If you’re buying a property with someone who isn’t your spouse or partner – for instance with a friend, a parent, a brother or sister, or another couple – we strongly recommend that you sign a property sharing agreement, however well you get on with them.
Why have an agreement?
We know it’s a cliché to talk about ‘being on the same page’. But there are times when it’s a seriously good idea to make sure that you are – and this is one of them.
It’s not just because you might fall out, though that does happen sometimes. And if it does, then sorting things out can be much more time consuming, expensive and stressful if there’s no agreement.
But questions can come up in even the friendliest relationship. It’s quicker and easier to figure it all out at the start, and make sure everyone’s expectations are clear, rather than having to dredge things out of your memory several years later.
What’s in an agreement?
An agreement should contain all the key details of how your particular property sharing works. For example, it should clearly set out who is responsible for what costs (rates, mortgage payments and repairs). That’s handy when you need to work out who has to pay the bills, and gives you a basis to discuss things if the arrangement needs to change.
An agreement also specifies how one person can buy the other out. Again, people’s circumstances change – it’s not unusual to find that you need the money that’s tied up in the property. So a typical buy out process would be:
- get an independent valuation
- set a timeframe for the other person to arrange to buy you out (for instance six months or whatever is fair for your particular situation)
- decide what happens if they can’t buy you out – usually that the property must be sold and the proceeds divided.
The other thing to bear in mind is that there are two ways to own a property. Your agreement will differ depending on which applies to you. It’s particularly relevant if one of the owners dies:
Tenants in common— you own the property in equal or unequal shares recorded on the title (for example John Doe as to a 1/3 share and Jane Doe as to a 2/3 share). When one person dies their share will go where their will directs. Ownership does not automatically pass to the surviving owner.
Joint tenants—you own the property jointly with no shares recorded on the title and when one person dies, the remaining person becomes the sole owner by survivorship.
The agreement doesn’t affect your responsibilities to the bank
It’s worth noting that if a bank mortgage is involved, nothing that the owners have decided between themselves will bind the bank. The bank hasn’t signed it – it’s a private arrangement. Instead, all owners who sign the bank loan are jointly and severally liable. This means the bank can single out any one of you to repay the loan. But having an agreement helps you to resolve things after the bank has come knocking at the door.
So before you buy a property with someone else, discuss the possibility of having a property sharing agreement. Whether we’re handling your purchase or not, we’d be happy to provide you with advice.