What Exactly Is a Co-Ownership Agreement?
Co-Ownership Agreement is a legal document between two (2) or more parties that are involved in the ownership of assets, such as vehicles, businesses, real estate properties or any other items they may decide to share. A Co-Ownership Agreement works almost exactly the same in theory as a Partnership Agreement. The only difference is that a Co-Ownership Agreement does not necessarily have to involve businesses or business partners . Any two (2) or more parties can enter into a Co-Ownership Agreements with each person having a specific share of the asset they decide to co-own. Very simple examples of Co-Ownership Agreements can be for scenarios, such as parents purchasing a car with their teenage child or buying a trailer to go camping with your group of friends. Co-Ownership Agreements are a very useful tool for establishing ownership, expenses shared, as well as the reliability and responsibility of each party.
Main Elements of a Co-Ownership Agreement Template
The template of a co-ownership agreement will contain specific essential elements that outline the agreement between the parties. Among those elements are issues of ownership rights, financial contributions, maintenance responsibilities, and decision-making processes.
It is important to memorialize the specific terms between the parties in the written agreement. It is important to include terms related to any third-party rights that may be imposed upon the parties, such as an easement or right of first refusal. In addition to the above, many co-ownership agreements template contain provisions for the sale of the property, method of payment or financing of real estate taxes, insurance coverage, and the sale or buyout of one party’s interest.
An overview of commonly included provisions is outlined below:
The parties must set forth what the ownership rights are in the property, including each party’s share of the property and whether it is undivided or if ownership is divided into separate units. The agreement will also designate how the owners will handle their expenses, how rental income will be distributed, and how ownership interests of a specific party or parties can be assigned to another party.
The parties must agree on who will be putting up what funds towards the purchase price of the property and how will they handle taxes, insurance and maintenance fees, etc. The actual amount, who is responsible for the amount and how the funds will be applied must be outlined in the agreement. In relation to real estate taxes on real property, owners must agree on going to the tax collector in the event real estate taxes are not timely paid.
The parties must also agree on how property will be insured going forward, including the subsequent obligations of the parties to maintain coverage. They must determine the type of coverage, including liability and flood, who will be responsible to pay, how the policy will be split and where the parties will obtain the policy. Notably, a co-ownership agreement often includes provisions about how decisions will be made in connection with the property and its management, including how routine decisions will be made, and how big decisions will be made, including what happens if the parties cannot come to an agreement.
Similarly, a co-ownership agreement typically contains provisions that provide the parties with a right of first refusal to purchase the other party’s interests in the event they decide to sell. A clause with a buy or sell provision that gives the parties the option to buyout the other party’s interest may also be included.
How to Write a Co-Ownership Agreement
Prior to drafting the co-ownership agreement, you should have:
Considerations for Drafting
- Decide what type of business entity will be formed (if any). Corporations, partnerships, and limited liability companies (LLC) are all business entities that can be formed to act as part of the co-ownership arrangement.
- Determine how the business entity will be organized. If an LLC will be formed, then you must draft the operating agreement. If a corporation will be formed, then you must draft the by-laws. If a partnership will be formed, then you must draft the partnership agreement.
- Establish the capital contribution of each co-owner and how profits and losses will be divided.
- Determine the authority each co-owner will have to partake in the management of the company. Have a trusted tax attorney or CPA set up a meeting with you and the co-owners to discuss tax implications of the co-ownership arrangement.
- Create a buyout provision to protect the co-owners in case one wants to leave, dies, or becomes otherwise incapacitated. Also create a document that provides adequate proof of ownership. A co-ownership agreement can also create a procedure to legally dissolve a co-ownership arrangement.
Our co-ownership agreement template is available for download and can address the above items and more. Drafting your own co-ownership agreement can be difficult and drafting an incomplete or poorly written co-ownership agreement is a common pitfall. It’s important to have a lawyer draft your co-ownership agreement so that all relevant issues are addressed in a legally enforceable document.
Co-Ownership Agreement’s Legal Requirements
Co-ownership arrangements, while an excellent tool for facilitating ownership among multiple parties, are not free from legal risks. As in most situations concerning business relationships, keys to avoiding these problems are clear communication and clearly worded documents. Since the co-owners are creating a legal relationship, it is nearly always essential to have legal advice regarding the co-ownership document. Many times conflicts do not result from the attempt to define business matters, like the division of responsibilities or the method for determining profits. Instead, disputes arise over the relationships between the parties? Who makes decisions? Who owns what? What happens if someone wants to sell? Emotions come into play and often make it difficult to return to a rational discussion. That is when the full importance of having a clearly worded agreement becomes apparent. The document should discuss methods to resolve conflicts. Mediation is preferred as a first step, with other avenues like arbitration or litigation spelled out as a secondary means. If the co-owners do not want to choose a method for resolving disputes, they should be aware that under the law different methods may be used based on the facts of the situation. State laws relating to real property ownership, partnership law, corporation law, and securities law may apply to a co-ownership arrangement. The parties should not rely solely on lay judgment about how a particular transaction is classified, but should consult with an attorney.
