I am sure I am not the only person who sees article after article about the current housing market and how that, in turn, is triggering significant increases in rent prices. You may think that as a matrimonial attorney, the rental market is one area that is not particularly germane to divorce proceedings, and frankly, for the last twenty-odd years, that has been largely true. That premise may be on the cusp of changing in the Lehigh Valley as we see skyrocketing increases in rent.
I just read an article in February of 2024 that stated that while Pennsylvania’s overall rent is declining, the rent in Lehigh Valley is still on the rise. Why does this matter in a divorce where the parties own their home? To understand why I see a change on the horizon, at least in this current market, you must first understand a few basics of divorce and equitable distribution.
When parties file for divorce in Pennsylvania, and they have assets, they will proceed with a process called equitable distribution. The name really speaks for itself. The parties, either through counsel or before the Master in Divorce, will equitably divide their real and personal property. Many factors are considered when determining how to divide property, inter alia, length of marriage, age, health, and sources of income for the parties. The entire list of factors can be found at 23 Pa.C.S.A. §3502.
Pursuant to 23 Pa.C.S.A. §3502(7) the Court will look to, “ the contribution or dissipation of each party in the acquisition, preservation, depreciation or appreciation of the marital property, including the contribution of a party as homemaker.”
In a majority of divorces, the largest assets to be divided are the marital residence and retirement accounts. Per the above, the Court will consider the contribution of a party to a marital asset like the marital residence.
Now that we know that property will need to be equitably divided and contributions to a marital asset will be considered, why do I remain concerned about the rental market?
During the process of a divorce, which can take from several months to years, if the parties do not reside together in the marital residence or sell the home, it is very likely the case that one party will reside in the home, and one will move out pending equitable distribution. That means while there is no decision yet as to who keeps the home or how much equity each party may keep, one party continues to live in the home and pay the bills related to the home, including the mortgage.
Case law has long established that the parties to a divorce have an equal one-half interest in the marital property, and “thus the dispossessed party will be entitled to a credit for one-half of the fair rental value of the marital home.” See Lee v. Lee, 379 A.2d 380 (2009). Basically, if the party residing in the home was not there, the dispossessed party could rent the home for value.
There are four prongs the Court will consider when deciding whether to award a rental credit:
- The general rule is that the dispossessed party is entitled to a credit for the fair rental value of the jointly held marital property against the party in possession of that property, provided that there are no equitable defenses to the credit.
- The rental credit is based upon and therefore limited by, the extent of the dispossessed party’s interest in the property.
- The rental value is limited to the period of time during which a party is dispossessed and the other party is in actual or constructive possession of the property.
- The party in possession is entitled to a credit against the rental value for payments made to maintain the property on behalf of the dispossessed spouse. See Lee v. Lee, 379 A.2d 380 (2009).
While all of this has been and remains true, in practice, fair rental credits are rarely, if ever, paid. That is because the fair rental credit is typically offset by the amount the party in possession is paying on the mortgage. Equity then dictates neither party receives a credit due to this offset.
Now add to this equation an overinflated rental market. It is not hard to imagine a scenario where the party in possession is paying $1,500/mo. on the mortgage, while remaining in the home, but the fair rental value is $2,800/mo. That would not create the typical offset situation and could, in fact, lead to a situation where the party in possession will owe a credit to the party who is dispossessed and could be earning more money if the home was rented. Of course, to show this, the dispossessed party would require a market analysis and appraisal determining what the market would bear for rent, but given this current rental market, this is not an impossible feat.
Perhaps now, when reading news articles about the cost of rental units, you will join the matrimonial attorneys in thinking about how this will play out in your neighbors’ divorce….but likely not.