What if your co-ownership partner needs to sell?
The most common concern with any long-term investment is the uncertainty of the future. When you are putting your hard earned dollars into a venture, there is always a question of “What if …?”
Entering a co-ownership arrangement to purchase a property is no different from any other major purchase or investment - you want to do all you can to minimise risk and maximise benefit.
For many people considering a co-ownership arrangement, the biggest “what if … ?” is how the co-ownership relationship might change over time.
Co-owning a property with a family member or friend offers many clear advantages when taking your first step onto the property ladder. That said, you should expect at some point in the future the personal or financial circumstances of you or your co-ownership partner might change.
The question then becomes: “How can I best prepare myself for such an occurrence?” This is where having a co-ownership agreement in place is essential to pre-empt any future change in circumstance.
For any investment to be successful, you must recognise that circumstances can, and almost certainly will change. Co-ownership is no different in that respect. So it is therefore essential to plan ahead.
You and your co-ownership partner (or partners) may be at the same stage of life and have similar goals when you enter your agreement. For example, you may be young and single and finding it too difficult to save a deposit large enough to purchase a property on your own.
Co-ownership allows you to combine your resources to achieve your common goal of entering the property market. But fast forward into the future, if one of you loses your job or decides to marry and settle down, you may find your goals have changed.
Similarly, if you are co-investing in a dream holiday home, your fellow co-investor may, over time, decide it is no longer suitable for their circumstances. Or if you have made a co-ownership investment to help your child on to the property ladder, the time may come where you’re both ready to make the next move e.g. the child buys the parents out.
“It’s essential to have a well-thought-out co-ownership agreement, not just because of the vagaries of the real estate market, but also because people’s goals and circumstances can change, particularly over the five to 10 years that a property may be co-owned,” property investment expert and author Michael Yardney said on his website propertyupdate.com.au.
Yardley cited the example of a co-ownership party that needed to immediately sell its shares in a property because the partner of one co-owner required expensive medical treatment.
“Thankfully the co-owners saw the benefit five years earlier in preparing what appeared at the time to be an expensive legal document. The agreement provided that all investors had the right to exit the property and the terms of this exit were, fortunately for all, crystal clear.”
Tenancy in common
Most co-ownership agreements are formed under a Tenants in Common arrangement.
While the term ”tenant” is commonly used to describe a person who rents or leases a piece of property, in a co-ownership arrangement a ‘tenant’ is a co-owner of the property.
Tenancy in Common is a form of property ownership wherein two or more people possess the property simultaneously and each has an "undivided interest" in the property. This means that each party has the right to transfer the ownership of their share of the property.
Unlike Joint Tenancy (typically where a property is owned by a married couple) there is no ‘right of survivorship’. If one of the tenants in common dies, each interest may be separately sold, mortgaged or willed to another.
Tenants in common may also hold unequal shares in a property. For example, ownership may be split 70-30, rather than 50-50.
First right of refusal
One of the options you can write into a co-ownership agreement when considering changes that may occur in the future is a “right of first refusal”.
Under this arrangement, if one party wants to exit the co-ownership agreement, the other parties are given the first option to purchase that co-owners share at an agreed price.
You might further decide that if no price agreement can be reached, an independent valuer can calculate the exit price. Your co-ownership agreement should outline what happens if the remaining co-owners don’t wish to purchase at that price: Can the share be sold to others? Do the existing co-owners have to approve of the new purchaser? Or should the entire property be put on the market for sale?
The key to any such arrangement is that all parties understand their rights and obligations before entering the co-ownership agreement.
At some point in the life of your co-ownership arrangement, there may be the option or opportunity to purchase the share of the other co-owner(s), or the desire to sell your share. If so, you will need to determine the price of that share.
You will need to calculate the current value of the property, rather than the price at which you purchased. For example, if you purchased together for $500,000 but the property has since increased in value to $600,000, you would expect to be buying out the appropriate proportion of the latter figure.
You also need to ensure each party has a clear understanding of what share of the property they own. This may be based not only on what you contributed to the original purchase price but what you have contributed to stamp duty and mortgage payments, as well as towards the ongoing maintenance of the property.
Note also that other costs may be involved. Stamp duty may be payable when you are changing a property title. And if the person selling their share had purchased it as an investment, then capital gains tax may also be payable by that party. (See our Ask an Expert section for more information)
Put it in writing
The key to the success of any co-ownership agreement is to ensure each party knows where they stand, right from the start. So when a situation arises that one person wants to sell or move, its whatever you both agreed at the beginning, e.g. one buys the other out or both decide to sell on the open market.