Chris Kwan, founder of Ozrealestates and Bankguru, shares the ins and outs of navigating property sharing agreements.
Have you ever thought about sharing a property with someone you know, a friend or colleagues by purchasing a property together? Or maybe you want to diversify instead of owing 1 property and have 2 properties with 2 people instead? Or like me, I simply cannot afford to own one property and need to have some partners who are happy with co-investing and not living there.
My personal situation is that I want to purchase a 600K apartment with 2 bedrooms in Melbourne but need at least 2 others to afford it. The other two partners are friends who find the return to be higher in investing with me and were able to get a bank to support us for the remainder of 70%.
The paperwork to purchase is not complicated with our names will be in the Title document as co-owners and the percentage is stated (in my case 40:30:30 – I will be the lead landowner at 40% with the other two having 60% and will be able to outvote me, should they decide to do so).
Agreements need to be drafted up to maintain relationships between co-owners and avoid unnecessary aggravation and costs arising from potential disputes because we may not necessarily be friends forever. Currently, there isn’t a body of law to regulate what happens when property co-owners decided to break up.
A Property Sharing Agreement is one of the solutions which can also help to reduce the financial risk of co-owning a property where the co-owners’ contributions towards the property are not equal.
For example, if a co-owner defaults on loan obligations or wishes to sell the property co-owners can turn to the Property Sharing Agreement enforce the obligations contained in it. It is easy to see why lawyers are not shy offering this “Property Sharing Agreement” usually from AUD 5,000 upwards while conveyancing is less than AUD 1,500.
It’s can be a bit more complicated but the common areas which should be in the Agreement are:
- The shares of each owner and the form of ownership to be recorded on the certificate of title to the property;
- How the parties are to contribute to property expenses, outgoings and maintenance;
- Processes by which individual owners may sell their share of the property;
- Method of dispute resolution; and
- Any joint and several obligations under any mortgage/loan.
In the first section, there are 3 possible “forms of ownership”:
- Tenancy by entirety
- Joint tenancy
- Tenancy in common
Tenancy by entirety is typically used by married couples and means that either party can not alienate or transfer the ownership unless both agree to do so.
In joint tenancy, all owners’ interests are joined together. Joint tenancy may be great for couples because when one partner passes away, his or her share goes to the remainder without more other than to produce a death certificate, there is no probate (saving thousands). This is called a Right of Survivorship. A joint tenant may alienate his property without the consent of the other, but if that occurs, the tenancy is changed to the third type, tenancy in common, and no tenant has a right of survivorship.
In my scenario, my preferred is tenancy in common. Having this individual ownership means that each one of us has the right to alienate, or transfer the ownership of, her ownership interest.
The second section is the meat of this Agreement and co-owners would need to discuss this seriously. Two clauses should definitely be found within:
- A clause that says what would happen where an uncooperative co-owner consistently breaches the Agreement.
- A clause that provides for the selling of the co-owner’s share to the others first at a price that is to be determined by an independent valuer (costs to be shared by all).
One should be mindful that the market for “share ownership” of property is not large and the intricacies of them not widely known (which is strange given that most of us have to live in shared apartments or flats at one time of our lives but unwilling to do so when it comes to property co-ownerships).
The new owner-buyer has to understand the process and this Agreement is to protect his or her interest and co-owners have to understand that this is not a “love-match” and what matters is how to handle the worse case scenario with uncooperative co-owners.
In many cases, there are similarities between Property Share Agreements and Strata Management Agreements. Even though there is no “common-property” within a flat or apartment, one should establish rules such as no smoking or partying if the co-owners will be living there. Basic maintenance of the flat or apartment means co-owners have to establish a fund for repairs, cleaning and so on that must be agreed by all. For those who have flat-mates or have experienced living with others, these clauses should be similar to drafting up living arrangements with people co-living together.
As for the rest, one has to tailor this with co-owners and it may pay to get legal assistance or advice. The above are my comments only and should not be considered as legal advice.