In today’s real estate market, with rising interest rates and stricter mortgage rules, it is becoming more and more difficult and unrealistic to afford a home using your own means alone. We have been noticing an increase in parents helping their children buy their first home by agreeing to co-sign on their mortgage and/or providing the bulk of the down-payment funds. There has also been a more pronounced need for adding people on title and on the mortgage in order to qualify for a mortgage or mortgage re-financing. More unique is the recent trend of real estate speed-dating events, where people can meet strangers interested in purchasing a home together by pooling their funds and credit scores; through this arrangement, each of them can finally break into the property market and start to build that tantalizing homeowner benefit: home equity.
This increasing shift to co-ownership creates a true need for well-drafted co-ownership agreements. A co-ownership agreement can be a very useful mechanism for a variety of reasons when more than one owner is holding title to property. Even when buying a property with friends or family, there is the chance of disagreements or disappointed expectations that can damage the friendship or relationship, sometimes irreparably. Signing a co-ownership agreement at the time of purchase provides an opportunity for all of the co-owners to work out points of contention before they become problems. The agreement is meant to provide a blueprint of how the co-owners are to co-operate with respect to managing the property and how the investment of each of the owners will be protected. It sets out the rights and responsibilities of each of the co-owners and addresses their expectations regarding events that involve the property. For instance, it can define how the co-owners are to manage the expenses related to the property (e.g., mortgage payments, realty taxes, utility costs, general upkeep and repairs, etc.), how the property is to be occupied, the rules regarding buying out the other co-owner(s)’s interest, the equitable distributions of proceeds upon a sale or other disposition of the property, a mechanism to handle disputes amongst the co-owners, a process for dealing with the death or incapacity of a co-owner, and more.
A co-ownership agreement is an important tool to have in place to establish the true intentions of the co-owners, especially when legal title to the property tells a different story. For example, in the common 99%-1% legal ownership structure that is often used between children (99%) and their parents (1%) to take full advantage of the children’s first-time homebuyer’s land transfer tax credit, the co-ownership agreement could provide the parents an avenue for repayment of their financial contribution towards the property upon its sale; without such an agreement, this ownership structure would mean the parents would only be legally entitled to 1% of the net sale proceeds upon any sale. The same kind of provision could also be applied when multiple investors purchase a home where there are unequal contributions towards the purchase price and closing costs – the co-ownership agreement could provide for equitable distributions upon any sale to account for such unequal initial contributions, as well as giving priority to paying certain co-owners over others if that was intended.
In addition, a co-ownership agreement could also be key to ensuring a co-owner is not allowed to partition or sell the property via an application under the Partition Act, contrary to the wishes of the other co-owners. Pursuant to such Act, all joint tenants and tenants in common in Ontario are subject to having their property partitioned or sold on the application of another tenant in common. Thus, having a co-ownership agreement that stipulates the intentions and terms surrounding any disposition of the property could prove useful in preventing such an application from succeeding.
Although co-ownership agreements are more typical when co-owners are holding title as tenants in common, as each of the co-owners can act on their share individually, they can also be useful in joint tenancy relationships in addressing concerns about the day to day management of the property. With joint tenancy, none of the co-owners can sell or encumber the property without the express consent of the other co-owners and there is also the automatic right of survivorship upon the death of one of the joint owners (i.e., the property will automatically transfer to the surviving co-owner(s) without any interest falling into the deceased joint owner’s estate). This estate planning purpose is the most common reason for choosing joint tenancy over tenancy in common in most instances. Nonetheless, there is always the possibility that the relationship between co-owners will breakdown and the co-owners will no longer want the property to automatically transfer to the surviving co-owners upon their deaths; accordingly, a co-ownership agreement could be used to allow each of the co-owners to deal with their share of the property individually (effectively severing the joint tenancy) without having to change legal title to the property.
In all cases of co-ownership of real property, you should consider speaking with your real estate lawyer about whether a co-ownership agreement is right for you and your fellow co-owners. Paying a few hundred dollars for a professionally drafted co-ownership agreement is a small yet worthwhile investment that could save you hundreds of headaches down the road.