15 Mar Could You Benefit From a Co-Ownership Agreement?
Property prices have been on the rise making it more difficult for buyers to get their foot into the property market.
Owning property jointly can seem appealing as friends or family can pool their money together to have a larger deposit, or substantially better borrowing power.
Parents are assisting their adult children by purchasing properties jointly with their adult children, people also purchase with friends for investments or share holiday homes.
Whilst people may get caught up in the excitement of purchasing a new home or investment property with someone else, purchasing property as co-owners is not without risks. Have you considered what would happen if for example:
1. One of the property owners dies? Should the surviving owner have the first right to purchase the deceased person’s share? Or should the deceased person’s estate have the right to require the property be sold?
2. How will the property be used or occupied? Are all the parties living in the property? If not, who will be responsible for the maintenance and upkeep of the property and expenses?
3. What if one of the property owners wants to sell their share this could be for multiple reasons such as financial hardship? You cannot list a share of a property for sale on the property market. If the other joint owner does not wish to purchase the share, then the owner wishing to sell their share should have the right to force the sale of the entire property.
4. A change in circumstances? Owning a property jointly with friends or family may not always suit your changing circumstances. A decision to retire or lifestyle change may affect a Co-Owners’ desire to remain in a co ownership arrangement where they would much rather free up their funds for retirement.
5. Different borrowing requirements? This can be particularly problematic where borrowers have different levels of borrowings for their interest in the property. For example, where only one Co-Owner requires finance to purchase the property. A bank may require all purchasers to sign the mortgage as they will all be joint owners of the property on title. How does the Co-Owner not requiring finance protect their interest in the property if the other Co-Owner defaults in their repayments, or the bank attempts to force the sale of the property?
These type of issues can be addressed in a Co-Ownership Agreement, which you should consider when purchasing a property with someone else. Having an agreement in place can avoid these types of issues ending up in Court, which would be costly.
A Co-Ownership Agreement can be entered into at any time, whether it be before purchasing the property or after, to give effect the verbal agreements that should be documented.
What is a Co-Ownership Agreement?
A Co-Ownership Agreement is a legal document between Co-Owners of a property that sets out the rights and obligations of each person with a share in a property and the way issues would be resolved should they arise during the term of Co-Ownership.
Joint owners can own property as Joint Tenants or Tenants in Common. Joint Tenants or Tenants in Common is created when a property is held by 2 or more people. The nature and terms of the Co-Ownership Agreement would differ depending on what type of legal ownership was created at the time the property was purchased.
Joint Tenants means the owners share equal ownership of the property. They own 100% of the property together and both have an exclusive right to keep or sell the property. Joint Tenancy creates a right of survivorship, which means if one of the joint tenants dies, the property is transferred to the survivors. No owner can sell or transfer their share without the consent of the other joint owner(s).
Tenants in Common
Tenants in Common is where the property ownership is divided between the owners in distinct shares. One of the tenants in common may have a larger share of the property than the others, which may equate to the amount of each owner’s financial contribution at the time of the property purchase. Each owner is free to dispose their share without the consent of the other joint owners, however this in practice would be problematic. Unlike a Joint Tenancy, Tenants in Common have no right of survivorship. Upon the death of an owner, the deceased’s share in the property is transferred to the deceased’s heirs.
What things should be included in your Co-Ownership Agreement?
To minimise the risks associated with co-ownership of property, the terms included in a Co-Ownership Agreement would need to be broad to provide assurance regarding each owners’ rights and obligations. It should deal with issues such as:
1. The apportionment of liabilities for the property between the Co-Owners, such as maintenance costs, rates, bills, insurances and mortgage repayments.
2. On what basis is each owner entitled to access the property? This can be particularly important where people purchase the property as a holiday home and allocating time when each owner can access the property, especially during the holiday season.
3. How rental income or sale proceeds are to be distributed to each owner.
4. If the property is to be sold – how will the Co-Owners make the decisions? Things such as which selling agent to appoint, agreeing to a price and the method of sale, should also be included as unfortunately relationships can break down.
5. Any limits to be imposed on Co-Owners on their ability to sell their share of the property? Does it need to be offered to the other joint owners first? What to do if an agreement cannot be reached? A contractual right to force a sale of the whole property should then be considered.
6. How disagreements between Co-Owners can be resolved in relation to the property.
If you are considering purchasing a property with another person, then considering a Co-Ownership Agreement can provide you with certainty and protection in uncertain times negating the need of an otherwise costly legal proceedings if disputes arise.
To make an appointment with one of our experienced Commercial Law Team contact 8525 2700 or click here to request an appointment.
Article written by Valentina Abouzeid