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CO-OWNERSHIP

If you and your spouse or partner, family member or friend are proposing to buy a home or investment property together, you will need to carefully consider the legal implications of the method of co-ownership you chose to adopt.

Basically, there are two alternatives: joint tenancy and tenancy in common. A clear understanding of these features and differences can be particularly important in some situations such as:

  • de facto couples purchasing a property together, especially when they will provide unequal financial contributions;
  • when one (or both) intending co-buyer(s) has been previously married and has children from that earlier relationship; or
  • family members or friends intending to buy a property together, whether as a residence or an investment.

It is often a good idea to review the provisions of your will (or making one if you have not previously made a will) when entering into one of the above arrangements. If you decide, after properly considering your position, to buy the property as joint tenants, then your will is not directly affected as far as the property is concerned, as the property passes by law to the surviving joint tenant automatically, regardless of what your will says.

However, even if you buy as joint tenants, you should still consider the impact on your overall asset position, from an estate-planning perspective. If in any doubt about the consequences, you should consult an experienced solicitor. 

FEATURES OF CO-OWNERSHIP

Tenants in Common

  1. The interest in the land of each tenant in common is separate and distinct from the other.
  2. The interest can be equal half shares each or any other shares (eg. it may be 1/3rd for one and 2/3rd for the other or it may be 1/100th for one and 99/100th for the other).
  3. There can be several owners as tenants in common all with different shares.
  4. All tenants in common are entitled to physical possession of the whole property.
  5. Tenants in common can each deal with third parties as to their share as a separate owner, generally without the need for other co-owner's consent (unless they have a co-ownership agreement in place).
  6. Tenants in common can acquire their interests at different times and from different people.
  7. Each tenant in common is free to sell or otherwise deal with their interest in a property at anytime (unless there is in place a co-ownership agreement which contains terms restricting this).

Joint Tenancy

  1. The interest of each joint tenant is not separate or distinct from the other. Each is entitled to an undivided interest in the whole property - that is, they each own the whole.
  2. There are no separate shares as each owns an undivided part of the whole.
  3. There can be more than 2 owners as joint tenants but none will own a distinct share.
  4. All joint tenants are entitled to physical possession of the whole property.
  5. In dealing with third parties joint tenants must act as a single owner.
  6. Joint tenants must acquire the property at the same time from the same person.
  7. Generally each joint tenant can only act at the same time as the other one. They must act together. Any independent dealing with the property by one joint tenant is likely to result in the "severing" (or ending) of the joint tenancy, effectively converting the co-ownership relationship to a tenancy in common.

SURVIVORSHIP - MAIN PRACTICAL DIFFERENCE

Tenants in Common

The interest of a tenant in common can be left under that person's will and forms part of their estate. If a tenant in common dies without a will that person's interest will pass under his estate under the rules of intestacy.

On the death of one of two tenants in common the survivor retains their interest and the decease's interest passes with his Will. There is no automatic transfer to the other. The tenancy in common continues. 

Joint Tenancy

On the death of one joint tenant that person's title or interest in the property automatically passes to the surviving joint tenant by operation of law. Therefore, where a couple own land as joint tenants and one decides to leave his or her interest under a Will to their child this will not be possible as the survivorship principle over-rides the Will. The interest of that person will automatically pass to the spouse on that person's death. When we say, automatically, the LPI still requires a form called a Notice of Death, referring to the Death Certificate issued by the Registry of Births, Deaths and Marriages, to be lodged with a registration fee, in order to change the title records, but this is only a formality.

On the death of one of two joint tenants the survivor becomes the sole owner of the property and there is no longer a joint tenancy. 

Presumption of Tenancy in Common

Under conveyancing law in New South Wales there is a presumption that where 2 or more people acquire an interest in property they do so as tenants in common unless the document where the interest was acquired specifically provides that they are to take as joint tenants.

This came through the introduction of the Conveyancing Act in 1920 and overturned the previous age-old general law presumption that property held by two or more was held by them as joint tenants. 

