MAIN IMAGE: Mfundo Mabaso – growth head at FNB Home and Structured Lending, Carina Van Vuuren – property and real estate director at Norton Rose Fulbright South Africa
Senior writer
Co-ownership needs a relook in the current environment, particularly as some home loan providers are punting it as a solution for those who can’t afford to buy property alone. FNB’s Mfundo Mabaso, growth head at FNB Home and Structured Lending, says that in this challenging economic environment, affordable housing customers earning a gross salary of between R3 500 and R29 600 per month are increasingly buying homes as a collective to cope with high interest rates and the rising cost of living.
“Higher interest rates might be with us for longer than anticipated, but there are different options that consumers can use to buy homes, such as collective buying,” says Mabaso. “Internal data for the six months indicate Gauteng as the leading province for collective buying, closely followed by the Western Cape. Interestingly, while collective buying is popular in the affordable housing market, there is a lot of uptake from affluent customers and families buying holiday houses and financing semigration homes.
Co-ownership has advantages but challenges, considerations, and implications that, if addressed adequately and legally, will safeguard relationships within the investment, especially if the property is purchased among family members and close family.
Definition and implications
Carina Van Vuuren, property and real estate director at Norton Rose Fulbright South Africa. She expands on the definition of property co-ownership, which is where two or more private individuals or entities own a property simultaneously in undivided shares, either specified as such in the holding title or presumed equal share arrangement. “Respective co-owners will share the rights and responsibilities attached to property ownership. A co-owner who holds an undivided share can apply to the relevant deeds office to issue a holding title for that share.
“This means that all the borrowers will be jointly and severally liable for the debt under the registered mortgaged bond in favour of the financial institution should a single bond be registered over the entire property,” she clarifies, “but the downside is that if one person defaults on their monthly instalment – in the case of those who chose to split the debit order across all or multiple participants – the account will go into arrears if the other members cannot settle the shortfall. This will negatively impact the credit profile of all participants in that arrangement, as everyone is jointly and severally liable for the loan given the bond, and the property will be registered in each of the names.”
Co-owners who decide to apply for separate holding titles may individually mortgage their undivided share of the property, but only if the financial service provider agrees. “Even so, that share may be foreclosed in the case of non-performance by that borrower,” says Van Vuuren. “This may result in the co-owners being in the unfortunate position of having an unknown third party as part of the co-ownership arrangement.”
A further aspect may also come into play if one member seeks to escape from the arrangement or dies. If there is no legal structure or agreement in place, in the case of death, the undivided share in and to the property will be dealt with as part of a deceased estate. “Such estate must then be administered and distributed in terms of the deceased’s last will and testament (Will) or failing a valid Will, in terms of the Intestate Succession Act, 81 of 1987,” confirms Van Vuuren.
“The surviving bondholders on the home loan account remain jointly and severally liable for the repayments under the home loan account until the estate has been wound up and a substitution of the debtor has been done for the deceased’s share in the property to another co-owner or third party.”
If a member wishes to leave the collective, the individual may sell their share to the collective or to an outside buyer, subject to specific requirements.
Benefits of co-ownership agreements
These, and other disadvantages, can be legally mitigated, however, by entering into a comprehensively drafted and executive co-ownership agreement, which Van Vuuren strongly encourages as it will help to regulate the relationship between the co-owners, “even though the agreement will have no bearing against third parties and will only be enforceable between the parties.”
Such an agreement will:
- Clarify the rights and responsibilities of the parties;
- Specify the rules and procedures for a party to exit the arrangement (whether by voluntary exit, death, insolvency or otherwise) and
- Detail the recourse available to the other parties should anyone default/ fail to honour their obligations.
Is it better to form a trust?
A trust can be established as the legal owner of the property, with multiple beneficiaries acting as co-owners. Still, trusts can present some difficulties, such as an administrative burden and tax liabilities, which will be cumbersome to manage.
“An alternative is for the parties to establish a private company with limited liability for its shareholders and directors, but those are subject to more regulatory compliance and administrative requirements,” says Van Vuuren. “A separate legal entity implies the selling of shares, mortgaging the property, and other liabilities such as rates, taxes and property maintenance. “If this is the choice, all parties will need to consult with a registered tax practitioner before deciding on the entity for property-owning purchases.”
Agents’ responsibilities in co-ownership purchases
In terms of the Offer to Purchase, the essential elements of a contract remain the same, says Van Vuuren, whether it is one or 12 people buying a property collectively, namely:
- The parties must agree on the terms of the contract.
- The parties must intend for the agreement to result in enforceable terms.
- All the parties must be legally capable of entering into a contract.
- The terms of the agreement must be unambiguous, must not be in conflict with the law, and the obligations must be capable of being performed.
- The sale agreement must be in writing and signed by all parties. Should any party be married in community of property or be a party in a civil union, the relevant consent will need to be signed by the spouse or partner.
In conclusion, Van Vuuren says there is a place for this kind of arrangement. “The advantages are cost and liability sharing, including the responsibility to maintain the property, and providing individuals with the opportunity to enter the property market for the first time. For existing property owners, this structure allows an investor to diversify their portfolio.”