Advantages of Using a Co-Ownership Agreement Template
One of the most significant advantages of using a co-ownership agreement template is the time they can save. Drafting an agreement from scratch can take a considerable amount of time, especially if the parties are negotiating different terms. Even simply sitting down and drafting the initial terms can be difficult, as issues may need to be addressed that the parties did not previously consider. A template can streamline this because it already contains much of the necessary language to address the key issues, and therefore saves time in the negotiation.
This time-saving benefit carries over to other aspects of the real estate transaction as well. Buyers and sellers are often eager to move quickly through to closing, particularly if they are beginning to incur the costs of holding two properties. It is common for a transaction to have a firm or soft closing date written into the purchase agreement, which can put undue pressure onto the parties to get a deal done. Thus, whenever something goes wrong during the purchase agreement process, the parties are usually more inclined to reach a resolution quickly to avoid disruption to their closing date .
A co-ownership agreement template can help speed up the process by providing both parties with the language and framework they need to address issues that arise. For instance, if a buyer is giving a sizable down payment as an advance on a larger contribution expected later on, a good co-ownership agreement template will already contain language addressing that. Issues regarding repairs, taxes, ownership and management costs, forbearance periods where one party can go for a temporary period without making payments, and other problems can also be quickly addressed and inserted into the template.
Finally, using a template for a co-ownership agreement can often be the more cost-effective option. While templates may not always be free, they are often relatively inexpensive compared to paying a lawyer to draft a custom agreement. The attorney’s fees associated with an agreement aren’t just for the drafting itself; the cost of an attorney’s time is often tied to how much legal research is needed before a contract can be drafted. Templates eliminate a lot of this drafting work because the contract already contains the provisions that will need to be addressed.
How to Pick the Best Template for Your Purposes
Selecting a suitable co-ownership agreement template is integral to fostering a collaborative and harmonious business relationship. Different types of partnerships, from family-run businesses to large-scale ventures, present unique needs that must be taken into consideration during the template selection process. For instance, a family business may be most concerned with the distribution of profits, while a larger enterprise might focus on intellectual property rights and decision-making procedures. Here are some key factors to consider when choosing the right co-ownership agreement template for your partnership: Compatibility with Specific Partnership Needs Before settling on a template, assess the needs and interests of your specific partnership. The template should reflect the fundamental objectives of your business relationship, whether it’s dividing profits, outlining intellectual property rights, or detailing the terms of ownership. The compatibility between your business’s needs and the template’s terms is critical to creating a cohesive partnership. Scalability and Flexibility A co-ownership agreement template should not be static; it should allow for growth and scalability. As your business evolves, the terms of your co-ownership may require adjusting. Choose a template that provides flexibility and easily accommodates future changes to the agreement. This will save you the hassle of having to draft an entirely new document every time your business develops. Customization Options While the ability to modify a template is necessary, choose one that has a framework which is adaptable to various business types, industries, and sizes. However, it should not be so general that the terms lack specificity. The right template will help you build a comprehensive yet focused agreement that will successfully establish the foundation of the co-ownership.
Making Changes and Revisions to Co-Ownership Agreements
The life cycle of a co-ownership agreement doesn’t stop as soon as it is signed. Over the years, your co-ownership agreement will probably need to be updated and amended in light of changing circumstances. Changes can include the sale of a co-owner’s interest, one party changing their name, changes in residential or business address, increase or decrease in the security interest, changes to key contacts, or amendments to the provisions of the agreement.
Making an amendment should be a straightforward affair. Either it can be made in writing so that the result is a wholly re-stated agreement encompassing the additional provisions, or it can be made as a simple side note to the agreement setting out the nature of the change . Provide the additional parties with a copy of the new or amended agreement to amend the originals at their end. If necessary, a notification of amendment can be sent with the updates so that the parties are not held to older versions.
Amendments to the agreement should be avoided if the amendments are substantial enough to make it disreputable. Rather than amend that agreement, a new agreement should be prepared to replace the original, taking into account the previous terms. A new agreement is often preferable, particularly if the amendments are significant. It means that the relevant parties do not need to go through the entire original agreement to find later changes.