March 9th, 2021
Tips for Co-ownership of a House Prior to Marriage
Author: Andrew L. Schwartz
Buying a home is one of the biggest financial decisions you will ever make. Buying a home with your significant other prior to marriage adds additional challenges and can be risky.
It is important to understand how to take title to your property, each partner’s rights, financial obligations regarding the property, and what happens to the house if you break up. All of these considerations should be set forth in a co-ownership agreement. The failure to have a proper agreement in place before the home is purchased may lead to unintended and expensive consequences. Here is what you need to know in order to enjoy the full benefits of home ownership if you decide to buy a house with your significant other before marriage.
There are several ways to take title to the property when you are not married.
One way is for only one partner to take sole ownership of the house. This may be beneficial in certain circumstances where a partner may have judgments against him or her that could attach to the property, or if one partner has poor credit. To be clear, though, this will result in only one partner being legally responsible for the mortgage and other carrying costs for the property unless a co-ownership agreement provides otherwise. In these situations, it therefore becomes all the more important to have a co-ownership agreement in place so that there is a clear legal basis to seek contribution from the other partner not named in the mortgage.
Tenants in Common
Another way to take legal title is as tenants in common. Property owned as tenants in common may be owned by two or more parties with equal or unequal percentages of ownership – called undivided interests – which are reflected in the deed. When the property is sold, each partner would receive his or her share of the proceeds, based on their percentage of ownership. Additionally, each partner has the right to sell all or a portion of his or her fractional interest to a third party or can devise it by will to anyone. In the event of a death of a partner, the deceased partner’s ownership share will not automatically transfer to the surviving partner, as in the case of a joint tenancy. Rather, the fractional interest will form a part of the deceased partner’s estate and pass in accordance with the deceased partner’s estate plan.
Joint Tenants with Right of Survivorship
A third option is to hold the property as joint tenants with right of survivorship. This is often the most common form of co-ownership for unmarried couples buying a home together. Joint tenancy is co-ownership of property by two or more persons characterized by the “four unities:”
- Unity of interest – all co-owners have equal ownership interest,
- Unity of time – all co-owners acquire their interest at the same time,
- Unity of title – all co-owners acquire their interest by the same instrument, and
- Unity of possession – all co-owners have an equal and undivided right to possession of the property.
The main difference between owning property as tenants in common and as joint tenants with right of survivorship is the survivorship characteristic. When a partner dies, his or her interest in the property automatically transfers to the other surviving partner by operation of law, even if the partner’s estate plan leaves the interest to someone else. The interest still goes to the surviving partner. If the four unities are ever severed before the partner dies, however, then a joint tenancy is converted into a tenancy-in-common and the survivorship characteristic is lost.
For instance, if two partners own a home as joint tenants, and only one of the partners decides to get a line of credit secured by a mortgage on shared property, that partner’s interest becomes subject to a mortgage, whereas the other partner’s interest remains free and clear. This results in the two partners becoming tenants in common. Similarly, if a joint tenant conveys his or her interest to a third-party, then the joint tenancy is severed, and the co-owners become tenants in common.
Why is a Co-ownership Agreement Necessary?
Irrespective of how the partners hold title to the property, a co-ownership agreement is very important as it details each parties’ respective responsibilities, rights and obligations regarding the property, including, specifically, how much each partner will pay towards the purchase of the house, the mortgage, real estate taxes, insurance, utilities, and other household expenses; how each partner will share in changes in the home’s value; who will have rights to certain tangible personal property acquired jointly; and what will happen to the personal property and the house in the event of a breakup or a partner’s death.
If the partners can agree on whether one person will keep the house and the other party will leave, this decision may depend on the financial ability of the partner remaining in the house as to his or her ability to afford the mortgage, insurance, taxes, and maintenance on their own. Another consideration is whether the partner desiring to keep the house is able to refinance the mortgage on his or her own in order to remove the other partner from title to the property. Even if the parties agree to let one of them take over the mortgage and continue living in the house, the other partner will remain liable on the promissory note, unless the lender releases him or her.
If one partner keeps the house, he or she will usually purchase the other partner’s interest in the property. With a co-ownership agreement, the partners will have in place a procedure to determine the price, timing of closing, and even how to engage a qualified appraiser to value the property. These purchases do not come without other costs and expenses, though, as unmarried partners are not afforded the same benefit of tax-free transfers available to spouses dividing up property or buying out a partner’s interest in house.
If the partners are unable to reach an agreement as to the disposition of the house, or if neither one can afford the mortgage alone, the house will have to be sold. If the parties can cooperate in pursuing the sale of the house, this can be accomplished without involving the court by selecting a real estate agent to advise the parties on market conditions and potential listing price and offers. If the parties cannot agree on a sales price and related sale terms and without a co-ownership agreement in place, the parties may then need the court’s involvement to seek a sale in lieu of partition of the property.
A partition action is a special type of lawsuit where a party can ask the court to physically divide real property among the co-owners. Of course, a home is not something that can be physically partitioned. Therefore, in such cases, the court will order the house to be sold and then will determine how the net proceeds, if any, are to be distributed after payment of all liabilities and liens on the property. Most partition statutes do permit the court to grant the property in its entirety to the petitioner, subject to payment to the other owner of the value of his or her interest. That payment can also be offset by unreimbursed expenses and other amounts owed to the homeowner by the departing partner. To the extent there are any net proceeds available after a sale, they may not (and often will not) be divided equally. One partner may seek contribution from the other partner for carrying a disproportionate amount of the property expenses, the owners may possess unequal percentages, or one partner may owe the other money, all of which can affect how proceeds are divided.
No matter the form of ownership, it is imperative that a co-ownership agreement be drafted at the outset so that all parties understand the expectations and what happens in the unfortunate event of a breakup