Welcome to this edition of It Depends. Today we’re talking about whether you need to have a co-ownership agreement.
What is a co-ownership agreement?
A co-ownership agreement is a document that sets out the rules generally in relation to the ownership of a property where there is more than one owner.
What should I include in my co-ownership agreement?
It depends. What’s important to you in your circumstances will be different to the next person. What you want to cover in your circumstances will depend on what type of asset you’re investing in, who your co-owners are and the issues that you foresee arising in your co-ownership of that particular asset. However, there are a few key issues that you should consider for every co-ownership agreement. They include what ownership percentages you have, if there are any circumstances where you foresee that changing in the future, what obligations each party has to contribute funding to the property. That is particularly important if you’re looking to do things to improve the property, such as develop it or extend it. What happens if someone wants to get out of the property? How are you going to fund that and what valuation methodology will be used? Other things that are important to consider are things like, well, what happens if someone stops paying their share of the mortgage? Can you forcibly exit them? How do you do that? And for what valuation? It’s also critical to deal with situations such as when the property can be sold. Do you both need to agree or are there certain circumstances where you pre-agree before entering into that arrangement that the property will be sold and the profits distributed?
Do I need one?
It depends. Whether you need a co-ownership agreement in your circumstances will depend on a few key issues. One main one is whether you want to be treated as tax law partners. As you jointly own the asset together the starting position for tax purposes is that you will be treated as partners. However, in some circumstances, that’s not the outcome that we’re looking for. If we don’t want to be treated as tax law partners, then having a comprehensive co-ownership agreement that governs the relationship and clearly sets out that we don’t want to be partners for tax purposes is a critical document for you. However, in our experience, it’s also important to have one whilst we’re all getting along and entering into the investment on good terms, to have a document that sets out what will happen and what the obligations are for each of the continuing owners of that property moving forward. If you’d like to talk about co-ownership agreements or whether you need one in your circumstances, please contact a member of our team.