Co-Ownership Agreements Explained
When two or more individuals seek to acquire a property, either commercial or residential, it is often necessary for the parties to enter into an agreement with respect to the ownership of the property ("Co-Ownership Agreement"). This is especially important in situations where the property is titled in one party’s name as opposed to both party’s name and/or where one party is making a greater contribution towards the purchase of the property. Such agreement will set out the terms and conditions by which the parties own and/or control the property.
It is important to note that, for tax and liability reasons, the parties generally take title to the property under a corporate entity (i.e. Corporation, Limited Partnership, Limited Liability Partnership) or another entity that best suits their needs (i.e. Tradename , Joint Venture, Venture, Non-Profit, Trust, etc.). While we will not get into the specifics of such entities, it is important to distinguish between a Co-Ownership Agreement and a Real Estate Purchase Agreement (where parties purchase property and then take title under a single entity). The main purpose of a Co-Ownership Agreement is to set out the parties’ expectations and intentions regarding the property and ownership of said property whereas a Real Estate Purchase Agreement merely sets out the terms and conditions by which the parties acquire a property. More simply, the Co-Ownership Agreement deals with the ownership and control of a property whereas the Real Estate Purchase Agreement deals with the purchase and sale of a property.
Typical Provisions in a Co-Ownership Agreement
Your co-ownership agreement should always include:
- Ownership Shares Calculate the relative ownership used only as a rough guide or rule of thumb with the actual shares based on monetary input or capital value.
- Stipulated Responsibility Owners can be held directly responsible for conditions and repairs by stipulating that certain conditions or repairs are that individual’s responsibility. also outline general expectations for maintenance and repairs, such as "owner responsibility".
- Repairs List the individual’s responsibilities
- Maintenance
- Insurance
- Resale
- Decisions Right of veto for each owner or a set percentage of approval required for a decision to pass.
- Dispute Resolution set out the procedure for resolving a dispute. This could be an informal process in which the owners meet to discuss the issue then come to an agreement on a solution.
- Improvements will the work be done by the owners or an outside third party.
- Charging of fees Owners can charge fees to one another in a co-ownership agreement. and how fees will be dealt with in the sale of the property.
Sample Structure of a Co-Ownership Agreement
A Sample Co-Ownership Agreement will contain the following sections and headings, specific to the people involved in the arrangement, the asset or property involved, and the terms negotiated and agreed to by the parties to the agreement.
Preamble: This section provides a description of what’s in the document and how the co-owners have decided to share the ownership of the property. Definitions / Interpretation: This section contains the definitions of words and expressions used in the agreement so as to make it easy to read and avoid confusion. Contracts typically contain a definitions section that is populated with abbreviations, acronyms, and words that have been defined for the purposes of that agreement only. Parties: This section identifies the parties to the agreement. Recitals: This section is a form of introduction to the agreement. It contains the background of the property that is the subject of the co-ownership agreement and the intent of the parties to the agreement and the deciding factors in setting out the agreement. Agreement: This section contains the actual agreement between the parties. The parties sign on this page.
Legal Insights for Co-Ownership
When preparing or entering into a co-ownership agreement, consideration should be given to the rules and requirements imposed by the applicable jurisdiction. Canadian tax laws (the Income Tax Act (Canada)) contain provisions that provide rules for allocating income, losses, deductions, credits, etc. from the co-ownership on a fair and reasonable basis considering the particular terms of the co-ownership agreement. The determination of the appropriate sharing percentage is based on each parties contributions (both in terms of cash and in terms of services), risks undertaken and functions performed. Although the income tax rules do not specifically require that a written co-ownership agreement be prepared, a written document is certainly advisable as it provides clear evidence of each party’s understanding of the applicable rules and their respective rights and obligations and how such items will be shared amongst the co-owners.
