Australia: The most important contract for joint buyers may not be the one they sign to buy the property …
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While buying a property with someone else is exciting, it is also risky. Before rushing to sign the purchase agreement, it might be a good idea to determine whether signing a condominium agreement is appropriate in your situation.
What is a co-ownership agreement?
A co-ownership agreement is a legally binding document concluded between 2 or more co-owners. This document will include terms to provide certainty as to how each co-owner will navigate the various issues related to land ownership. Terms serve as a record of each co-owner’s intentions as to how issues should be resolved and can avoid the need for costly legal action, or worse, a breakdown in the relationship between the co-owners.
Forms of co-ownership
The nature of the conditions included in a condominium contract will depend on the type of legal property created by the purchase contract. It is therefore necessary to first understand the two main types of co-ownership available. In New South Wales, property can be owned by 2 or more co-owners as “tenants in common” or “roommates”.
Common tenants are the places where the property is distributed among the owners in defined shares. While each owner is entitled to physical possession of all of the property, legal ownership is divided into shares. Each owner is free to sell or treat their share as they see fit (unless there is a co-ownership agreement in place). Unless otherwise specified in the land purchase contract, there is a presumption that the jointly purchased land will be held as a common tenant.
Co-ownership means that the owners own the property together equally and jointly, as opposed to each owner having their own allocated share. No owner may sell or transfer his share of the property without the consent of the other co-owner (s). When an owner dies, the share of the deceased owner is automatically acquired to the surviving owner (s).
Risks associated with co-ownership of a property
Failure to prepare and sign a co-ownership agreement can be a costly mistake. If one owner wants to sell the property but other owners do not, disputes can arise and court intervention may be necessary. There are also situations in which you may find yourself legally liable for unforeseen costs.
For example, when the co-owners have jointly signed a mortgage loan agreement, all the owners are generally jointly and severally liable for the debt. This means that you are responsible for 100% of the repayments and the debt, when another owner refuses to pay their share.
Another problem with borrowing arises in circumstances where a co-owner seeks financing for the purchase of a second property. A bank will assess the total loan amount owed on the first property as a liability on behalf of the owner looking to buy, which can negatively impact the ability to borrow.
Drafting your co-ownership agreement – elements to consider
The terms included in the condominium agreement should be broad enough to provide certainty as to the rights and obligations of each owner in all possible circumstances. Depending on your situation, it may be a good idea to include terms that address the following issues:
- how the responsibility is distributed among the co-owners for various expenses such as maintenance costs, mortgage payments, tariffs and bills
- if and on what basis each owner has the right to access the property
- the acceptable amounts to be received by each owner in the circumstances where a property is rented, leased or sold
- how rental income or sale proceeds are to be distributed to co-owners
- what limits are imposed on co-owners with regard to their ability to dispose of their share of the property
- whether the remaining owner has the right to purchase the exiting owner’s share of the property
- how ownership disagreements are to be resolved between co-owners
The implementation of a co-ownership agreement will bring protection, peace of mind and comfort to the co-owners. It can also eliminate the need for costly lawsuits in the event of a dispute. If you are considering a collective property purchase, we recommend that you seek legal advice regarding the preparation of a co-ownership agreement.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.
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