The Comprehensive Guide to Creating an Effective Property Co-Ownership Agreement Template

An Overview of Property Co-Ownership

Property co-ownership refers to a situation where two or more persons own a property simultaneously. It’s a form of shared ownership that can extend to various types of real estate, including residential homes, commercial buildings, farmland, and more. This concept is particularly common among family members, friends, or business partners who seek to pool their resources for either investment purposes or personal use.
Entering into a co-ownership agreement has its advantages. Primarily, it often makes homeownership more financially accessible for individuals who may not be able to secure a loan or afford a property on their own . It can also provide greater flexibility in the use and management of the property, as all parties involved can have a say in decisions related to the upkeep, renovation, or sale of the asset.
However, while co-ownership can provide a pathway to homeownership and investment, it’s not without its downsides. Disputes between co-owners can arise if there is a breakdown in communication or if one party feels that the other is not adhering to the terms of the agreement. Moreover, in the event of the death of a co-owner, the future of the property can become complicated, particularly if there is no formal agreement in place delineating what will happen to that person’s share.

Essential Features of a Property Co-Ownership Agreement

To ensure that the co-ownership operates smoothly, it’s crucial to have a co-ownership agreement in place that outlines the rights, responsibilities and obligations of each owner. Some of the essential elements of a property co-ownership agreement are as follows:
Ownership percentages – The percentage ownership of each co-owner should be stated in the agreement. As these percentages may change over time, for example, when additional investment is made by one owner to improve an asset, or when assets are sold or bought, there should ideally be a process set out in the agreement for how ownership percentages are to be calculated or varied.
Financial responsibilities – A co-ownership agreement should set out the financial obligations of each party going forward. For example, if the property is jointly owned, who is responsible for paying the mortgage, if there is one – is it split equally between the owners, or paid by whoever is living in the property at that time? Who is responsible for paying other property related outgoings such as council tax and insurance? How are maintenance costs to be dealt with? If the property is rented out, how much will each investor receive in rental income? Clear mechanisms should be set out to estimate likely monthly costs and how these will be apportioned between the co-owners.
Dispute resolution clauses – A property co-ownership agreement should contain a dispute resolution clause which sets out an agreed process for resolving any disputes between the owners, for example, whether through mediation or expert determination. Such clauses can help to deal with tough situations quite quickly and cost-effectively.
Sales procedures. When a property co-ownership arrangement is formed, the investors should have full confidence that they will be able to exit the arrangement when they want to, as well as being able to buy out departing co-owners at a fair and equitable price. A properly drafted exit mechanism should be built into the agreement and there should also be a process for deciding the value of the property, if applicable, which should be determined by an independent RICS registered valuer. A formula should also be put in place for calculating the amount payable from one owner to another to ensure that the arrangement is attractive to potential investors such that they can ensure that they exit without being severely out of pocket.
Re-financing – If there are likely to be a number of re-finances during the ownership period, then this should be expressly covered in the agreement, and payment mechanisms set out. It is important that no owner is left "on the hook" without their knowledge for a particular liability.
Accounting – The accounting functions for a co-ownership property must be built into the agreement – which includes invoices and accounts, taxes and administration. How input costs and administration costs are paid, i.e. who covers them and how, for example, should an external company such as an accountant be used to perform account duties; the type of accounts and taxes; who pays; will there be an annual profit or loss sharing, and so on.
Should anything go wrong with the property as a result of tenant killing the place or wilfully neglecting it, (although perhaps this is unlikely!) the co-ownership agreement should be able to stipulate how this are going to be funded. This is to avoid issues with managing an empty property and to be able to adequately manage the investment from the off-set.
Co-ownership agreements will vary from individual arrangement to arrangement, depending on the needs and wishes of each co-owner. However, an investment in an appropriate co-ownership agreement is an important and valuable one, helping to tie down all of the issues above and provide peace of mind and comfort to all owners before entering into a co-ownership arrangement.

Co-Ownership Legal Considerations

When structuring a co-ownership and property co-ownership agreement, it is critically important to obtain appropriate legal advice regarding the transaction and to draft the co-ownership agreement with consideration to the legal position. An experienced commercial lawyer should be able to steer a purchaser / owner through the pitfalls and litigation that can arise, particularly in dealing with transfer duty land tax. They will also be able to draft provisions that provide protection to a purchaser in the event of one of the parties bankrupting or becoming uncontactable.

Available Templates

Choosing a template can be a challenge as there are many providers that sell property co-ownership documents. They will often typically have a disclaimer that it is your responsibility to ensure the document is suitable for your needs, which really means, we can’t be bothered to check that what we produce is fit for purpose, so you need to check it is suitable.
If you want to use a template, and there are many good websites such as Lawpack, DOCDQ etc, then I advise that you go through each paragraph and make sure that it is suitable for your purposes. Cross out paragraphs that do not apply to your situation and add paragraphs that should be included. In addition, you may want to consider what would happen if 2 of you wanted to sell the property and one did not. Who can force the sale? The answer lies in the answer to these questions.
Many templates do not cover all scenarios or they will use the purchase price to determine share value on subsequent sale or transfer. This may not be suitable if you buy the property for £140,000 but spend £100,000 improving it and requiring further loan funding. Likewise, there are no standard clauses for pre-emption or right of first refusal. Becoming a property owner through co-ownership can be a rewarding yet challenging experience. Therefore, from the start, it is crucial to agree on the terms and conditions of that ownership. A well-drafted property co-ownership agreement sets out clearly the rules governing the relationship between the owners. It deals with matters such as decision-making procedures, how any profits will be shared, and what will happen if one owner wishes to sell. Without a co-ownership property agreement, the property co-owners will be subject to the statutory default provisions of the Children Act 1989 & Trusts of Land and Appointment of Trustees Act 1996 (TLATA) which may not result in the outcome envisaged by the parties.