When dealing with real property, applicable provincial or territorial laws are also relevant, as is any applicable municipal law. These laws may impose registration and disclosure requirements that will need to be addressed. For example, under the British Columbia Land Title Act (BC) such requirements apply to interests in land that are registered at the LTO. Similar provisions are contained in the Ontario Land Registration Reform Act. Failing to comply with these disclosure obligations can result in negative tax consequences; for example the VU becomes a revocable trust under the BC Trust Act and is subject to a punitive 104%/52% penalty tax rate on its income in the first two years after it ceases to be unincorporated.
Other tax law considerations include that the VU may be subject to the property management rules (e.g. Sect. 67.4) that will include a "reasonable" salary offset and interest on partners’ loans and thus impact the deduction of losses. This can, depending on the amount of interest on partners’ loans, negate the anticipated benefits of the co-ownership.
The Income Tax Act also has rules (Part VI.2) to deter the shifting of income and gains to beneficiaries subject to lower rates of tax, especially minors or trusts (such as the VU). The Part VI.2 tax payable by the trustee of an unincorporated inter-vivos discretionary trust on certain distributions of income or capital may be more than the amount of tax that would otherwise have been paid by the beneficiaries receiving the distributions and might discourage co-ownership if most of the co-owners are minors.
Taxpayers should consult with their tax advisors prior to entering into a co-ownership arrangement in order to discuss the issues noted above as well as other considerations that may arise.
Creating a Co-Ownership Agreement: Expert Advice
When preparing to draft a co-ownership agreement, it is important to clearly communicate the obligations, duties, responsibilities, and rights of each co-owner in order to avoid potential future disputes. It is equally important to discuss with fellow co-owners the issues that may arise respecting property rental or distributions, and account opening or accounting details. All issues must be properly discussed and resolved before the parties sign an agreement.
In addition to the above, the following are some expert tips that co-owners should keep in mind when drafting a co-ownership agreement:
In general, co-owners who wish to have an agreement prepared should stipulate in the agreement that the co-owners are under no obligation to accept future offers to purchase even if they want to sell their share, which should protect them if they do not agree on the offer price. In other words, an offer to purchase that is accepted on behalf of all co-owners must be one that the co-owners have all agreed on . Co-owners should review their share of ownership and net worth to ensure they do not inadvertently give away too much of their assets. Co-owners may consider including terms in the co-ownership agreement that will help to add value to their respective shares, such as: keeping clear, complete, and updated records; keeping track of personal property damagementexpenses, taxes, etc.; and ensuring common expenses are paid in full.
Co-owners must take time to consider the obligations they are responsible for in the co-ownership agreement, and assess the risks involved in accepting responsibility. Further, co-owners should not agree to the terms and conditions of the co-ownership agreement if the terms are unreasonable or the expectations are unrealistic.
Like other legal documents, co-owners should seek the advice of a lawyer if they plan to enter into a co-ownership agreement. A lawyer can ensure that co-owners are obtaining proper representation and that the agreement falls in compliance with the applicable legislation in Ontario.
Frequent Errors in Co-Ownership Agreements
A co-ownership agreement is a delicate document that addresses many different aspects of a collective ownership. The fact that it presents the particularities of the co-owners’ situation, it could be easy to overlook some crucial clauses or address them imprecisely, which could prove to be problematic later on down the road. The following list comprises of some recent frequent mistakes made by clients and candidates. The goal is to rectify these errors and avoid them in the future.
- Cancellations will always be subject to more favourable legislation in the future. This is because despite the cancellation in your co-ownership agreement, nothing stops a future amendment to the Civil Code about family patrimony from applying to your situation. Be cautious about stating despite the nullity of the clause that it cannot be cancelled otherwise by the present co-ownership agreement. The outcome that results might not be the one you had initially conceived.
- Weeks and weekends? There is no word in the Civil Code to describe a day that ends on Tuesday at noon, or a week of 10 days. If you plan to share such means, consider using a more precise formulation that refers to days with a standard, established duration.
