"Real Estate Partners Need an Agreement", Vancouver Sun

by Janice and George Mucalov

In a rising real estate market – as currently in Vancouver with residential property – people generally focus on the upside potential. Often, there are time pressures to make the investment. The opportunity presents itself, and you have to find a partner quickly to take advantage of the deal.

But things can go wrong when people invest in real estate together without first addressing issues that almost invariably arise in the course of ownership. What you need is an agreement – typically a co-ownership or joint venture agreement – to deal with this, taking into account the nature of the property and the partners’ differing interests, expertise and contributions. Even small transactions warrant an agreement.

Take the example of one woman, a recent immigrant, who had put together sufficient funds to buy a condo jointly with a friend. Their combined incomes also allowed them to pay the mortgage. But within a year, they had a falling-out and couldn’t stand to live together anymore.

Fortunately, when they bought the place, their lawyer had drafted a short co-owner’s agreement. If differences couldn’t be resolved, the property could be jointly sold at the instance of either person. Otherwise, whoever was unhappy could be stuck with a hard-to-sell interest. (Who wants to buy a part-interest in a condominium, with a co-owner who’s a stranger?) The alternative – a court-ordered remedy – would be time-consuming and expensive.

As it turned out, matters didn’t come to that, and the situation was sorted out by one woman buying the other out and assuming the mortgage (another option in the agreement).

In other, larger, commercial co-ownership situations, more detailed yet flexible agreements need to be worked out.

In principle, though, the following should be considered in any co-ownership situation (among arms-length parties, where joint tenancy with right of survivorship is unsuitable):

What happens if money needs to be sunk into the property?
If the property was bought as a rental investment, it may not throw off as much rent as expected, so an operating shortfall could result. But you may not have budgeted for this, and scraping together the ongoing shortfall could come as a nasty surprise. The agreement should cover the funding of any shortfalls, thus flagging the issue. Typically, it will provide that the co-owners must fund shortfalls (not otherwise financed) in proportion to their ownership interest.

Capital expenses might also be needed for renovations. What if one partner feels renovations will enhance the value of the property, but the others don’t have the money or don’t want to spend it this way?

How will decisions be made about the property?
Some decisions may be so important that they should be unanimous or close to it. Examples include decisions to sell or refinance the property, decisions involving major capital programs, or decisions as to how and by whom a commercial property is to be leased and managed.

Routine decisions can perhaps be delegated to a co-owner with special expertise, who can be placed in charge of day-to-day operations directly (for a fee), or perhaps to a management company.

What exit strategies are available?
Co-owners may have different investment horizons. If one co-owner wants out sooner than others, the others will want some control over who the new co-owner will be. Various mechanisms such as the first opportunity to purchase, right of first refusal provisions and approval rights are available. A balance needs to be struck, appropriate to the deal, between the ability of a co-owner to freely liquidate his position and the interests of the other co-owners to have some control over the identity of their new co-owner.

As well, the agreement should deal with dispute resolution, such as mediation or arbitration. It should also provide for “divorce” or other exit mechanisms if the owners ultimately can’t see eye-to-eye – perhaps allowing any unhappy co-owners to force the others to buy them out or sell to them at a specified price (a “shotgun buy-sell” provision).

Whatever the deal, your lawyer will need to be aware of tax implications and applicable statutory provisions (such as the Partition Act and other relevant provincial legislation), and consider the particular circumstances.

No one co-ownership agreement will suit all deals. Your agreement must be drafted to fit your situation and, ideally, put in place before you complete your investment.

© Copyright by Janice and George Mucalov

A version of this column was first published in the Vancouver Sun. The column provides information only and must not be relied on for legal advice. Consult your lawyer if you need legal advice.