Customizing a Co-Ownership Agreement

The process of tailoring a template document might involve adjusting the language to reflect the particular nuances of a shared-property relationship. In Section 2 of their agreement, most people will want to make notes on the property in question, but they might also want to add a sentence or two about the reasons for the co-ownership arrangement (i.e. a second home to spend weekends and holidays at). Some people co-own property for purely financial reasons; others do so for social reasons. Your co-ownership agreement should reflect the motivations of each co-owner (understanding that the motivations might not be the same!).
The agreement should also address the expenses entailed by ownership. These items could range from property taxes to gardening services, and the co-owners will want to know whether they are opting in to covering shared expenses under the frame of 50/50 or some other configuration . For example, when discussing property taxes, the co-owners should note whether the latter will be divided into equal sections, or if the portion owed by each person will reflect the percentages of the land owned. Other expenses should be broken down similarly; if one co-owner will be responsible for more land than the other, he or she should expect to cover a larger percentage of expenses attached to that land.
To that end, someone writing a co-ownership agreement should also explain how and when expenses should be paid. Will they be allocated on a monthly basis? A yearly one? Will the money be sent to the co-owner responsible for paying property taxes, or will it be divided anyway in the process of paying taxes? Writing out a plan like this not only serves to promote understanding among co-owners, but offers an invaluable resource in case the situation becomes contentious.

Avoiding Pitfalls in a Co-Ownership Agreement

One of the most common mistakes in the use of property co-ownership agreement templates is failing to adapt the terms of the agreement to the specific needs of the owners. A property co-ownership agreement is a layer on top of the law; it cannot override statutory provisions. Sometimes people think they are circumventing the law by amending it with a contract, but nothing could be further from the truth. For example, there is a section of the Landlord and Tenant Act that states who is responsible for repairs. It doesn’t matter what you agree in a property co-ownership agreement, if you sign that contract you really are agreeing that you will do as you’ve agreed, and you are probably bound, unless one party has severely breached its obligations under the agreement, to perform your side of the bargain.
When mistakes are made in property co-ownership agreements it’s generally for two reasons. Either the rights of co-owners have not been fully considered, or worse still, the co-owners haven’t even considered whether or not a property co-ownership agreement might be needed in the first place until they’re well into the purchase process. There are two equally common scenarios that arise from misunderstanding of the position.
In the first, two friends are pooling their money together in order to buy an investment property together. They don’t review the risks and rewards, and just assume that it is joint ownership. There may be a disagreement on management, or a falling out between the two, and very soon after the agreement is signed one of them walks away, refusing to comply with the terms of the agreement. That’s not an unusual result, but it’s not the only one. The other co-owner may say, "You owe me at least 50% of the market value of the property, and we’ll get this done at a time that suits me." At that point the "default provision" of the Trustee Act (that states that one party can buy out the other for a quarter of a million, even if the property is worth a million) comes into play. Many property co-ownership arrangements fail because the parties have neglected to put in place a formal agreement, and the refusal of one party to perform their end of the bargain gives rise to disagreement and later dispute.
The second most common mistake is to elect to use a standard property co-ownership agreement template without fully appreciating the nature of the obligations contained within. For example, it is common for people to include obligations to protect the other party if one owner’s rights are challenged by a third party. This was recently seen in a recent case concerning adverse possession when two adult children were forced to remove themselves from a property notwithstanding a deed of gift that protected their rights in it. One of the children convened with her brother and together they decided to negotiate with the landlord and offer to vacate the property. Could the brother recover his share of the proceeds of sale, or was he bound by the terms of the co-ownership agreement?
As it turns out, the agreement was worded in such a way that the proceeds were divided across the same basis of ownership that each party owned the property – so the brother did indeed have to share in the proceeds of the sale that real property with his sister. He was very unhappy at this result. If no agreement had been drawn up, he would simply have had to abide by the provisions of the Trustee Act (which celebrates its 25th birthday next year). But because they had an agreement, he was bound to abide by its terms. Ensure that you read the agreement thoroughly and understand the obligations contained in it before signing.

Managing a Positive Co-Ownership Experience

Co-ownership relationships require more than initial planning; they need ongoing attention and care. To foster a successful co-ownership dynamic, several key strategies should be considered.
First, it is critical to maintain regular communication among the owners. This can take the form of periodic in-person meetings, emails, or even phone calls, but the goal is to have a regular touchpoint to check in on how each party is feeling about their ownership share, any concerns they have about the property, and any suggestions for improvements.
Second, regular reviews of the co-ownership agreement are essential to ensure that it remains current and relevant. As time goes by , circumstances may change – such as a new addition to the family or a change in job situation – that may make changes to the agreement necessary. Failing to update the co-ownership agreement can lead to misunderstandings and potential disputes down the line.
These disputes can be avoided with conflict management techniques that allow parties to properly address problems before they become larger issues. For example, when disagreements do arise, the parties should use effective and clear communication while remaining respectful of one another. This often means being able to listen to the other party’s perspective and view points, even if those differ from your own, and equal compromise should be a priority.
Ultimately, following these practices will help ensure that the co-ownership relationship is well-managed from beginning to end.