Joint Ownership Considerations for Unmarried Couples
By Attorney James Spella, Schloemer Law Firm, S.C.
It is becoming more common for two individuals, who are not married, to embark upon the purchase of a co-owned residence. The co-owners may be both widowed/divorced, couples prior to marriage, or same sex couples. Home ownership and a place to share a residence is affirming to their relationship.
Ownership of real estate, and the financing of its purchase, should alert these co-owners of certain matters which are better discussed prior to the purchase. These matters are certain to become apparent, best to discuss prior to the purchase.
For purposes of this discussion, we will discuss the impending co-ownership purchase by Jack and Jill.
- Jill and Jack at some time will purchase a home together – ‘together’ implying that it will be joint ownership and joint financial commitment.
- The purchase will occur prior to any anticipated marriage.
- Jill will be providing the down payment, which is estimated to be 20% of the purchase price, resulting in effect, a loan of one-half of that amount to Jack.
- This outline does not address Jill’s solo ownership, since that is not their initial intent. They both have indicated that there would be co-ownership.
- Both Jack and Jill will have the ‘title’ in the home in both of their names and be equal owners.
- An LLC for ownership is not to be considered since it will be viewed as requiring a commercial loan with a higher mortgage interest rate.
Achieve joint ownership in a manner that meets their agreed upon objectives and terms in a manner that affirms their relationship.
- How will ownership be titled?
Joint tenancy with the right of survivorship – this means on the death of an owner, the ownership of the deceased vests automatically in the survivor.
Tenants in Common – this means on the death of a co-owner; the deceased’s interest is governed by his/her will/trust agreement as to asset distribution. But such ownership interest could be governed by an ‘agreement’ that would provide to the survivor certain options, i.e. the right to purchase the interest of the decedent.
What form of ownership will Jill and Jack choose?
Joint tenancy with the right of survivorship suggests a gift of the deceased’s ownership interest to the survivor.
Tenants in Common suggests that an agreement is in place which provides the survivor the right to purchase – though the decedent’s estate planning documents could also make the home a bequest to the survivor subject to the survivor assuming existing indebtedness.
- If to be owned as tenants in common – what rights would accrue to the other party on the occurrence of triggering events?
- Trigger Event – Death
Should the survivor have the right to purchase the interest of the decedent? If so, the Agreement would address:
- Valuation: ½ fair market value by appraisal, or
½ of the equity in the property (original cost less mortgage indebtedness).
- Payment terms: amortization period – interest rate – collateral (2nd mortgage).
- Any obligations owed by Jack as the survivor would also be satisfied in full or subject to amortization.
- The survivor would continue to have occupancy of the home during the period of time the survivor exercised the option to purchase, and if not exercised, the home would be placed on the market for sale.
- Question: who would be responsible for expenses during this option/sale period of time – the survivor or shared equally?
- Trigger Event – Break Up
In the unfortunate situation when the parties are no longer ‘together:’
- Who has the right to maintain occupancy, and the other party vacates?
- How is notice given by one party to the other of this ‘break up’ – written notice?
- Who has the right to purchase the other person’s interest? This should be as an option to purchase. If one of the individual’s has provided more in the funds necessary for the down payment, perhaps that party, regardless of who provides the notice of ‘break-up’ should have the first option.
- If the first optionee does not exercise, then the other could have an option for the other party.
- Like ‘death’ – purchase price and payment terms would need to be addressed as outlined above.
- If neither exercised their option, then the parties agree to sell the home by commercial means – i.e. a broker.
- Trigger Event – Marriage
Unless a Prenuptial Agreement would provide otherwise, the home would eventually be classified as marital property, the down payment debt forgiven, and the collateral mortgage released.
Since this is not a second marriage, it probably is unlikely that a Prenuptial Agreement would be considered. One would be considered by either party if a significant inheritance was anticipated that should not be part of marital assets subject to division on the termination of the marriage during lifetime.
If not already in joint tenancy, a deed would be prepared to place title as ‘survivorship marital property’.
- Down Payment
Jack will be indebted to Jill for ½ of the 20% down payment.
How would that obligation be evidenced? A note – demand, term note, or amortized note – interest rate.
How will note be collateralized, if at all?
How does Jill feel about this obligation?
Assume household expenses to be shared equally –– this includes utilities, insurance and real estate taxes.
If one party is unable to do so equally – does that create a liability to the other?
Expenses shared equally even if only one person is in possession following break up notice or does occupant pay 100%? Since Jill would most likely be the occupant – shared equally would be most likely preferred.
- Initial Summary
The above addresses the considerations and matters that would be set forth in a Co-Ownership Agreement based on responses and delineated objectives. If desired, an Agreement for review would be drafted.
- No Agreement
The parties may find the ‘legalese’ threatening as relates to their objective of just wanting to co-own the home, and that triggering events are ‘remote’ and ‘unlikely’ and that they have always worked things out, then all that would need to be done would be:
- They purchase the house together as tenants in common or joint tenancy.
- Jack signs an uncollateralized note for half of the down payment.
This blog is an outline for discussion purposes only. It is not intended to recommend any one provision or any specific course of action.
Originally published: July 20, 2020.
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