Use of Homestead Property and its’ impact on estate administration

The importance of a Semicolon – Does property partially used as primary residence and partially for business purposes qualify as Homestead?

Does property partially used as primary residence and partially for business purposes qualify as homestead under Article X, Section 4 of the Florida Constitution? Surprisingly, the answer apparently rests on a semicolon.

This question was addressed in 2003 by the Florida Court of Appeal for the First District in Davis v. Davis, 864 So. 2d 458 (Fla. 1st DCA 2003). The facts of this case are as follows: Mr. Horace Davis lived with his wife Carolyn on a contiguous piece of property measuring less than 160 acres outside of municipality in an unincorporated portion of Nassau County. The property included the couple’s residence and on a portion separate from the residence, Mr. Davis operated a mobile home park generating profit through rent. Mr. Davis died in 2000 having written a will.

When the administration of Mr. Davis’s estate subsequently began, Mrs. Davis petitioned to have the entire property including the mobile home park declared as homestead under Article X, Section 4 of the Florida Constitution. In doing so, the property would not pass under Mr. Davis’s will but instead descend pursuant to Fla. Stat. §732.401(1) to Mrs. Davis for life estate and to Mr. Davis’s lineal descendants for a vested remainder. The personal representative of Mr. Davis’s estate agreed as to the couple’s residence but objected to the mobile home park being declared as homestead property. The trial court agreed with the personal representative and Mrs. Davis appealed.

The legal arguments in this case turn on the language in Article X, Section 4 of the Florida Constitution which provides in the relevant part that the maximum physical extent of Florida homesteads shall be:

“if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner’s consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner’s family […]. “

Section 4 contains two clauses separated by a semicolon – an initial clause addressing the limitation as to property outside of a municipality, and a concluding clause addressing the limitation as to municipal property. The personal representative of Mr. Davis’s estate argued that the limitation to the residence of the owner or the owner’s family in the concluding clause applied also to property located outside a municipality discussed in the initial clause. This would mean that Mr. Davis’s mobile home park would not qualify as homestead as it was used for renting business instead of residential purposes. Contrarily, Mrs. Davis contended that the restrictive language in the concluding clause applied only to a homestead located within a municipality, relying on the semicolon separating the initial and concluding clause of Section 4.

The appellate court reversed the trial court’s ruling and sided with Mrs. Davis. Giving Section 4 a plain reading and also a reading consistent with prior case law, the appellate court held that the language limiting homesteads within municipalities to the residence of the owner or the owner’s family does not apply to homesteads located outside municipalities. The court adhered to the Florida Supreme Court’s construction of materially similar clauses in previous Florida constitutions, and emphasized the grammatical importance of the semicolon serving to separate the language defining the extent of homesteads as it appears in a single sentence.

Subsequently, Davis has created a split in Florida bankruptcy courts on this issue. The U.S. Bankruptcy Court for the Middle District of Florida has followed Davis in In re Earnest, 21 Fla. L. Weekly Fed. B770 (U.S. Bankr. M.D. Fla. March 26, 2009) and in In re Oullette, 21 Fla. L. Weekly Fed. B773 (U.S. Bankr. M.D. Fla. March 26, 2009). Both cases involved a debtor filing a voluntary petition under Chapter 7 of the Bankruptcy Code and the Chapter 7 trustee filing an objection to the debtor’s claim to declare their property homestead and thus exempt. In In re Earnest the debtor owned a property located outside of a municipality which included the debtor’s residence, a building rented to a third party, and a warehouse used by the debtor’s business. Similarly, In re Oullette involved two mobile homes on a property located outside of a municipality, one occupied by the debtor and one rented to a third party. The bankruptcy court found in both cases that the only binding and relevant case was Davis. Accordingly, the bankruptcy court held that the debtors’ commercial use of a portion of the property and rental to a third party did not preclude the debtors from claiming the entire property as exempt under Article X, Section 4 of the Florida Constitution.

The U.S. Bankruptcy Court for the Southern District of Florida was not so persuaded by Davis. In In re Radtke, 344 B.R. 690 (Bankr. S.D. Fla. 2006), the debtors filed a joint voluntary petition under Chapter 7 of the Bankruptcy Code and the Chapter 7 trustee objected to debtors’ claim to declare their property homestead and thus exempt. The property in question was zoned for eight mobile home lots, sixteen recreational lots, and one single family home site. The debtors used the single family home as their primary residence and rented out the remaining lots to third parties. The bankruptcy court refused to declare the debtors’ property as exempt. In doing so, the court expressly declined to follow Davis because the debtors’ lessees could and did sub-lease their mobile homes or recreational vehicles, thereby establishing that the debtors used a portion of their property for commercial purposes. The bankruptcy court further held that while a decision of a court from an alternate state district was persuasive, there was no binding authority of the Supreme Court of Florida and the language in the Florida Constitution was not intended to extend homestead protection to those portions of property which its owner utilizes for commercial enterprise.

For competent advice on what qualifies as homestead property, you should not hesitate to contact the attorneys of Chepenik Trushin LLP, who are ready, willing, and able to assist with your estate planning and probate litigation needs.