Co-ownership: How to avoid legal pitfalls
MAIN IMAGE: Robert Krautkramer, director with Miltons Matsemela.
The co-ownership trend is growing in popularity among homebuyers in South Africa. Take care though, warns Robert Krautkramer, director with legal firm Miltons Matsemela, if a watertight agreement isn’t in place this could become a decision to regret for a lifetime.
Two or more people buying property together certainly eases the burden which the costs of acquisition present (transfer fees; transfer duty; costs of cession of exclusive use areas; bond registration costs; home owner consent fees and what not), but, let this not fool you. Buying property together can also lead to a lifetime of misery if you don’t have a watertight agreement in place.
Also read: How does co-ownership work?
And don’t be fooled into thinking that just because you are married, and buying together, that this is also a grand idea. One should always have a partnership agreement / co-ownership in place when buying property together – whether married or not.
Ask Mr Unhappy (we changed his name to maintain confidentiality), one of our former clients, who once bought a vacant property. He went to his wife and invited her to put her name on the offer to purchase because he felt generous (and in love). They were happily married, out of community of property, without accrual. Many years later things went pear-shaped. Mrs Unhappy packed her bags and sued him for a divorce. Since her name was on the title deed as an equal co-owner she wanted half the proceeds of the house when it sold (they had agreed to sell it).
Mr Unhappy had kept meticulous record of every cent he spent building a house on the property. He even kept record of every single watt of electricity that was used since the house was built. One would think, that being so astute, when this day arrived, he could easily say “But I paid for this and for that, so I should get X% of the net proceeds!” Guess what!? We calculated that he had spent 97% of the ± R2 600 000 it had cost to buy the land and build the house; maintain it and improve it over all the years they happily lived there. It was now worth R5 000 000!
But Mr Unhappy had overlooked one small detail. He never actually AGREED with Mrs Unhappy, at the time of buying, that she would contribute anything for her share in the property, nor, what were to happen if she did not contribute equally? As we had predicted, and which prediction our client refused to accept, the Cape High Court ruled that mere co-ownership does NOT mean that if you paid more than your partner, that the net proceeds must then be shared in accordance with that ratio. There must be an express agreement to this effect. So Mr Unhappy was ordered to pay Mrs Happy (she had changed her surname of course), 50% of the FULL net proceeds after the property was sold. Mr Unhappy’s R2 600 000 input was meaningless to the Court.
What are the typical things co-owners need to guard against?
Being co-owners means you own the property together “in equal undivided share”. You have to thus act in unison. And if the day comes when you cannot agree on whether to sell, or fix, or rent or whatever, then you have a problem! Your partnership is in trouble. And the only solution then, is a protracted court case which will cost you both dearly, where you must ask the court to dissolve the partnership, appoint a “receiver” who must then sell off the asset and who then shares the proceeds as per the court’s findings.
The only way to avoid this, is to plan ahead. Before you buy the property draw up a contract which will cover all the foreseeable things such as the following (have an attorney do this – pay the R3 500 or whatever he or she may charge because it is nothing in comparison to what Mr Unhappy had to eventually pay his and Mrs Unhappy’s respective legal teams):
- Who will pay for what when it comes to all the costs associated with buying?
- Who will pay for what with regards to bond repayments; maintenance; upkeep and renovations? i.e. how will each party’s contribution be determined?
- You should agree that upon eventual sale, you will each receive a pro rata share in the net proceeds, based on your actual input
- How will this input be calculated? i.e. what will each party have to put on the table to prove this?
- What is the intended use of the property?
- How long do you intend to keep it and what do you intend to do with it?
- What happens if one of you can no longer contribute your pro rata share?
- What if you cannot agree on an eventual selling price? Who gets to decide what a reasonable market value is?
- Which estate agency will be appointed?
- What if you cannot agree on what to do with the property anymore, or for how much to rent it out if it is an investment property?
- Will you take a dispute to court or to an arbitrator or adjudicator? Will this person’s decision be final and binding?
- Who will take care of all the admin associated with the property if it is going to be rented out or used as an Airbnb for example?
- Will you put a value on this when it comes to the eventual division of the proceeds?
- What if just one of you decides one day, “I want out”! Must you offer your share to the other, and for how much and on what terms?
- Who will attend to the transfer of the property one day (i.e. which attorney)?
- What if one of you dies?
These are but a few pointers to consider. Do not leave it to chance, or fate, or the smell of roses…
About the author: Robert Krautkramer has been a partner at Miltons Matsemela Inc since 2011, a boutique law firm that focusses almost exclusively on property law. He has 23 years’ experience all in all as an admitted attorney and regularly presents seminars to estate agents on contract law; the Estate Agent’s Code of Conduct and new relevant legislation, such as the PPA; the Expropriation Bill; and FICA.