- What happens if a co-owner dies? Upon the death of a co-owner, his/her successors are bound by the co-ownership agreement for the remaining term, up to 25 years. However, any clause otherwise more favourable will prevail. Be careful then about how you state that the co-owner pays families above and beyond his/her quota on a regular basis to avoid any issues with the Civil Code.
- Name of the registry: Several Choices. The name given at the register does not always match the one the province formally adopts, and it can differ from the one used by the owners amongst themselves. The best example is the Torrens registry versus the registry of immovable property: The Torrens is a registry in the office of land registration in Nova Scotia, British Columbia and New Zealand, for example, while Québec also has a registry called "the register of personal and movable real rights in immovables" that has very little relation to personal rights and movable property. This results in useless discussions and delays when dealing with the government.
- The "family exclusivity": a euphemism for "the non-existence of other heirs". Was there a pre-marital agreement with respect to the establishment of conjugal union? Even if it is a reservation, any court order would be disposed to ignore it if a dispute arises between the children of two successive unions. It’s even worse if the children have previously succeeded to the estate of their deceased parent before the new union.
- Disparity in rights: It is not unusual that spouses, whether married or not, who makes more money than his/her partner pays for a bigger share, or negotiates an ameliorated support appropriation. However, this is often discouraged in co-ownership contracts, where everyone is in theory equal even if their contributions differ.
Resolving Disagreements in Co-Ownership
Disputes between co-owners are not uncommon. Situations may arise such as one owner is deliberately trying to keep the property from the other co-owner or one owner tries to "squeeze" out the other. Right of first refusal, refusal to offer a buyout price, purchase for non fair market value, and so many other issues arise. Many times, a property cannot be partitioned and sold into more than 2 pieces by a judge so as to accommodate the co-owners, and if a buyer is not willing to purchase the property as a whole, the judge must decide what to do. Florida eminent domain laws give the judge a great deal of latitude in how he or she handles the partition and sale of a property in its entirety, and the best thing that can be done by the co-owners is to sit down and negotiate a settlement (the best approach) or consider mediation as an alternative to litigation.
Mediation is a formalized process whereby a third party mediator sits down with the people involved and helps them try to reach a compromise without going to court. The mediator first meets with each of the parties, often separately, and then goes between them to see if a settlement can be made that is acceptable to both. Mediators are often experienced attorneys with a bit of experience in real estate law who can help you avoid going to court while still protecting your rights of ownership.
In the event that mediation does not seem to be the best approach, then you must go back to court. If there has been some sort of fraud or bad faith on the part of the other co-owner(s), the judge should award your client the property in its entirety. If there has not been, then the judge probably will order the joint ownership to continue and will mandate that the co-owners proceed with a partition suit that may very well lead to a forced sale of the property. Depending on the circumstances, co-tortfeasor type liability or offsets for the property struck across to reimburse the other may be forthcoming.
Case Studies of Co-Ownership Agreements
To illustrate best practices and lessons learned, we’ll review three scenarios where co-ownership agreements were employed successfully or fell short of expectations, as well as how each situation was addressed.
Case Study No. 1: Unenforceable Restrictions
Penny purchased a lucrative investment property before she even knew her fiancé Alex. Penny, an architect, saved her money for years with the intent of purchasing rental property when she was ready. After three years of dating, Penny and Alex decided they were ready to marry. Prior to signing their prenuptial agreement, Penny asked Alex what he thought about including a co-ownership contract for her investment property. Alex was reluctant but Penny insisted. She was adamant that she wanted to protect her asset in case their marriage didn’t work out.
On their honeymoon, Penny handed Alex the contract and he reluctantly signed it on the plane. When Penny became ill with the flu at their first stop, she decided not to consult a doctor overseas. Alex disagreed, insisting they see a doctor and filed a temporary restraining order on the property, preventing Penny from accessing the property. Penny had not anticipated Alex would become so controlling after they were married, nor had she anticipated that her health would quickly decline. She ultimately ended up hospitalized abroad for a few weeks and when released to recover at home, she realized that Alex had no intention of returning the property, much less their marriage.
