Co-Ownership Agreements: A Primer
A co-ownership agreement is a legal contract that lays out the terms and conditions of joint ownership. The purpose of this type of agreement is to establish clear guidelines and responsibilities for each party involved in the shared ownership scenario. It’s important for all parties to understand their rights and obligations regarding the property, how it will be handled, and what happens if they decide to sell or terminate the agreement.
A co-ownership agreement is particularly important when multiple parties share a property as it can protect them from possible future disputes . It clearly defines each person’s contributions, such as financial or maintenance responsibilities to the property, and what actions require the consent of the other parties. This can include issues like obtaining permission for certain types of renovations, maintenance work, or making any decisions involving the renting or leasing of the property. Without an explicit agreement, one party might unfairly shoulder more of the expenses or decision-making, creating potential conflict.
Components of a Co-Ownership Agreement
Key components of a co-ownership agreement depend on the items of concern in each venture as well as the discretion of the parties. The most common elements found in co-owner agreements include:
A. Shares of the Co-Ownership
An individual’s share of the co-ownership generally does not need to be equal among co-owners. The share a co-owner has of the property will not be in question if the co-owners agree that the shares are equal.
Whether a co-owner has an equal share of the property could be problematic if the parties have almost equal control over the property as the result of equal or close to equal ownership of the property. This could be the case if one co-owner owned 54% of the property and the second owner had 46% of the property. The owner with the majority (54%) of the property cannot simply get rid of the 46% owner by selling his or her share of the property to a third party. Instead, under the law, the co-owners with less than 51% of the property could be "squeezed out" of the forced sale.
B. Maintenance and Repair Responsibilities
The parties can agree to the type of maintenance and repairs that are to be done on the property as well as who is responsible for these costs. The percentage of the costs for maintenance and repair can be determined based on the co-owners’ respective ownership interests. For instance, the cost of maintaining a house can be split in half between two people or split three ways for three co-owners.
C. Use of Property and Decisions
If business decisions need to be made about the property, those decisions will normally be made by co-owners’ approval. While there are ways to alter how business decisions are made to decide on maintenance and repairs of the property, there are no shortcuts around other co-ownership decisions.
Forms of Co-Ownership Agreements
When working on a Co-Ownership Agreement, the first thing to determine is the type of co-ownership arrangement(s) at play. The most common types of co-ownership include joint tenancy and tenancy in common. There are significant differences between these types of co-ownership and they influence how you structure the Co-Ownership Agreement.
Under a joint tenancy, both owners have equal rights to possession of the whole property. This is often the default arrangement where property is owned equally and no other agreement is recorded. Further, if one owner dies (assuming there’s no Will), the survivor continues to own the property outside of the estate of the owner who died. The net result is that one owner can unilaterally sell the property (regardless of the preference of the other owner).
Under tenancy in common, owners can own property in different proportions (become 40%/60%, for example). Whereas an owner who dies under joint tenancy continues to own the property, a tenant in common has their share of the property pass through their estate. In other words, upon death, the deceased owner’s share is passed to one or more beneficiaries through their Will. Further, each owner can unilaterally sell 100% of their ownership with the proceeds from the sale split according to their share of ownership.
Advantages of Using a Template
A pre-written co-ownership agreement for real estate can save you around $150 to $300, as opposed to hiring an attorney to write up an agreement. In addition, if you’re worried about the time factor, you can literally whip your agreement up in minutes and get back to the business of owning the property.
With a template, you can be assured you have not forgotten to include a necessary clause. When you create your own contract from scratch, it’s easy to overlook something important, such as how you will handle early buyer departure or how you will manage the sale of your share of the property. A template will ensure that you have the necessary and most up-to-date legal language in the document.
Tailoring the Template to Your Needs
Every co-ownership agreement template is customizable to meet the specific needs, circumstances and preferences of the buyers. For instance, the default in most templates is that the buyers are married to each other. If the purchasers are business partners or friends, but have no romantic involvement, then that fact needs to be added to the template. Purchase prices tend to vary according to the creditworthiness of the purchasers and the amount of deposits and/or pay-downs made at the close.
The percentages of the equity can be easily amended based on the proportion of deposit amounts and/or mortgage payments contributed during any pay-down periods .
