Dangers of acquiring property as Tenants in Common without a formal written agreement between owners

For many, purchasing a property is becoming increasingly difficult due to inflated property prices and higher interest rates. Some prospective buyers may consider turning to Tenancy in Common as a means of entering the property market as a part-owner. Tenancy in Common is a legal arrangement in which each independent buyer owns and controls a portion of a property. Such an arrangement is not to be confused with Joint Tenancy, where parties own the whole of a property together. Under joint tenancy, when one joint tenant dies, the property will pass to any surviving joint tenant/s. Under a Tenancy in Common, the portion of the property owned by the deceased will form part of their estate and will not automatically pass to the remaining Tenants in Common. Joint Tenancy is usually preferred by couples, whereas Tenancy in Common may be utilised by friends, investors, or family members as a means of purchasing a property together while keeping their individual interests in it separate.

A common issue with Tenancy in Common arrangements is that often at some point, one of the co-owners wishes to sell his or her interest in the property, while the remaining co-owners wish to retain their interest. Having a valid, written formal agreement between the co-owners is crucial in these circumstances. Ideally, the remaining Tenants in Common will be able to buy the exiting co-owner out, acquiring his or her interest in the property. However, often the existing co-owners are unwilling or unable to do so, sometimes because they are unable to secure the funds necessary to purchase the interest in the time provided by the co-owner looking to sell. This usually results in a dispute regarding how or if the property is to be sold.

If the co-owners cannot agree on how to deal with the property, Section 38 of the Property Law Act 1974 (Qld) allows a co-owner to apply to the court seeking appointment of a Statutory Trustee to sell the property. A Statutory Trustee is a court-appointed corporation or individuals tasked with completing the sale of the property on behalf of the co-owners. Absent a formal written agreement between the co-owners, the court is unlikely to reject an application under section 38 to sell the property. However, a properly drafted and executed written agreement between the parties may enable co-owners looking to retain or increase their interest or prevent or delay the sale of the property to do so.

The court may reject an Application to sell the property via Statutory Trustee if a formal written agreement is in place between the co-owners that sets out how the property is to be sold. It is common for such agreements to have clauses requiring the co-owners to retain their interest for a certain period before being able to dispose of them, or even providing the co-owners with a right of refusal of sale by one of the other co-owners. The clauses inserted into such an agreement should be carefully considered and agreed upon by the parties prior to acquiring the property.

The uncertainty caused by a failure to execute a formal written agreement often leads to lengthy, expensive disputes between the co-owners if one or more look to dispose of their interest in the property. Not to say a written agreement is guaranteed to prevent a successful application for sale by Statutory Trustee, nor that it will prevent disputes between co-owners regarding sale, but it will go some way to reducing the likelihood of such events occurring.

If you would like advice on how to document an agreement please call us now on 07 3839 7555 or email tony.crilly@perspectivelaw.com