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Lining Up The Ducks

When considering co-owning an investment property it’s a good idea to enter a binding agreement to help reduce the potential cost and stress of disputes in the future, writes Annabel Sheppard.

By: Annabel Sheppard

20 April 2024

Whether you’re buying an investment property with a friend or family member who will share in potential capital gains, or there’s a more “arms-length” arrangement to develop bare land, getting your ducks in a row before you make a move is advisable.

Specifically, it’s always worthwhile considering a property sharing agreement to clearly set out the obligations and rights between the parties.

Taking the time to enter into a binding agreement at the outset ensures a prudent investor can reduce the potential cost and stress of disputes or disagreements with their co-owner in the future. It helps ensure everyone has the same understanding of how the shared ownership of the investment property is to work.

The Agreement

There are several aspects to consider in co-owning property that should be clearly set out in a property sharing agreement:

  1. Minimum investment period: It’s normal for property owners’ investment intentions to change over time. For example, an investor might initially intend to invest for 10-plus years to benefit from capital gain, but later change their mind and wish to sell earlier to free up their capital for other opportunities. A minimum investment period can give all co-investors certainty that they will not need to worry about the other parties wishing to exit earlier than originally anticipated.
  2. Payment of outgoings: Most people anticipate the fact that they will need to contribute towards insurance, rates, mortgage payments and other costs. But you should also think about what will happen if one co-investor fails to make recurring payments. You may want to ensure that any co-investor who has had to contribute more than their fair share to outgoings is credited back at the point of sale.
  3. Maintenance: How any improvements and maintenance items will be funded.
  4. Dispute resolution: It can be expensive and stressful dealing with a breakdown in a personal or professional relationship, and this can be worse when a significant investment is involved. Including a suitable dispute resolution clause can help resolve disputes in a more efficient manner.
  5. Exit strategy: All investments generally at some stage must come to an end. A property sharing agreement can guide the process to buy out other co-investors, or alternatively the process to sell the property, pay professional costs incurred, and how profit will be divided.

The Pitfalls

If a dispute arises between co-owners, then in the absence of a property sharing agreement the only resolution may be to apply for a court order to sell the property under the Property Law Act.

This can be costly, personally and financially.

We recommend talking to your lawyer about drafting an agreement, which clearly sets out all parties’ expectations and agreements to ensure the co-ownership of a property remains a beneficial investment.

Annabel Sheppard is a partner with Wynn Williams. She specialises in property law extending across the residential and rural sector. Her extensive knowledge of commercial law sees her regularly engaged by individuals and business owners to advise on asset planning and protection, including the formation and management of trusts.

www.wynnwilliams.co.nz

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