We have reached Step 4 in our series on the Steps to Co-Ownership. Previously, we have discussed how to find your partners and creating your group in Step 1, how to create a financial model in Step 2, and how to create house rules in Step 3. In Step 4, we will discuss everything surrounding a co-ownership legal agreement.
Purchasing a house is a huge commitment. With multiple parties in a co-ownership arrangement, GoCo recommends creating a legal agreement to protect the members of the party. While you may be very close with your co-ownership parties, protecting yourself and each other is important. A legal agreement between the owners of a home exists to provide assurance and guidance around remedies. It is what the owners agree will happen if promises in the partnership are not or cannot be kept. It is important to have a co-ownership legal agreement as family law trumps most other agreements including home purchase contracts. Without an appropriate agreement in place, co-ownership partners may lose control of their home.
What’s A Co-Ownership Legal Agreement?
A legal co-ownership agreement is a customised contract that accommodates the co-partnership wishes of what might happen in future scenarios and creates agreements that will supersede family law. It varies from group to group as the agreement is tailored to suit each group. Regardless of variations, a co-ownership legal agreement should clearly define your arrangement and discuss all contingencies and changes with their agreed outcomes. The three main areas of a legal agreement that we will cover are Rights and Responsibilities, Financial Obligations, and Future Scenarios. Covering all these areas can ensure that, in the event of a break in the partnership, co-owners won’t lose control over their homes.
In short, you and your partners want to have a document in the event of future scenarios and possibilities that could occur and may need legal recourse. GoCo always recommends a legal agreement no matter how close the group is - it’s best to have it and not need it then need it and not have it.
Let’s look at some examples:
“Four co-owners, all senior women, live together in a 4-bedroom home. One dies suddenly and the share of the home passes to the daughter of the deceased who decides to rent it out at her discretion. Without a proper legal agreement in place, the remaining co-owners lose control over who lives in their home.”
“Two married couples co-purchase a home. One couple decides to divorce: a life partner would like to remain but the shares of the home are considered a joint asset and must be liquidated. The burden of finances cannot be managed by the remaining life partner and the strain and unanticipated legal fees result in all parties abandoning the partnership and selling their home.”
In general, there are two types of legal relationships between co-owners when they buy property. These are tenants-in-common or joint tenants. Joint tenancy invokes the right of survivorship so that upon the death of an owner, the ownership interest of that owner passes in equal shares to the surviving owners. Tenants-in-common allows owners to have their share of the property form part of their estate, with the asset distributed on their death based on their will.
The best choice for your co-ownership arrangement will be dependent on what best suits your circumstances. However, a legal agreement protecting a co-operative real estate purchase should be based on a tenants-in-common agreement and should contain very clear instructions about what happens in the event of a partner’s death, divorce or default.
What Goes Into A Legal Agreement?
A good agreement lowers the risk of a broken co-operative arrangement. It will detail the required present and future behaviour to make the house function. You and. your partners want to have legal assurance that in the event of future scenarios that may break the partnership, however unlikely those scenarios are. GoCo recommends including the big three topics of Rights and Responsibilities, Financial Obligations, and Future Scenarios in the legal agreement.
Rights and Responsibilities
Your House Rules that were created in Step 3 can be included as part of your legal agreement. It is good to include details such as the mortgage payment schedule, required funds for maintenance, chore schedules, use of space and noise and privacy. Including remedies for broken house rules is also a good idea as partners now have contractual recourse if rules are not followed. Consider things such as excessive noise, no contributions to common funds and failure to complete assigned chores.
Financial Obligations
This is important to include in your legal agreement. The required schedule for mortgage payments, other payments like bills and taxes should all be included in the legal agreement. By signing the agreement, all partners pledge to each other that they will meet their financial obligations. This means that in case of default, there is a legal remedy available even if you don’t have to use it. Lenders do not recognise fractional mortgages. If there are four people contributing to the mortgage and on the title, the bank sees them all as equally responsible for the mortgage. If the mortgage defaults because of one person, it can impact everyone.
Future Scenarios
Some partners may wish to exit the arrangement in the future due to life changes or other circumstances. Co-owners must be in agreement as to how and when the property will be divested in the event of such things. There needs to be clear answers and direction in the legal agreement. Think about if a co-owner wishes to leave the property for an extended period of time, will this trigger a specific event of sale or assignment, of their share? What will happen to the share of a co-owner in the event that they have defaulted on their obligations? What events trigger the sale of the property as a whole? Leave as little to no ambiguity to these questions. Everyone needs to be on the same page for any sort of exit strategy.
Default
Default provisions should be clearly laid out in a co-ownership situation. Co-owners need to address whether an act of default was committed, the duration of the default, the nature of the act of default from a moral and social perspective and the relationship of the individual to other co-owners. Ranges of penalties will be dependent on the reasons and duration of the default. The more severe the default, the more likely it will lead to severe consequences and potentially requiring the removal of a co-owner. It is important to have legal recourse in this area even if the default can be resolved amicably.
Desire To Leave
Co-owners may want to leave of their own accord in the future. There needs to be a section that clearly outlines the procedure of a departing co-owner in the legal agreement. You need to consider whether the departing co-owner’s share will be sold to other co-owners or will it be listed for sale.
Marriage, Children and DIvorce
Co-ownership purchases become more complicated if you co-buy a property with a life partner. In these situations, the legal agreement must comprehensively address the relationship of the parties. Marriage contracts can deal with the treatment of assets during a marriage and in the event of a marriage breakdown. Consider including this in your agreement to prevent future issues in this regard.
A co-ownership agreement will breakdown important elements between co-owners, such as exit strategies, rules and regulations of the home, and monthly financial obligations of all parties. A marriage contract, on the other hand, will address life partner-specific issues, such as equalization of your share of the property on separation, and trust provisions between you and your life partner in the event that one life partner will not be placed on the title of the property.
A marriage contract can also address what would happen with your share of the property in the event that you and your life partner have children. For instance, the agreement might include a clause that triggers the sale of your share of the property on the birth of a child or provide terms for one life partner to pay the mortgage while the other is on maternity leave. Certain terms of a marriage contract may also impact the co-ownership situation. For example, terms concerning your attendance at meetings in a co-owned house can be modified within a marriage contract to include for your life partner attending a house meeting as your proxy.
Finding a Lawyer
Find a lawyer that has some experience of draft agreements for co-ownership. It is essential that an agreement is created with all partners and the contents of any wills or spousal agreements are shared with the lawyer as they prepare your agreement so that they align.
It may seem very intimate to share will with house partners that you may have just met, but this transparency will help resolve any dispute about what happens in the home: your partners will thank you for it.
To Simplify
Your co-living legal agreement should be written with the same mindset of a will. You and your partners should think of all contingencies and remedies that make sense over, at minimum, the next five years.
The best way to do this is to sit down and discuss all of the possibilities and exit strategies with your group. Go through any and every future scenario and how you and your group best wish to deal with it. No matter how small, no matter how silly it may seem to discuss, bring up any issues you feel should have legal backing. Above all, make sure you include Rights and Responsibilities, Financial Obligations and Future Scenarios including exit strategies. Once you have had a big discussion and agreed on what you want to be included and all of the strategies to deal with them, then its time to find a lawyer to draft up your legal agreement.
Stay tuned for our final step: Step 5: Finding Your Property.