Our office is contacted frequently about disputes related to real estate clients own with other individuals. This can include un-wed significant others, siblings, friends and business partners. In most of these situations, the owners do not have any sort of written co-ownership agreement, and as a result, the dispute can become very costly, or the owners may be surprised by the rights the other owner may have absent a written agreement. Although we can oftentimes help these clients resolve the situation, it would be much easier and less expensive if there is a clear written agreement on the front end. This article discusses some of the issues that should be considered and put to paper before co-owing real estate.
Right to Partition/Transfer Issues
Many people do not realize that one co-owner can force the sale of a co-owned property. This is called the right to partition. An owner has a right to partition property even if they only own 1% of the property (note, in some limited circumstances there may be alternate options to partition by sale, but that is a topic for another day).
Thus, if one is buying property and intends to keep it as a long-term investment, the other co-owner can, after owning the property a few days, change their mind and try to force a sale. Fortunately, the right of partition can be waived in writing, and thus a co-ownership agreement can control this issue. The right of partition can be given up, or limited to certain time frames, circumstances etc. This is a critical issue that is worth considering before entering into co-ownership.
A related issue is a right of first refusal or the like. If one owner does decide he or she needs or wants to sell, the other owner(s) can protect themselves to some degree by having a right of first refusal. This would allow the co-owner an opportunity to buy out the other before the property can be put to sale. This is likewise something that should be considered and can be a strong protection afforded by a co-ownership agreement.
Yet another issue on this topic is what happens when someone passes away? Becomes disabled? Files bankruptcy? Wants to take out a loan? These are all issues that ideally should, and can be, dealt with in advance as part of a co-ownership agreement.
There are many components of cost sharing that may be overlooked and lead to dispute. Who is going to pay for the insurance, taxes, mortgage, maintenance and improvements? Is one party living in or using the property more? How does that impact the cost sharing? What if one side wants to do improvements and the other does not? What if the “improvements” actually de-value the property. There are ways to confront these issues before they arise, but you need to have a co-ownership agreement spell them out in advance.
Rights of Use
Who gets to live in the property? What part? Can either owner rent out all or a portion of the property? If so, who gets to keep the rent? Again, these are issues that can be dealt with, but much easier to do so when there is a clear agreement on them before conflict arises.
Who gets the final say as to dealing with tenants, improvements, issues that may arise etc.? Can one owner spend a designated sum for routine repairs without approval? Is an owner entitled to compensation for management of the property, dealing with tenants etc.?
What happens if there is a disagreement or one party fails to perform their obligations? Is there a right to cure (And charge some interest or fee for so doing)? Is there a requirement to mediate or arbitrate? If litigation ensues, is there an attorney fee provision?
Again, addressing this in a co-ownership agreement can greatly reduce the cost of a dispute, and is something that should be considered. These are just some of the issues that can and should be considered and agreed to in advance of an issue arising. It can be much, much less expensive to deal with these issues by having clear understanding and agreement before a dispute erupts. At Brewer, Offord & Pedersen LLP we have vast experience in these matters and are happy to assist, whether you are thinking about getting into co-ownership, want to enter an agreement with existing owners, or are unfortunately in an active dispute.