How to Purchase Real Property with Someone Else

If you are a business owner with the intention of purchasing real property, there may be cases when you need to do so with another person. For example, if you are in partnership with someone else, you may jointly purchase property for use in your business. In addition, if you are a shareholder in a closely held company, you may wish to purchase commercial real estate with other shareholders and then lease the property to the company for use in the business.

There are two principal forms of co-ownership of real property:
  • Joint tenants
  • Tenants in common

Joint tenants each hold an indivisible share of the property, which cannot be individually transferred or gifted in a will. In other words, they hold the property together as a whole, and regardless of how much each party contributed to the purchase price, equal ownership is presumed.

The key feature of a joint tenancy is the “right of survivorship”. This means that if one joint tenant dies, then his or her ownership interest is automatically transferred to the other joint tenant. As a result, the deceased co-owner's interest in the property cannot be inherited by his or her heirs. Therefore, even if a joint tenant has made a will that purports to leave his or her ownership interest in the property to a beneficiary, the gift will be void and not enforceable.

For a joint tenancy to exist, what is called the “four unities” must be present:
  • Unity of time: the interests of all the co-owners must arise at the same time.
  • Unity of possession: each co-owner must have an equal right to occupy or possess the entire property.
  • Unity of interest: the interest of each joint tenant must be identical in nature, duration and extent.
  • Unity of title: the interests of the co-owners must arise from the same document.

In contrast to joint tenants, co-owners who are tenants in common own a specific share of the property. The shares do not have to be equal, and ownership percentages can be determined on whatever basis the co-owners decide. Unless restricted by contract, ownership interests can be transferred at any time, or gifted by will when the co-owner dies. The four unities are not required for a tenancy in common, only unity of possession is necessary.

As a result, there are a number of situations where a tenancy in common makes the most sense. For example, if the owners don’t intend to own the property together indefinitely and at some point they will sell the property and split the proceeds, or if the owners have contributed different amounts to the purchase price, then a tenancy in common is most appropriate. Because one or both of these situations arise in most commercial contexts, when more than one person purchases property together for a business, it is most often as tenants in common.

If you purchase property with another person and want to hold the property as tenants in common, it is important that you document the transaction properly and specifically declare your intentions with respect to ownership interests, maintenance and use of the property, and rights upon disposition.

Most Co-ownership Agreements typically include the following provisions:
  • Details of the property;
  • Co-ownership details;
  • Use of the property;
  • Rights and obligations of co-owners, including payment of expenses;
  • Mutual obligations;
  • Modes of transfer;
  • Bank accounts;
  • Mortgage and utility payments;
  • Sale of the property
  • First right of refusal;
  • Insurance;
  • Indemnity; and
  • Term and termination.

  If the co-ownership is a joint tenancy, then the right of survivorship will apply upon the death of one of the co-owners. However, if the owners are tenants in common, then the Co-ownership Agreement should address what will happen upon the death of a co-owner, because the co-owners have the ability to dictate in the agreement what will happen at that point.

For tenants in common, the contract should also state clearly what the percentage ownership interests of each co-owner will be, as well as the effect of such percentage interest in situations such as the sale of the property, payment of expenses related to the property, and the like. The determination of percentage interests may not always be straightforward. For example, one co-owner may pay a higher percentage of the down payment, and the other of the mortgage. But the parties have the ability to choose whatever percentage interest they desire and write it into the contract.

The Co-ownership Agreement should also state clearly how the property will be used. Unless otherwise stated, the co-owners will each be entitled to full use of the property. In a business context, this may be a recipe for conflict, so the agreement should specify the manner that both the co-owners and the company will use the property, and also the method for resolving disagreements. Similarly, the Co-Ownership Agreement should address the manner in which the monthly mortgage payments and expenses will be paid, as well as how the property will be maintained and repaired.

Because tenants in common hold a transferable interest that, absent any contractual restriction, could be sold at any time, the Co-Ownership Agreement should specify any desired transfer restrictions. For example, some tenants in common put in place a "right of first refusal", which gives the tenant who does not wish to sell the ability to buy the interest of the selling co-owner at a price determined according to an agreed upon formula or assessment.

There is one final thing to keep in mind with respect to co-ownership. A joint tenant can “sever” the joint tenancy and turn it into a tenancy in common at any time. A joint tenancy can be severed by mutual agreement, by mutual conduct, or by one co-owner taking an action that will destroy the unity of title. However, simply making a will purporting to dispose of an undivided share in jointly owned property will not sever the joint tenancy.

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