One or more people purchasing property together or jointly with others, is becoming more and more prevalent. This is mainly because it is becoming increasingly difficult for young individuals to raise the purchase price and the costs required to buy a property. Accordingly, many decide to pool their assets in order to take their first step up the property ladder.
What is Co-ownership?
Co-ownership is when one or more people jointly own the same property. In essence, it is when they legally share ownership without dividing the property into physical portions for their exclusive use. It is thus commonly referred to as co-ownership in undivided shares. Think of 2 people jointly owning a motor vehicle: they do not stipulate that one person is the exclusive owner of the engine and the front seats, and the other person, the exclusive owner of the rear seats together with the boot.
It is possible to agree that owners acquire the property in different shares; for instance, one person owns 70 % and the other 30 % of the single property. The different shares can be recorded and registered in the title deeds by the Deeds Office. If ownership is given to one or more purchasers, without stipulating in what shares they acquire the property, it is legally presumed that they acquired the property in equal shares.
Co-ownership is governed by fairness, reasonableness, practicality and equity and the courts will apply these principles should there be any disputes. Therefore the risks, the benefits and the obligations that flow from the property are shared in proportion to each person’s share of ownership in the property.
The Implications and Risks of Co-ownership
It is very important that prospective co-owners enter into an agreement between themselves before they purchase any property. If they do not sign any agreement before they purchase, they will soon realise that they are practically, physically and financially “joined at the hip”; generally to each party’s detriment. Unless the parties have entered into a prior agreement, transfer will automatically be given to the co-owners in equal shares without any prior arrangements being made as to which co-owner has the right to manage and take decisions regarding the co-ownership. In this situation, both the 50/50 co-owners are entitled to call the shots and as a result, neither has any overriding decision-making authority : hence a potential stalemate.
There are many examples of disputes and stalemates, because these issues were not agreed to upfront. Despite the fact that the parties may have an agreement between themselves, they should realise that the agreement will only regulate the relationship between the co-owners as between each other and it will have little or no bearing against third parties such as banks, creditors or the world at large. This is because, unlike an ante-nuptial contract which is registered in the Deeds Office, which provides official and public notice to all concerned, a private co-ownership agreement is not registered in the Deeds Office and therefore will not avail against third parties.
Co-owners should also be aware of the fact that regardless of how the co-owners have split their joint ownership and responsibilities in the co-ownership agreement, the banks will always want both borrowers to sign that they will be “jointly and severally liable” to repay the loan. This means the bank can recover the full amount from either debtor, exclusively or from both of the joint borrowers/owners in proportion to their shares. The home loans condition will override any private arrangements between any co-owners as well as, override any title deeds which may record that the property is owned in different shares. In short, the bank can choose to sue anyone of the co-owners for the full amount owing under the bond.
The following are examples of disputes between co-owners where they failed to enter into any agreement before the relationship commenced.
Example 1
One of the co-owners fails to contribute his share of the finances as initially agreed, resulting in creditors such as the bank or Body Corporate taking action against both to recover the shortfall. An investor was registered on the title deed as only owning a 2/3rd share in the property. A problem arose when his fellow owner failed to pay his 1/3rd share of the mortgage bond installment. Much to the others investor’s surprise, the bank simply drew the full monthly installment from his own bank account, after the bank realised that it could not recover the 1/3rd share from the defaulting co-owner.
Example 2
Three co-owners purchased an investment property and obtained a mortgage loan from the Natal Building Society. When 1 of the 3 co-owners fell into debt, the bank was entitled to sell the whole property at an auction in order to recover its loan and the remaining 2 co-owners could do nothing to stop the sale in execution. A block of flats was bequeathed: a 2/3rd share to the sister and a 1/3rd share to the brother. The elderly sister who depended entirely on the rental proceeds of the building to support herself, could not make ends meet, as her brother cruelly refused to cooperate in upgrading the building. He would not agree to the sale of the whole building, even though she needed to realise her share of the capital to live on. Their joint ownership was not subject to any terms and conditions in the will, nor to any other agreement. Her brother selfishly kept her in a financial stalemate and she became desperate, because he would not assist her in any way. She was then advised to sell her 2/3rd share to property developers, leaving the brother still owning his remaining 1/3rd share. She stole a march on the brother, because there was nothing he could do to stop her from selling her 2/3rd share to strangers.
Example 3
Two young ladies purchased an investment apartment in Sandton on a 50-50 basis. They did not enter any co-ownership agreement between themselves when they purchased the property. Initially they both shared the flat and the value of the property soared. Inevitably they became tired of living with each other and a dispute arose over the fact that the one did not keep her half of the fridge clean and tidy. The problem was that both wanted to become the exclusive owner of the property as well as the exclusive occupant. The dispute was who was going to transfer her half share to the other and for what price? As neither one would give in to the other, the whole property had to be sold on the open market, and each of them could only realise 50% of the proceeds, without either earning the right to retain ownership and occupation of the apartment. A farmer who was the owner of an undivided 1/520th share of mineral rights objected to plans by the other co-owners to develop a coal mine, alleging that he would be prejudiced. The court declared it had a discretion based on justice and equity to allow the mine to proceed, provided the applicant be awarded his pro rata 1/520th share in the value of the coal actually mined, less his proportionate share of the mining costs.
Example 4
An estate agent was told that the 2 adjoining homes were on separate properties. So she sold each house to 2 different purchasers. Much to everyone’s shock, it was later discovered that the 2 properties had never been subdivided and that the 2 separate houses were still on a single piece of land. There had never been any subdivision. The disastrous result was that the 2 different families had unbeknown to each other, become that joint owners of the single piece of ground and had accordingly become the 50/50 owners of each of the 2 houses.
Elements of a good co-ownership agreement
A good agreement should unambiguously record what the co-owners have agreed, to avoid any disputes arising in the future. It should address the following issues:
- In what proportion will the property be shared?
- Who has the sole right to occupy the property?
- Who will contribute what initial payments to acquire the property?
- Who will contribute what amounts to the ongoing future costs and finances?
- How the profits or losses be split, should the property or a share is be sold?
- The sale of one party’s share must be restricted or regulated.
- The right to draw funds out of the access bond must be regulated.
- A breakdown of the relationship between the parties,
- Death or incapacity of one of the parties.
- Dispute resolution options before issuing summons.
- Termination of the agreement