If you own property with a marital partner, there are laws which regulate each party’s right to use, manage and occupy the property. If you purchase property with anyone other than a spouse, there are very few laws which regulate those same rights and obligations.
A co-ownership agreement creates and regulates each owner’s rights and obligations relative to the property. For instance, the agreement might address ownership interests; who has the right to occupy the property; who is obligated to pay the mortgages; what happens if one party breaches the agreement; what happens if one party wants to sell and the other does not; and what happens if a party dies.
A co-ownership agreement should be considered anytime there are multiple owners of property and the property is held in the names of the individual owners rather than in an entity such as a partnership or limited liability company. An agreement is needed whether the property is investment property or will be occupied by the parties but it is even more important when one or more of the parties will occupy the property as a residence.
Here are some common examples of when co-owners will benefit from a co-ownership agreement:
- Unmarried individuals own and live in property together;
- A parent assists a child in purchasing a home and is a co-owner of the property;
- A parent and child co-own a home in which both will live and in which both will contribute financially;
- One party owns a home and a second party intends to “buy in” and become a partial owner of the property; and
- Two or more parties invest in real estate which will be held in their individual names;
Here are some examples of issues a property prepared co-ownership agreement will address:
- Which party or parties will buy the property and hold title to the property?
- What ownership percentage will each party own?
- Who will contribute to the down payment?
- Who will originate the mortgage?
- How will the mortgage payments be divided?
- Who will pay the mortgage?
- What happens if a party is unable to pay his or her share of the mortgage?
- How will other expenses such as taxes, insurance and maintenance by divided?
- What are each owner’s responsibilities for upkeep, maintenance, and cleaning?
- What happens if one party wants to sell and the other does not?
- Will the parties have the right to purchase the other party’s interest before the property is placed on the market to be sold?
- Who will you determine a fair price for the property?
- How will the proceeds of a sale be divided? Will the parties be entitled to a return of their portion of the down payment before any allocation of profits?
- What happens if one owner dies?
- How will the owners resolve disputes?
Here are some very possible scenarios which can occur if there is no co-ownership agreement.
Two Unmarried Parties Living Together
Two un-married partners purchased property together and lived in it as their primary residence. One partner died and his or her heirs inherited the deceased partner’s share of the house. If the surviving partner signed the loan documents along with the deceased partner, he or she remains fully liable for payment of the entire loan. Half of the house is owned by the deceased partner’s heirs.
A Parent Assists a Married Couple in Home Purchase
If one of the marital partners has a bad credit history he or she may not be able to qualify for a loan. The other spouse, although he or she has a good credit history may not be able to qualify for the loan without financial assistance.
Often a well-meaning parent will agree to co-sign or otherwise assist in obtaining a loan for the home purchase. The parent who assists in the purchase of the home may end up in title along with the spouse with good credit history while the marital partner with bad credit was not allowed to be in title because the lender forbade it.
In that scenario, there is one marital partner in title along with the parent who assisted in obtaining financing. Even if the assisting parent paid none of the down payment and has not paid any of the mortgage payments, if there is a subsequent divorce, the court may not recognize that the parent in title is simply a nominee or stand-in for the spouse with bad credit and instead recognize that parent as owning half the property. The parent’s ownership would not be included in the divorce decree, which may result in the court awarding half of the in-title spouse’s interest to the other spouse. If the assisting parent is the parent of the bad-credit spouse, the bad credit spouse could end up with a three-quarter’s interest in the house – the half owned by his or her parent and half of the other spouse’s interest in the house. A co-ownership agreement could address this situation.
A Parent Purchases a Home with A Child
A parent and child, along with the spouse of the child, agree to jointly purchase a home. The parties agree that the title will be held in the name of the child and the child’s spouse. There is a subsequent divorce. Without a co-ownership agreement, the parent may be at the mercy of the court hearing the divorce as to how the proceeds are divided and whether any rights of the parent are respected.
Oral agreements related to real estate are almost never enforceable. The time to address issues such as those discussed above is before there are disagreements. Contact us if you have further questions or need assistance in preparing an agreement.