5 things to keep in mind on property co-ownership
When unrelated individuals share the ownership of a home or condo, it’s wise for them to take the time at the outset to prepare a co-ownership agreement. The two most common forms for holding title to co-owned property are (a) holding title to the property in the owners’ individual names and (b) forming an entity to hold title, with the entity owned by the individuals. The form used depends on many factors, and affects many issues, including how the property can be financed (if at all), the owners’ respective tax benefits and burdens from owning the property, the owners’ potential liability to third parties injured at the property, the potential for protection from the owners’ creditors, and how the property will pass upon the death of any owner. The choice should be made only with professional advice. Regardless of how title is held to the property, here are five topics that should be addressed in any co-ownership agreement:1. Usage Rights. The co-ownership agreement should provide firm and fair guidelines for when the property may be used by each owner. Many co-owners create a rotating schedule so that key periods (such as Christmas and other holidays) are allocated equally. A fixed schedule, however, doesn’t prevent the owners from informally re-arranging their occupancy periods. 2. House Rules. The co-owners should have a clear understanding of the dos and don’ts of usage. For example, will pets or smoking be allowed? May an owner allow friends and relatives to use the property? May any owner put the property into a rental management program for their use period? Are the owners required to have the property professionally cleaned after each use? 3. Management and Financial Issues. Unless the co-owners hire a professional property manager, the co-ownership agreement should designate the owner (perhaps on a rotating basis) who will handle the bills and other paperwork for the property. The agreement should include a list of these duties, and provision should be made for when the designated manager cannot or does not perform the required tasks. The likelihood of disputes over money will be reduced if the owners agree to an annual budget in advance, including the anticipated expenses and income (if any), coupled with a schedule of regular contributions from each owner. The budget should include building a cash reserve so funds are readily available to pay for needed repairs and replacement. 4. Making Decisions and Resolving Disputes. It is not uncommon for co-owners to have a difference of opinion on crucial issues, and a well-drafted co-ownership agreement will contain a dispute resolution process. If, for example, a home were co-owned by two couples and one couple wanted to remodel but the other couple didn’t, the result could be a stalemate. Many co-ownership agreements include a requirement that disputes be mediated by a third party. 5. Exit Strategy. When co-owners buy a property together, they usually have similar goals. But, sooner or later, their interests may diverge because of changes in their individual financial situations, relocation, divorce, death and other events. The co-ownership agreement should address whether one owner can sell or give his interest to an outside party and whether any owner can force a sale of the entire property or another owners’ interest. Co-owners often retain a preemptive “right of first refusal,” with special rules for disposition to a relative.When co-owners address important issues at the outset, it is more likely that they will have a smooth relationship. For a longer list of issues that should be addressed in any co-ownership agreement, check our firm’s website at http://www.BreckenridgeLawyer.com and click on “Co-Ownership Questionnaire.” Noah Klug is an attorney with the Breckenridge law firm of Bauer & Burns, P.C. He may be reached at 970-453-2734 or Noah@BreckenridgeLawyer.com. This article is intended as a general overview; consult a professional for advice on your particular situation.
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