The buyout section in the template is customizable; its default is an appraisal of what the co-owned property is worth. An individual outside firm is necessary to value the property. Many co-owners want to see that value in the buyout section, which can also include details about what the new co-owners do if they disagree about a demand to buy out or be bought out.
The template gives the co-ownership contract holders the ability to define what common areas a purchaser is responsible for. This part can be easily expanded to incorporate more specifics simply by adding additional detail. The common area duties might involve the upkeep of the landscaping or paying the property insurance.
Typical Pitfalls to Avoid
Common mistakes when drafting a co-ownership agreement
A couple of things that we’d really like to point out from our perspective is that you should read the agreement to see what’s covered before you write it. I’m not sure how many times we’ve had clients come to us having prepared their own co-ownership agreement but not actually even read it all the way through to know what it contained. Where you have a partner who’s pretty strong in a particular area, that can result in them being able to impose their will onto the other partners and not even realizing that may have happened until it’s too late.
Another thing is giving consideration to what the relevant laws are. Given that different provinces might have different legislation that applies, some of them have different references to things that you may be thinking of. Even waivers of statutory provisions or elections not to take certain remedies would have to be tailored to the province that the real property is located in.
Also, again be careful of the time limits. Sometimes using the same form and cutting out sections that you don’t think apply can result in having time limits that you don’t realize, particularly because there are a lot of parties in the Co-Ownership Agreement for real property.
Another thing is that it’s best to have an entirely separate form for real property and personal property, and make sure that it references which property is being referred to in the schedule and what property is subject to the co-ownership agreement, whereas sometimes they just say "the parties agree as follows:" and then it’s all spelled out in the one agreement. The problem with that is that if you ever want to sell one of the undivided shares, or have a third party become a party to it, you now need to have the whole agreement signed resulting in the other party having rights in the personal property as well as the real property, by virtue of how they’re all intertwined, which is not what they necessarily wanted to do.
Legal Implications and Requirements
When drafting or downloading a co-ownership agreement template, the legal implications of the document should not be overlooked. As with any legal document, it is essential to ensure that the agreement complies with local laws and regulations. There may be certain provisions that are required for co-ownership agreements in your jurisdiction, or there may be legal restrictions on the types of arrangements that can be made.
In addition to compliance, it is important to consider how the terms of your co-ownership agreement template may be interpreted by a court. For example, if the agreement provides for joint ownership of a property, but only one of the co-owners is listed on the legal title, there may be questions about the legal status of the other co-owner. Similarly, if the agreement provides for a right of first refusal to purchase the property, but does not specify the price or terms of sale, it may be difficult to enforce the right if the co-owners wish to sell their interests.
Consulting with a lawyer can help to ensure that your co-ownership agreement template complies with legal requirements and is structured in a way that protects your rights and interests. A lawyer can also assist in negotiating the terms of the agreement and providing guidance on any potential disputes that may arise between the co-owners.
Assessing and Finalizing Your Agreement
Now that you have completed your co-ownership agreement template for your property, it is time to take the final steps to have it properly reviewed and finalized. This part of the process ensures that everyone is in agreement with the terms and conditions, and that the co-ownership agreement template follows all required laws and regulations. Start by sending an electronic copy of the completed co-ownership agreement template to each party involved in the co-ownership for review. Each party needs to take the time to read through the co-ownership agreement template and ensure that it meets their needs and fulfills all necessary tasks and obligations. It is important that everyone reads through the co-ownership agreement template fully before signing.
Second, you must have the completed co-ownership agreement template reviewed by a legal professional. You can either meet with the legal professional in person or send them the electronic copy via email. The legal professional will review the co-ownership agreement template and make recommendations on whether any changes should be made. This step of the process enables the legal professional to verify whether everyone’s statements are accurate and that the legal document abides by local , state, and federal laws and regulations. Additionally, the legal professional may send the co-ownership agreement template to other parties to review, such as mortgage and insurance companies, to verify that everything is in order.
Finally, you will need to obtain signatures from each party prior to the finalization of the co-ownership agreement template. Each party’s signature should be original, not electronic. Obtaining signatures cements everyone’s agreement and provides verification of approval. After signatures have been obtained from each party, make a copy of the signed co-ownership agreement template and provide a copy to each party involved. Mastering the co-ownership agreement template is easy with careful attention to detail. By taking the time to review the agreement template, consult with a legal professional, and obtain signatures, each party can rest assured that the co-ownership will be harmonious and beneficial for all involved.
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