognize that these types of scenarios are not the most ideal to engage with as a real estate professional. However, knowing where the parties are in the process and managing appropriate expectations with both spouses can reduce stress, help avoid transaction land mines and assist in making a difficult transaction smoother for all parties involved.
This article appeared in the December 2021 edition of Chesapeake Real Producers.