Although buying property with someone else is exciting, it is also risky. Before you rush to sign the contract for purchase, it would be sensible to consider whether executing a co-ownership agreement is appropriate in your circumstances.
What is a co-ownership agreement?
A co-ownership agreement is a legally binding document entered into between 2 or more co-owners. This document will include terms to provide certainty as to how each co-owner will navigate the various issues associated with property ownership. The terms serve as a record of each co-owner's intentions as to how issues are to be resolved and can avoid the need for costly legal proceedings, or worse a breakdown in the relationship between co-owners.
Forms of co-ownership
The nature of terms included in a co-ownership agreement will depend on the type of legal ownership created by the contract for purchase. Therefore, it is first necessary to understand the two main types of co-ownership available. In NSW, property may be held by 2 or more co-owners as 'tenants in common' or 'joint tenants'.
Tenants in common
Tenants in common is where property ownership is divided between the owners in defined shares. While each owner is entitled to physical possession of the whole property, legal ownership is divided into shares. Each owner is free to sell or deal with their share as they wish (except if there is a co-ownership agreement in place). Unless specified otherwise in the contract for purchase of land, there is a presumption that land purchased jointly will be held as tenants in common.
Joint tenancy means that the owners own the property together equally and jointly, as opposed to each owner having its own allocated share. No owner may sell or transfer their share in the property without the consent of the other joint owner(s). Where an owner passes away, the deceased owner's share automatically vests in the surviving owner(s).
Risks associated with co-ownership of property
A failure to prepare and sign a co-ownership agreement may prove to be a costly mistake. If one owner wants to sell the property but the other owner(s) do not, disputes may arise, and the courts intervention could be necessary. There are also situations where you may find yourself legally liable for unforeseen costs.
For example, where co-owners have jointly signed a home loan contract, all owners are usually jointly and severally liable for the debt. This means that you are responsible for 100% of the repayments and the debt, where any other owner refuses to pay their share.
Another issue related to borrowing arises in circumstances where a co-owner seeks to obtain finance for the purchase of a second property. A bank will assess the total amount of the loan owing on the first property as a liability in the name of the owner seeking to purchase and this can negatively impact one's ability to borrow.
Drafting your co-ownership agreement – things to consider
The terms included in the co-ownership agreement should be sufficiently broad to provide certainty regarding each owners' rights and obligations in all possible circumstances. Depending on your situation, it may be wise to include terms addressing the following issues:
- how liability is apportioned between co-owners for various outgoings such as maintenance costs, mortgage re-payments, rates and bills
- whether and on what basis each owner is entitled to access the property
- acceptable amounts to be received by each owner in circumstances where a property is rented, leased, or sold
- how rental income or sale proceeds are to be distributed to co-owners
- what limits are imposed upon co-owners regarding their ability to dispose of their share of the property
- whether the remaining owner has a right to purchase a departing owner's share of the property
- how disagreements in relation to the property are to be resolved between co-owners
Having a co-ownership agreement in place will provide protection, peace of mind and reassurance for co-owners. It may also eliminate the need for costly legal proceedings in the case of dispute. If you are considering a joint purchase of property, we recommend that you seek legal advice regarding the preparation of a co-ownership agreement.
This article was co-authored by Law Cadet Bill McLaughlin.