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Avoiding the pitfalls of co-owning property

1 Mar 2024

| Author: Emma Toseland

Co-ownership (or shared ownership) means buying or owning a property with someone else. Rather than owning the property all on your own, you might own a defined portion of the property with another person owning the balance. Your respective shares would usually reflect how much you have each contributed towards the purchase price.

As house prices and interest rates continue to rise, it is increasingly common for people to consider sharing ownership with parents, friends, siblings and in some cases third-party organisations. In other cases, co-ownership may be inherited. But no matter how the situation arises, here are some key points and tips to consider.


1. What is shared or co-ownership?

Shared ownership in New Zealand fundamentally takes two legal forms: joints tenancy and tenants in common.

Joint tenancy: Owners have equal rights in the property and if one co-owner dies, then that owner’s interest in the property (shares are not defined in a joint tenancy situation) automatically goes to the surviving owner by way of survivorship. This type of shared ownership is most common for couples or where the owners are trustees of a trust. Unless an agreement is put in place stipulating some other scenario, in a joint tenancy the owners generally share equally in the expenses and profits of that particular property.

Tenants in common: Property is purchased in defined shares, generally in accordance with that person’s relative contribution to the purchase price but can also result from an inheritance. The most common co-owner is a partner or spouse but increasingly it might be mum and dad, brother or sister (or some other family member) and, in some cases, a completely unrelated third-party organisation such as Kāinga Ora. When one tenant in common dies, his or her share doesn’t automatically go to the other owner/s. It will usually become part of the estate and is distributed according to the deceased’s will or, if there is no will, as provided in the Administration Act 1969.


2. Choosing carefully and documenting wisely

Because buying a property is a major financial decision, it is crucial to choose carefully the person with whom you will enter into a shared ownership structure. Failing to anticipate how the ownership will work day-to-day and what should happen in worst-case scenarios, changes in circumstances or relationship fall-outs, could result in expensive disputes and complex negotiations.

Taking your time and creating a formal and legally recognised agreement between co-owners should not be viewed as a lack of trust or a sign that the relationship is doomed to fail. Rather, it is an acknowledgement that those involved need protection if the unforeseen and unexpected occurs.

For couples that wish to define and protect their contributions to a property, a contracting-out agreement or ‘pre-nup’ is recommended. For most other situations, but especially with tenants-in-common and where friends and family are involved, a shared ownership agreement or property-sharing agreement is recommended. This agreement should deal with the limitations and requirements of each party and can be formal (best practice) or an email or something else in writing.


3. How will the co-ownership work day-to-day? And what should be in the property-sharing agreement?

When agreeing on what should be in a property-sharing agreement, it is important to anticipate the day-to-day running of the property and what should happen in worst-case scenarios.


4. Some key issues to consider: How many people will own the property and what are their contributions and shares?

  • What occupancy rights will each owner have (if any)?
  • How will any loans/mortgages in respect of the property work? Will they be a shared cost or will one party be paying the mortgage?
  • What should happen if one party breaches his or her obligation to pay the mortgage?
  • Who will own the chattels in the property?
  • Who will pay the rates, insurance and maintenance?
  • What happens if one owner wishes to make improvements to the property?
  • If one party wants to sell the property, how should this work? How will the sale proceeds be divided when the property is sold?
  • What happens if one party dies?
  • How will any disputes be resolved?

Is it an investment property or a primary residence? This is not an exhaustive list and even with the most basic property-sharing agreement, there will be specific and personal matters to consider. Given the likely time constraints once an agreement has been signed, potential co-owners should sit down and finalise the terms of their agreement before making an offer on a property. This is particularly important if lending is required because the bank will need to understand how the ownership will look before approving lending.


5. For couples: the contracting-out agreement

If you are married, in a civil union or in a de facto relationship, you may be deemed to have equal shares in the property regardless of any difference in financial contribution. If defining what was contributed and ensuring that amount is protected is important, then entering into a contracting-out agreement pursuant to s 21 of the Property (Relationships) Act 1976 is recommended. This will allow you to record the separate contributions and ensure these remain separate in the event of separation or death


6. Get financial and accounting advice before entering into the co-ownership arrangement

It is becoming common for one co-owner to live in the property while the other is named on the record of title but does not actually live there – for example, a parent supporting a child into his or her first home.

If one co-owner is not residing in the dwelling and it is not their main home, then when that person wants to sell his or her share, they may face unexpected tax consequences, particularly in relation to the bright-line test. As the sale of the share will be deemed to be at market value, the selling party may need to pay tax on any uplift in the value of their share if the dwelling has not been their main home. This could have implications even if the parents wish to gift a portion of the property.

In a situation where mum and dad have assisted their child into their first home and wish to sell their share to their child over time, there could also be tax consequences. Those considering shared ownership should get advice from a tax lawyer or accountant to ensure they are getting the best from the structure now and into the future. ■


Emma Toseland is a senior solicitor at McCaw Lewis and a member of The Law Association’s Property Law committee ■

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