§ 7.04 Characterizing Improvements
| Jurisdiction | United States |
| Publication year | 2021 |
§ 7.04 Characterizing Improvements
[1]—Definition
An "improvement" is a contribution of funds made to improve property, not to acquire property. Improvement issues frequently involve real estate. For example, if funds are used to add a room or a swimming pool to property, there is an improvement. Courts generally distinguish between maintenance expenditures and capital improvements.51
[2]—Characterization of Improvements
[a]—Majority Rule—Funds Contributed Toward Improvements Are a Loan
Most states that have considered the issue agree that funds contributed for improvements do not cause a change in ownership, even if the funds contributed are not of the same character as the property improved. Pursuant to the concept of fixtures, the permanent addition to the estate takes the character of the dominant estate.52 Such contributions merely create a potential reimbursement claim.53 Sometimes the claim is referred to as a reimbursement claim, while other states refer to it as an equitable lien.54 However, uniform rules for calculating the reimbursement due have not evolved.
Various rules have been suggested. For example, a number of cases state that the amount of reimbursement due should be the amount contributed.55 Some courts would add interest from the date the amount was advanced.56 Other courts focus upon the amount by which the value of the property was enhanced by the improvement.57 A Virginia court concluded that, without a showing that the expenditures increased the value of the property, there could be no claim.58 Other standards that have been used include the greater of the amount spent or the enhancement,59 or the lesser of the amount spent or the enhancement.60
A Louisiana case considered this issue. Shortly before marriage the husband bought a house. In connection with the purchase, the house was appraised as being worth $155,000. Shortly after the purchase, the husband and wife made a variety of improvements to the home. After the improvements were completed, in connection with an application to obtain a second mortgage loan, the house was appraised for $162,000. Shortly thereafter many houses in the area were damaged by hurricanes, and undamaged houses became much more valuable. Because of this factor, a few years later the house was appraised for $193,000 at the time of divorce. The trial court found this evidence established that the improvements had increased the value of the property by $7,000 ($162,000 compared to $155,000), so that was the amount of the marital claim.61
The Nevada Supreme Court has accepted as a general rule reimbursement of the amount spent.62 However, the court concluded that this would not be a fair measure if the enhancement value differed greatly from the amount spent. In such situations, courts are permitted to base the reimbursement award on enhancement, rather than on the amount spent.63 If reimbursement is to be measured by enhancement, another related issue is whether the enhancement is to be measured at the time of the improvement or at the time of divorce.
A California court awarded reimbursement for the cost of improvements where neither party argued that enhancement would be a fairer measure.64 The court noted that in certain circumstances enhancement could be the better yardstick.
The distinction between cost and enhancement can sometimes be significant. For example, in a Missouri case, the wife alleged that certain improvements were made, during marriage, to the husband's separate property house, and claimed reimbursement to the marital estate.65 The court concluded that the property increased in value during marriage due to potential commercial uses of the land, not because of any improvement, and held that reimbursement was not warranted. According to the court, in those instances when the value of property is based upon alternate uses of the lot, and is not affected by minor improvements to the property, reimbursement is not justified even if marital property is used to improve realty, since the expenditure of marital funds did not enhance the value of the property.
A West Virginia case presented a related issue. The husband made substantial capital improvements to a house that was purchased by the wife prior to marriage.66 The house was subsequently destroyed by a flood, and there was no mention in the case of any flood insurance. The husband received no reimbursement for the destroyed capital improvements.67
The same rules are generally applied to determine reimbursement for marital improvements to separate property as for separate improvements to marital property,68 or when one spouse's separate property is used to improve the other's separate property.69 When computing the reimbursement due when community property has been used to improve separate property, in most cases the offsetting benefit theory normally has not been applied.70 The reimbursement due the marital estate is not reduced by any benefit received from the use or ownership of the property.
It is not clear whether the improvement must be a permanent capital improvement to warrant a reimbursement claim. In other words, it is unclear whether funds spent for maintenance and repairs are reimbursable. If the justification for the reimbursement is that the value of the property was increased, maintenance and repairs would not be reimbursable.71 In contrast, if the justification is merely that funds were used from one estate to satisfy a necessary expense of the other estate, reimbursement would be appropriate.72 It appears that courts now require permanent capital improvements to create a claim.73
If one spouse improves separate property with efforts contributed during marriage, a reimbursement claim again can arise, in view of the marriage as partnership idea that all the fruits of either spouse's efforts expended during marriage should be allocated to the marital estate. One approach to calculating the marital estate's reimbursement award in this situation is to calculate the "value" of the services rendered.74 Some courts have been concerned that this standard might yield too large a marital claim, if the "value" is determined based upon what would be a reasonable wage for this effort. For example, in one case75 the court concluded that, when the reimbursement claim arises due to efforts of the non-owning spouse, the marital claim should be measured by the enhancement in value of the property resulting from the efforts. In this case, the court also deducted from the marital claim the value of the benefit the marital estate enjoyed from the use of the property.
An Illinois court took a different approach when a spouse improved the other spouse's separate property. The court awarded the spouse $5,000, which the court decided was the value of the services.76
Reimbursement issues have primarily been considered in community property states. However, some equitable distribution states have endorsed the principle. For example, Illinois77 and Wisconsin78 have adopted statutes authorizing reimbursement awards. The same result is reached under the West Virginia statute, under which marital property includes only the enhancement that results when marital property is used to improve separate property.79 A reimbursement result was reached in an Arkansas case in which the husband's separate realty was improved during marriage with marital funds.80 At divorce, the wife was awarded half of the amount contributed.
An Ohio court has held that, where marital funds are used to make an improvement to a spouse's separate property, the marital estate has a claim for the amount the value of the property was increased as a result of the improvement.81
An Arkansas court has held that the marital estate is entitled to "some benefit" when marital funds are used to improve separate property.82
There is a split of authority regarding whether funds contributed toward payments on property purchased in a credit transaction are "improvements" not affecting ownership, or whether some other treatment is appropriate.83
[b]—Minority View—Funds Contributed Toward Improvements Do Affect Ownership
Some courts have not accepted the view that funds contributed toward improvements do not affect ownership. For example, a Kentucky court stated that the marital estate would have an ownership interest in the property based upon, among other things, "the value of all improvements made to the property from other than nonmarital funds."84 Pursuant to the pro rata formula announced by the court in this case, it is clear that marital funds contributed toward improvements of separate property can affect ownership, and thereby affect the marital claim to the appreciation in value of the property.
A later Kentucky appellate case tried to clarify this rule.85 In this case, the husband inherited realty during marriage; the realty was encumbered by some indebtedness. The husband used separate property to pay some of the indebtedness. Additional funds were borrowed to finance capital improvements. The court found that the marital contribution was $93,806 (apparently the cost of the improvements), while the separate contribution totaled $26,626. Applying a pro rata concept, based on the relative contributions, the court held that the separate estate had a 22% interest in the realty, while the marital claim was 78%. At divorce, the house was worth $134,000. The separate property claim was 22% of $134,000, or $29,480. The marital claim was 78% of $134,000, or $103,580, less the $84,000 remaining debt outstanding for the capital improvement. The marital estate was responsible for this debt, because the marital contribution was in the form of the borrowed funds.
Some other cases do not provide as clear guidance regarding this matter. For example, a Maine case strongly endorses the application of the pro rata approach to improvement situations.86 The court concluded that the funds spent renovating the separate property house "represent an...
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