A written co-ownership agreement maximizes the odds of a successful relationship. It does so in two ways. First, it documents the parties' understanding. The best time to decide what each person gives and receives, and when, is before any disagreements arise. Secondly, creating the agreement means that the parties must think about and resolve issues they otherwise might not consider. Resolution is much easier before the parties have a stake in the outcome.
The issues to deal with in the co-ownership agreement include the following:
- Contributions: How much will each party contribute to acquire the property, and to pay the on-going expenses? Since expenses include not only the mortgage, taxes, and insurance, but also maintenance and repairs, they will likely include unexpected outlays. Although expenses are usually shared based on ownership percentages, problems often arise over who decides when expenses are incurred. What is the consequence if a party doesn't pay their share?
- Percentage Ownership: Parties often assume that they are acquiring equal interests, regardless of how much each contributes. The interests are equal only if the owners so agree. A written agreement will clarify all parties' intentions before the money is spent.
- Sale or Transfer: The owners assume that they will only be dealing with each other, people that they know and trust. Unless the parties restrict the right to sell or transfer an interest, any owner has the right to sell their interest to a stranger or demand sale of the entire property.
- Management: Typically the touchiest issue is the making of decisions about the ownership, use, and operation of the property. Without a pre-arranged management structure, the simplest problems can lead to discord. The usual mechanisms to solve management issues include granting one owner the authority to make decisions in his or her discretion, or reaching consensus by a majority of owners.
- Possession: Does one owner have exclusive use of the property? If co-owners occupy the property at the same time, how is the space allocated? Most importantly, does the agreement give an owner the right to allow third parties to use the property, e.g., friends, roommates?
- Liability: The parties should agree that an innocent owner will be indemnified by a negligent owner for wrongful acts. This gives protection in the event of third party claims or lawsuits. Without such a provision, the innocent suffer with the wrongdoers.
- Termination/Sale: The most important issue is the "exit strategy," i.e. how to end the relationship and dispose of the property. This issue can be addressed with right of first refusal, sale upon predetermined events, such as a certain date, and buy out upon death.
Without an agreement, the alternative is costly litigation.
The best arrangement is one which is thoughtful and comprehensive. By addressing all possible contingencies before they come up, the parties can easily structure a neutral approach-one which meets each person's needs. Putting the agreement in writing adds permanency to the arrangement, surviving the passage of time or substitution of parties.
If you trust each other enough to invest together, do it the right way with a well-crafted co-ownership agreement.