Property Sharing Agreements

With the rapid rise in property prices in some parts of the country, it is becoming common for people to co-own property. This can be an exciting time for everyone, however co-ownership comes a myriad of legal issues. While co-owners may start out with the best intentions, circumstances can change. In order to protect all parties, we encourage our clients to formalise any decisions and enter into a property sharing agreement from the outset.

Here, we cover some of the common issues:

Contributions to the purchase price, outgoings and repairs & maintenance

An agreement should set out the cash contributions made by each co-owner to the purchase price of the property. These contributions should be reflected in the percentage share each owner has in the property. For example, a simple structure will have two parties owning a property as tenants in common in equal shares, with each party having a 50% share in the property. This ownership is then reflected on the title. Not only is each party’s share of acquisition costs covered, but expenses (or outgoings) also need to be accounted for. It is possible that one owner might agree to pay all of the rates, water and maintenance, and repairs during ownership. If the property is not to be lived in by the owners, but rented, then other factors relating to these payments need to be considered.

Debt and liability

A common problem with co-ownership is bank lending. It is relatively simple if all co-owners are borrowing equal amounts to complete the purchase, from the same bank. However, it becomes more complicated if only one party requires lending, yet the other doesn’t. To secure its lending, a bank will require a mortgage over the property but only the borrower is responsible for the loan repayments. What is the agreed position if the borrower owner defaults and the bank seeks to enforce its mortgage? A bank may also require a guarantee be given by the non-borrowing owner, which can be risky for this owner if the borrower defaults on their payments to the bank. A co-ownership agreement can stipulate that only the borrowing owner is responsible for servicing the debt and include an indemnity against any loss suffered by the non-borrowing owner due to the other owner’s default. Another important component of such an agreement is a provision preventing either party from any further borrowing secured against the property.

Disposal of property

Of course, the good intentions of the parties that frequently exist at the start, often change as owners make decisions in their lives. As a result, terms that cover the sale or buy-out of a co-owned property are important. Co-owners should generally share the profit (or loss) in the sale of the property proportional to their either their initial contributions to the property, or their ownership. When a co-owner wishes to sell their share of the property, it is usually initially offered to the other owner, with the value determined by independent valuation. If the other owner does not wish to purchase the other share (within a pre-determined timeframe), that triggers an open market sale to a third party. It is unusual for an unknown party wanting to purchase a share of a property with a complete stranger, and at this point, if the share cannot be purchased, the property is often sold on the open market.

Death of a co-owner

An agreement should also anticipate the unexpected death of any co-owner. With shared ownership (as opposed to joint ownership), the deceased owner’s share belongs to his or her estate and can be given away in that person’s will. However, this leaves the undesirable situation of surviving co-owners ending up in ownership of a property with family members or others associated with the deceased co-owner. In this instance, a first right to purchase the deceased’s share from their estate should be included.

Dispute resolution provisions

Despite best intentions, disputes can still arise. A dispute resolution provision can help to clarify the process for resolving conflicts or disputes, which could involve mediation in the first instance - a desirable alternative to court proceedings. In some situations, the High Court can order the sale of a co-owned property, and also make orders around the disbursement of the sale proceeds.

The Property Team are here to help you with all the legal aspects of your property sharing agreement.

Contact us to discuss how we can help you reach your goals.

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