Amid the competitive property market in which we find ourselves presently, many first home buyers are exploring co-ownership arrangements with family members and friends to help secure a property, and a place on “the ladder”. Co-ownership can help buyers pool resources together to overcome the hurdles of meeting equity margins to obtain bank lending for a purchase, and then to service the debt once lending is obtained.
With these advantages comes the potential for disputes between co-owners. In Robertson v Robertson [2021] NZCA, two brothers found themselves in a deadlock, unable to deal with a property they owned together for over 40 years. This case highlights the risks of proceeding with co-ownership without clear understanding between the parties.
Exploring the decision of the Court of Appeal in this case demonstrates how the Courts will make a binding decision in respect of a property when the co-owners are at an impasse. With these considerations in mind, it is also useful to discuss the basic ingredients of a co-ownership agreement, which will help to avoid many of the common issues that can arise.
Robertson v Robertson
The Robertson brothers owned a Northland property in equal shares since the 1980s. They subsequently had a falling out and could not reach an agreement on how to deal with the property. The property had residential development potential but was also used by one brother as a boat building business.
The High Court (upheld by the Court of Appeal) used their power under the Property Law Act to order the property be sold at auction, with either brother able to bid on the property to purchase it outright. An auction was ordered as the brothers both obtained competing valuations and could not agree on the property value. In making an order under the Property Law Act, the Court must consider the number of co-owners and the extent of their shares, the value or any contributions or improvements made by them and any other matter the court considers relevant.
The basic terms of a co-ownership Agreement
The decision highlights the need to have these matters agreed before a property is purchased, to avoid costly litigation in resolving disputes that can arise. Having the following points agreed before proceeding will be a good starting point to a co-ownership Agreement:
Contributions to the purchase price, acquisition costs and outgoings
An agreement should set out the cash contributions made by each co-owner to the final purchase price of the property. This contribution should be reflected in the percentage share each owner has in the property as tenants in common. For example, a simple arrangement will have two parties owning a property as tenant in common in equal shares, with each party having a 50% share in the property.
The Agreement can also determine the share of acquisition costs in buying a property, as well as the apportionment of outgoings such as rates, power, maintenance, and repairs during ownership. If only one party is to occupy the property, it may be preferable to have an unequal division of certain outgoings such as power.
Debt and liability
A common hurdle to co-ownership is resolving bank lending arrangements. It is straight forward if all co-owners are borrowing equal amounts to complete the purchase. However, it becomes more complicated if only one party requires lending to fulfil their share of the purchase price, while the other doesn’t. A bank lender will require a mortgage is granted over the entirety of the property, even if only one owner is a borrower. A bank may also require a guarantee is given by the non-borrowing owner, which can be risky for this owner if the borrower defaults on their payments to the bank. The co-ownership Agreement can make it clear that only the borrowing owner is responsible for servicing the debt and include and indemnity against any loss suffered by the non-borrower due to the other owner’s default. Finally, the agreement can also contain provisions to prevent either party from increasing the borrowing that is secured against the property.
Disposal of property
The sale of a co-owned property is as important as the purchase. Co-owners should generally share the profit or loss in the sale of the property proportional to their initial contributions to the property. If one party borrowed to pay their share of the purchase price, any debt owing should come out of the borrower’s share only.
When a co-owner wishes to sell their share of the property, it is generally offered to the other owner in the first instance, with the value determined by independent valuation. If the other owner does not wish to purchase the other share (within a pre-determined timeframe), that triggers an open market sale to a third party.
Death of one co-owner
A co-ownership Agreement should anticipate the unexpected death of any co-owner. In event of one co-owner’s death, the surviving co-owner is offered a first right to purchase the deceased’s share from their estate. If the surviving co-owner does not exercise this right, this again triggers an open market sale, with the deceased’s executors acting in place of the deceased co-owner.
Dispute resolution provisions
Despite the best intentions, disputes can still arise in a co-ownership arrangement. Dispute resolution provisions can help to clarify the process for resolving issues as they arise. Co-owners can require disputes to be taken to mediation in the first instance, which can be a desirable alternative to arbitration or litigation.
Looking ahead
The above is not an exhaustive list of matters to consider, even with a basic co-ownership Agreement, there are plenty of terms to discuss and resolve between proposed co-owners. A typical sale and purchase Agreement will require no more than ten working days to satisfy a purchaser conditions such as finance approval or due diligence. This can put a lot of pressure on potential co-owners to finalise an agreement between themselves in such a short timeframe. It is accordingly recommended that proposed co-owners sit down and finalise the terms of their agreement before an offer on a property is made and while all parties are focussed on the transaction, to ensure that an appropriate agreement is in place as soon as possible. This is especially the case if bank lending is required by any party, where the bank’s security requirements will need to be factored into the agreement also. In our experience, if the terms of the co-ownership agreement are not documented at the time of settlement, the distractions of a busy life can often mean the agreement never gets finalised.
If you would like assistance in preparing a co-ownership agreement, do not hesitate to contact our property solicitors, who will be able to assist.
