Property is relatively easy to buy – and even easier to buy with a friend. But if you haven’t planned for when things go wrong, the whole exercise can turn into an expensive debacle.
Buying property can be a very rewarding experience. Buying property with a friend, partner or relative can often enhance the experience.
However, before you buy property, you need to think about the “exit”. You need to think about what will happen if things go wrong. Property is a long-term and high value investment. The chances of things going wrong may not be too great, but when they do – it is expensive.
In our experience, the following issues need to be considered before you buy property with another person:
In what proportions will the property be owned? If the investment is equal, the split will also likely be equal. But if one party contributes more to the purchase price, or commits to paying more of the mortgage, or undertakes to perform work on the property, then the percentage ownerships may vary.
In what proportions will people contribute to the initial cost of the property? If a person contributes something other than money – how will it be valued? For example, if someone agrees to make improvements to the property, will they be paid cash, or will the work “pay for” an interest in the property? What happens if they do not perform as agreed, to the required standard, or at all?
How will title to the property be owned? The title may be held directly by the owners, either as equal “joint tenants“, or more likely as “tenants in common” if the parties are not married. These two forms of ownership are discussed further below. If there are many owners, then a third party “nominee company” may be more practical. What happens on the death of a co-owner should also be addressed, since the estate is likely to want to sell the property.
How will the property be used or occupied? If the property is a house that is to be shared by the co-owners, then the starting point at law is that both owners are legally entitled to have full access to the whole of the property. In fact, if a co-owner tries to prevent another co-owner from access to the property, then that can amount to trespass by the party trying to prevent access! Therefore if one party is expecting to have sole occupancy this needs to be agreed between the owners. ‘Vacation ownership’ is necessarily more complicated, and can be accomplished through schedules which address periods of usage. If the property is to be rented to third parties, then consideration needs to be given to who will manage this process.
What happens if one party is not being able to meet their share of contributions and expenses? For example, the cost of maintenance, repairs or improvements. Often another party is required to bridge the gap, and then there is an argument about what they receive in return. Do they get compensated with a rate of interest, or are they entitled to acquire a further interest in the property?
People’s responsibilities need to be clearly defined – otherwise things don’t get done. For example, who will be responsible for taking out insurance on the property, who will hold and collate tax information, who will maintain the property – and if a property manager is appointed, how will they be selected?
What debt, if any, will be able to be secured against the property? What additional security will be provided, e.g. personal guarantees or other property? In what circumstances will that additional security be released? What recourse will one party have against the other party if only one party’s security is called up?
When can one party require the sale of the property? A “part interest” in a property is not necessarily worth the same as the total value of the property dividend by the ownership interests. This is because few people want to acquire an interest in property with people they do not know well. You therefore need to agree on what circumstances one party is able to force a sale of the whole of the property. If you don’t have a contractual right to sell your interest in the property, or force a sale of the whole property, then the only other avenue available to you is to apply to the Supreme Court. An expensive exercise. Normally these agreements also provide for a “right of first refusal” so that when one party wants out, the other is given the opportunity to buy that interest. The sale price can either be a function of the market (the appraised value), or an agreed fixed price.
What if one owner gets divorced, or is made bankrupt? Will the other parties be forced to sell at a potentially discounted price in the wrong market?
How will decisions be made about what to do with the property? Will it be by majority, or will all owners need to agree? What if there is a “deadlock” between the owners? The starting position at common law is that all owners must agree on all decisions.
All these issues can lead to unnecessary arguments, disputes and costs – and ultimately, broken relationships. They can also be easily sorted out before the property is purchased – by the parties negotiation and then entering into a ‘Co-Ownership‘ or ‘Landholding Agreement’.
Unfortunately we see a lot of property deals go south. Not because of anything wrong with the property itself, or even the property market in general. But because people haven’t agreed in advance about what they will do when one of a number of foreseeable events occur.
The starting position for both types of property ownership
To give you some idea of where you would stand if you don’t have an agreement in place:
Tenants in Common
- Each tenant in common has a separate and distinct interest in the property.
- An owner’s interest can be equal, or it can be in any other proportionate share, e.g. one third, three quarters, etc.
- There can be more than two owners in the property, each with different proportionate shares, i.e. there is no requirement for equality.
- No matter what a party’s ownership interest in the property, all owners have the legal right to physical possession of the whole of the property, that is, they can’t be excluded from occupying the property.
- Each owner can deal with their interest in the property with third parties, usually without the other owner’s consent. For example, they can sell their interest, mortgage their interest, and lease their right of occupancy to third parties.
- Tenants in common can acquire and dispose of their interests in the property at different times and with different people.
- The interest of each owner of a property held as joint tenants is not separate or distinct from the interests of each other owner. Each owner is entitled to an undivided interest in the whole property. This can be a difficult concept to grasp, but essentially each owner owns the whole property.
- There are no separate shares, as each owner has an undivided part of the whole property.
- There can be more than two owners as joint tenants, but none will own a distinct share. Each owner therefore effectively has an equal interest in the property to each other owner.
- All joint tenants are entitled to physical possession of the whole property. This means that one owner cannot prevent the other owners from occupying the property.
- In dealing with third parties, joint tenants must act as a ‘single owner’, i.e. they must act together, and are not able to deal with their interest separately.
- Joint tenants must acquire the property at the same time from the same vendor, and must dispose of the property at the same time to the same purchaser.
- Generally each joint tenant can only act at the same time as the other one. They must act together. Any independent dealing with the property by one joint tenant is likely to result in the ‘severing’ (or ending) of the joint tenancy, effectively converting the co-ownership relationship to a tenancy in common. See here for more details about severing a joint tenancy.
How we can help
We are property investors ourselves. We have experience in documenting and managing “Co-ownership”, and we can individually customise a Co-Ownership or Landholding Agreement to suit your individual needs.
Call us on 1300 654 590, or email Andrew Andreyev at firstname.lastname@example.org.