HOW TO CHANGE A JOINT TENANCY

Once you and others have become co-owners on a title, circumstances may change. You and your spouse may have decided to allow each of you to leave your share of the property in your Wills and so need to convert the joint tenancy into a tenancy in common. This is called "severing" the joint tenancy.

There are several ways a joint tenancy is severed with the loss of the right of survivorship as the essential consequence. These include by:

  • Disposal of a joint tenant's interest;
  • Agreement between the joint tenants;
  • Course of conduct or dealing;
  • Court order; or
  • Order for a partition.

A disposal of a joint tenant interest:

This can be done by:

  • a transfer from all the joint tenants to themselves as tenants in common;
  • a transfer of his or her interest by one joint tenant only, including where:
  • the transfer is to that person as a tenant in common; or,
  • the transfer is to one of the other joint tenants (or a third person) either by way of sale or as a gift.
  • transfer or change of title by law. For example, where a joint tenant becomes bankrupt and the title automatically passes to the joint tenant's trustee in bankruptcy.

However, a sale of a property by you and your spouse in the normal course where you engage an agent for sale, enter into a contract and settle the sale will not change or sever the joint tenancy in the property, or in the proceeds of sale, unless there has been an agreement that one or more of these acts will sever the joint tenancy. 

An agreement between joint tenants

To ensure such an agreement is effective to sever the joint tenancy it should be in writing, signed by all the joint tenants, and it should provide that the severance is to take effect immediately. 

A course of conduct or dealing

The doing of something which clearly indicates that all the joint tenants had acted on a mutual basis to demonstrate their intention to be tenants in common, will generally be enough to end the joint tenancy, once and for all. 

Court Order

Any order of a court which is or its implementation is inconsistent with the joint tenancy continuing, will end the joint tenancy.

Although any court order may effect severance it normally will arise under orders of the Family Court dealing with property or orders pursuant to Section 66G of the Conveyancing Act 1919. 

Partition

Co-owners can agree to partition a property, or transfer various parts to each of them. For example, a farming family could divide up the farm between them or sell it and split the proceeds. If co-owners cannot agree then the only recourse is to apply under the Conveyancing Act which allows the Supreme Court, on application of one or more co-owners, to appoint a third person or trustee to hold the property and sell it and pay the proceeds to the co-owners.

More unusually a co-owner can seek actual partition of the property where the Court is convinced this is a better result for the co-owners than sale and distribution of the proceeds.

Under a court order for sale the co-owners can generally each bid against the other to acquire the property. 

Stamp duty on Changing a Joint Tenancy

Generally, only nominal stamp duty will be payable on a dealing of the type previously referred to which has the effect of severing a joint tenancy.

However, great care must be taken not to alter the beneficial interests of the parties as are evidenced by their joint tenancy, otherwise full ad valorem stamp duty may need to be paid on an independent valuation of the difference, even if no money is changing hands between the parties in the transaction.

For example, A and B are joint tenants but propose to sever the joint tenancy and describe themselves on title as tenants in common in 1/3 and 2/3 shares, respectively. If the property is valued at $600,000 then, on the face of it, B (the 2/3 tenant in common) would have to pay stamp duty on the extra $100,000 legal interest in the property that he/she obtains as a result of this transaction.

This is the value of the additional beneficial interest in the property he/she is acquiring, bearing in mind he/she already owns an interest worth $200,000.00. 

RIGHTS AND OBLIGATIONS BETWEEN CO-OWNERS

The law is vague, uncertain and some would say unfair when it comes to regulating rights between co-owners. From the relatively few established principles that case law has provided over the years, some of the more significant rules are:

Each co-owner is entitled to use and occupy the entire property but must also permit each other co-owner to do the same.

If one co-owner uses the whole property, without attempting to exclude the other(s), the co-owner occupying the property does not have to pay any rent or occupation fee to the other co-owner(s).

