Developing a sound co-ownership agreement is key when pooling resources to get into the often prohibitively expensive real estate market.
Developing a sound co-ownership agreement is key when pooling resources to get into the often prohibitively expensive real estate market.
But it’s an underused tool, despite all the headaches and acrimony it can save down the road, says Josh Sprague, an associate with Perley-Robertson Hill & McDougall LLP in Ottawa.
It could also alleviate potential risks, both for the clients and the lawyer.
The agreements can be very simple or very complex, depending upon the needs and the wants of the individuals. And some lawyers also encourage them for couples buying a home together, particularly common law partners in Ontario.
“It’s generally not common for couples who buy property together to enter into a co-tenancy or co-ownership agreement,” says Sprague. “Generally speaking, it would be easier to go ahead and negotiate some sort of an agreement at the beginning, when emotions aren’t so high.”
Co-ownership agreements aren’t so different from cotenancy agreements, co-investment agreements and even trusts, he says, because they all set out everyone’s rights, responsibilities and obligations.
They are also flexible tools. A co-ownership agreement can apply to two friends buying a house together in which they intend to live just as well as investors purchasing one or more units together that they plan to rent out.
Sprague uses a shared family cottage as an example. When several people are involved in the ownership and use of the same cottage, a schedule of responsibilities for the property is essential, as is how payments will be made and how the property will be maintained.
A formal document could also address what happens when one of the siblings wants to sell their interest or when one dies.
“A co-ownership agreement that’s signed at the time that Mom or Dad want to start moving control over ownership of the family cottage could really help things down the road,” says Sprague.
The basics of an agreement, much like a novel, involve a beginning, middle and end, says Andrew Fortis, Hummingbird Law LLP’s real estate and corporate/commercial practices lead.
“There’s always those three stages in my mind in any transaction — the getting in, the going about and the getting out,” he says. “The real takeaway is if you’re going to enter into a co-ownership agreement you really have to pause and think about the terms of that agreement, thinking about what’s going to happen on the going in, what’s going to happen on the continuation of that agreement and what’s going to happen on the exit.”
The agreement can even out imbalances in the initial investment. If one partner goes in with a higher amount than the other but there’s a desire for an equal partnership, the agreement can lay out the terms of additional payments required over time to equalize that relationship.
But knowing the client, their situation and relationship and asking the right questions will determine how that agreement ultimately looks and whether one or more of the partners ought to seek out independent legal advice.
Mark Baker says it is important when a client purchases a property to ask if anyone else is involved in the deal, either as a co-purchaser, tenant or financier.
“The first question I ask is whether they’re moving in with someone else and what their relationship is with that person,” says Baker, principal of Baker & Company in Toronto.
His questions might be probing and could make some people feel uncomfortable, but Baker feels they are important.
When two women came to him to close a home purchase, Baker asked them about the nature of their relationship. Buying a house as friends, business partners, life partners or a married couple does play a role in how the co-ownership agreement is framed.
And there is often an assumption that a common law couple has the same rights as a married couple when it comes to property.
“Unless you’re married, the Ontario scheme of property rights does not kick in. And so you’re left in a kind of no man’s land when you’re entering into a financial transaction with your partner,” Baker points out.
“And so you have to dive right in to those personal, sensitive questions early on in the interview because it makes a difference in how you treat this joint investment. You’ve got to ask the hard questions: What kind of relationship do you have and you’ve got to be prepared for whatever answer comes back.”
Relationships do, inevitably end, either through separation or death. So discussing how that will look like at the beginning of the relationship when it is fresh is much easier than when it does come to an end and when emotions run high.
Defining the difference and delineating the relationship through the agreement is a “golden opportunity” to think about what would happen at the end of the relationship and put provisions in place for that time, Baker adds.
A married couple without a co-ownership agreement that does end up splitting up will default to a conflict under the family law regime, which can be very contentious and emotional. And post-breakup, the two parties may not be so keen to share the same way they did at the start of a relationship. That co-ownership agreement could well provide them with a course they can follow without dragging along that emotional baggage.
“I bring humour and levity to the situation because it is a serious subject and it is a bit of a dark conversation unless you put it into perspective, which is all things, most things, come to an end . . .” Baker says. He says planning in advance means clients can worry less about the outcome should they separate.
Baker warns that there are circumstances in which another lawyer might be required.
By probing the relationship and the nature of the purchase, the lawyer will distinguish if there is an unequal investment and responsibilities, which could mean it’s a two-lawyer issue, he says.
“You’ve got to remember when these individuals come in and want to buy a property together, it feels like a real estate deal where you have two people who have aligned interests, and that you can probably represent both of them buying the same property,” he says.
“When you get into the co-ownership agreement, I think you start to have two clients at that point,” he says.
Sprague points out that a co-ownership agreement — at least the offer of one — can also protect the lawyer. If a client points a finger at the lawyer for unintended consequences of co-ownership should things turn sour, the lawyer can say he did suggest a co-ownership agreement at the time of purchase.
“At least you can point back at your file and say: ‘I know as the lawyer when I have individuals buying property as co-tenants I always recommend we discuss these issues and here are the types of things we discuss when we do so,’” he says.
