Property Sharing
Property Sharing Agreement
Many of the major banks are promoting shared equity models where parents, friends or relations take an equity interest in a property, rather than just lend them money.
While the banks new interest in this model can be linked to the change in lending policies around loans from relations, these arrangements are nothing new. By sharing the costs associated with owning a property (not only the purchase price but mortgage payments, rates, insurance and maintenance expenses), individuals can not only get into the property market, but can often afford to purchase a larger more desirable property than they would be able to do so on their own.
One of the biggest concerns with shared equity arrangements is the potential for disagreements between co-owners. It is important to have a clear and detailed agreement in place outlining each individual’s rights and responsibilities, as well as a plan to resolve any disputes that may arise, for example if one co-owner needs to sell their share of the property.
A property sharing agreement is a contract between two or more owners of a property that can be adapted to include a wide range of co-ownership circumstances. For example:
Parents who want to assist their child by funding the purchase and intend to have an ownership interest in the property to reflect their contribution;
Family members who buy a property from the estate of a deceased relative;
Parents and adult children who purchase a larger property for everyone to live in, and everyone contributes to the purchase price;
A group of friends who pool their resources to buy a property in which they will live together; or
Two or more families who want to purchase a holiday home to be used by the individual families from time to time.
A property sharing agreement can be flexible and drafted to suit the particular circumstances of the parties and will usually include the following items:
How the property is to be owned, and how each party’s ownership share is to be recorded on the title.
Who can occupy the property.
What cash contributions are made toward the deposit and the funding of the purchase price.
Who is to be responsible for renovations, repairs, maintenance, the payment of rates, mortgage payments, and insurance.
How to deal with disputes.
A valuation and sale procedure to be used to sell the property or buy out another co-owner in the event they default on their obligations, die, or decide they no longer want to continue with the arrangement, plus a clear and effective process to allocate the sale proceeds.
Without a property sharing agreement providing a contractual procedure, parties would need to revert to litigation under the Property Law Act 2007 to sell the property in the event they couldn’t agree. This process through the High Court could take up to three years and cost upwards of $50,000.00.
It is worth noting that the repayment of any loans to the bank should be carefully drafted in a property sharing agreement. A property sharing agreement between property owners is a private arrangement, and its terms do not bind the bank. Instead, the parties who sign bank loans are usually jointly and severally liable. This means in the event of a default, the bank can single out any one party to repay the entire loan. Products promoted by the banks just involve splitting the loans into different portions and repayment terms, the parties are still jointly and severally liable.
Another issue is if one party does not live in the house or its their second house, then their share of the sale proceeds may be subject to tax under the Brightline test.
Give us a call if you are considering entering into this type of arrangement, as you will need legal assistance with the conveyancing, mortgage finance and advice on the arrangement.