Penny wanted to get the property back but was unsure if she had any rights in Texas where they married instead of her native England. Alex claimed the property was his and even shared a photo of himself walking away from the home on social media. The co-ownership agreement they signed was not valid in England and even if it were, there was only a verbal agreement in person that the contract would remain in place even if they divorced. A contract that is not in writing typically cannot be enforced, and the arrangement could not be proven in court given that Penny was in a different country for most of their marriage.
Even if the property was in good standing and in Texas where they married, many jurisdictions recognize verbal and oral agreements, and it could have been enforceable. Very few people would agree to any contract without first having an attorney review it. Now in England, Penny sought a divorce and sought to have the contract invalidated, at least in Texas.
Case Study No. 2: Bad Arrangement
Pat and his business partner Jackson signed a business co-ownership contract. Every time a profile was created for a new clinic, it began with "Co-ownership since 2010," the year they formed their company. Pat was unhappy with their formed company. He felt that Jackson made all the decisions for the four locations, and was always quick to dismiss some of his ideas. One day, while watching movies in Jackson’s office, they began arguing about their management and each member’s role and responsibilities. In a fit of anger, Jackson threw a coffee cup and hit Pat in the eye. They were rushed to the hospital immediately, and Jackson was charged with battery. Pat sought to exclude Jackson from his own business, but the courts found no breach in the contract .
Pat simply didn’t understand that even though Jackson had made the decision without consulting the other managers, he had the ability to do so based on their agreement. Based on their contract, Jackson owned 51% of the company while Pat owned 25%, and each other manager owned 12% so they had only 24% combined while Jackson maintained 51% of the decision-making power. If Jackson made every decision involving the business, he had the right to do so even if it caused conflict.
Jackson and Pat established a friendly relationship after the incident, and decided to work as partners again so they could both run the business, rather than selling it or dissolving the agreement. They remained partners until half of the clinics were sold but decided to try a buy-sell agreement to create more clarity and accomplish their larger goal of opening more clinics.
Case Study No. 3: Patent Pending
Willie’s brother, Sam, was his business partner. Sam had a great idea for a device that would make it easier for people to carry several bags of groceries at once and Willie loved the idea, but wasn’t so thrilled about dealing with contracts or dealing with lawyers. He suggested they incorporate the business to protect each other, but Sam never got around to it. He figured that he was going to live in Willie’s house temporarily while they built the business and the contract was unnecessary. At first, they were able to share one car with only one set of keys so that it would be easier to run the business. Before long, however, Sam moved out, then broke up with his girlfriend a month later. He told Willie that he was going to move to California to work with Will’s cousin, Joe, who started a similar business. Willie was not thrilled since he had not even seen the business plan and he had invested nearly all of his money purchasing the machines and materials. Willie filed a temporary restraining order on Sam and the business for anything other than to pay rent but Sam had already moved out of town, then Willy learned that Sam incorporated the business in California. Sam registered the invention in California and was planning to seek a patent even though they had not decided on the partnership agreement. When just starting out, many entrepreneurs feel confident enough to "wing it" and trust each other enough not to create a written agreement. He forgot that the devil is in the details.
When Sam returned to Texas to learn about setting up his business, Willie’s lawyer filed a declaratory judgement. He did not have the money to pay a retainer but Willie’s lawyer agreed to wait until the case was settled. He had enough money to pay for the lawsuit and fees and the agreement included a provision to pay three months of rent for all six months of Sam’s unpaid rent.
They learned that it is essential to establish an agreement, even a temporary one, as soon as possible since the first steps set the foundation. It is often wise to discuss any conflicts out of court rather than unnecessarily complicating matters with attorneys and judges. It was also wise of Sam to incorporate. Even though it was not "legally binding," he was able to seek a patent in California. Willie still needed to file a declaratory judgement while taking steps to correct their previous omission.