If one co-owner spends money in carrying out necessary repairs and maintaining the property, or pays for the construction of improvements on the property, without the consent of the other co-owner(s), that co-owner cannot force the others to contribute for the expenses paid for by that co-owner.

In some cases, however, it may be that the co-owner incurring the expenditure can recover from the others the amount by which the improvements have increased the value of the property, although this amount generally cannot be more than the actual cost to the co-owner of effecting the improvements.

Owing to the unsatisfactory state of the law in this regard, all co-owners should consider entering into a mutual agreement between themselves setting out how they wish to deal with their mutual rights and obligations with respect to each other.

Although not usually necessary between spouses as the Family Law Act 1975 will regulate the issues, it is important for co-owners owning property as partners for a business, for investment purposes, or where they wish to live in a de facto relationship, or where they simply wish to purchase a residence together when they are not in any of these relationships, to enter into a mutual co-ownership agreement.

The types of issues or matters which a co-ownership agreement should deal with include:

  • Who contributes what share or portion of the price and/or deposit.
  • How much the parties will borrow and who is responsible for the repayment.
  • Which of the co-owners will live in the property or part of the property and on what basis.
  • Whether to own as tenants in common or joint tenants.
  • How proceeds of a sale will be distributed.
  • What events will cause a sale to take place.
  • How obligations to pay rates, maintain the property, carry out repairs and/or effect improvements will apply.
  • Restrict rights to lease or mortgage the property.
  • Provide a procedure should one wish to sell to allow the other co-owners to purchase the selling share.
  • Provide for a method to resolve disputes.

DUAL OCCUPANCY

Originally the most common type of dual occupancy was where an existing house was divided into two separate residencies. A family would either divide or add to an existing property to allow a separate fully self-contained accommodation - a "granny flat" and elderly parents would move in. This concept then became commercialised largely due to a sympathetic planning approach by state and local governments. This resulted in the ability to subdivide the land containing the dual occupancy residence which of course, meant that each newly subdivided lot could be separately sold.

There are several distinct ways in which dual occupancies can be regulated, For example, by strata subdivision, by separate titles, or as one title as tenants in common with a agreement in place regulating the use of the property. At one stage tenancy in common agreements were used not only in duplexes but also in blocks of 3 or 4 flats. In fact there are a number of properties still the subject of such agreements in Sydney.

Often people jointly seek to develop parcels of land for their mutual benefit and each such arrangement should be carefully thought through. A written agreement to deal with the intended arrangement or dual occupancy should be entered into.

Such an agreement would deal with issues such as:

  • how the property is to be developed;
  • what the living arrangements will be throughout various stages of development;
  • who will be appointed as solicitor, architect and builder;
  • attach plans of the agreed development;
  • provide for dispute resolution provisions;
  • how to divide the property on completion; and
  • how to apportion values to different parts of the property on partition.

Dual occupancy arrangements can be very simple or very complex but for certainty and security all should be carefully considered and committed to writing for the benefit of all parties. 

FURTHER INFORMATION

This Information Outline is provided courtesy of Yandell Wright Stell who are experienced in this area of law. They are located at Level 5, 139 Macquarie Street SYDNEY NSW 2000 or call them on (02) 9252-2278 if you would like more information on this legal topic, or you wish to obtain formal advice regarding your situation.

Yandell Wright Stell Lawyers is a result oriented firm as distinct from a procedurally-oriented firm. The result is achieving your goals as quickly and efficiently as possible and to your best advantage. Our firm through its professionals and support team supply legal services in the following areas of law: *Property law including conveyancing, property development and planning matters. *Commercial dispute resolution and litigation. *Immigration law including all visa applications. *Banking and finance law. *Intellectual property law including trade marks, copyright, designs and patents. *Telecommunications and information technology law. *Insolvency and bankruptcy law. *Corporate, commercial and business law matters. *Family law. We are centrally located in Macquarie Street, Sydney from where we are able to deliver first class results and personal service to all our clients.

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