Are you considering investing in property with friends? In today’s escalating property market it is becoming more common.
The subject of friends pooling their resources came up recently in a property investment chat group. There were tales of financial success, tempered by cautionary tales of woe. It definitely crosses the line of mixing business and pleasure but good legal advice can help you manage the risk.
Investing with friends has several benefits, including:
- the sharing of resources
- widening your sphere of knowledge
- sharing risk
However, you will also share the returns.
There is value in a written agreement and we recommend there is one in place for any property sharing venture. However, our experience has been that the pre-contract, brainstorming and crystal ball discussions that occur beforehand are even more valuable. In these informal and relaxed conversations, friends can debate issues relating to the investment. This is especially important when they are contributing in different ways to the purchase or there is an uneven distribution of responsibilities. For example, some of the friends may be providing more capital, others may not be living in the property.
Enter into an agreement
It’s really important, whether investing in a property, boat or business, to enter into an agreement. All the parties’ rights and obligations need to be recorded. An agreement is a way to manage everyone’s expectations at the outset.
That agreement can include some of the following issues:
- What each party will contribute towards the purchase;
- The shares of each owner and the form of ownership to be recorded on the certificate of title;
- How the parties are to contribute to property expenses, outgoings and maintenance;
- The process by which the individuals may sell their share of the property;
- The method of dispute resolution;
- What will happen in the event of a death of one of the parties;
- Relationship property separation of the parties;
- What happens in the event of an injury to one of the parties;
- If one of the parties decides to move out of the property; and
- Any joint and several obligations under any mortgage.
This list is by no way exhaustive and each agreement will vary in its complexity.
In our experience, it is usually when a dispute arises or when one party seeks to leave the partnership that the agreement becomes most useful. This aspect of the agreement needs to have thought and care in its drafting. We do not recommend long-winded dispute resolution clauses. In some cases, these add more cost and can impact negatively on the relationships of those involved. There is a benefit to having a clear-cut exit strategy (for example if an agreement cannot be reached between the parties, then the property is sold) as opposed to a dispute resolution process. In an attempt to find the perfect solution, these often bind the parties in a prolonged process to the detriment of everyone’s pockets and mental well being.
When should the agreement be put in place?
We always recommend that individual owners obtain independent legal advice before signing any property sharing agreement. However, it is not a statutory obligation. Your lawyer can help prepare an agreement, ideally at the time you purchase the property. If necessary though, it can also occur after the property has been purchased. Go for the first option if you can because many conflicts arise not at the time of entering the partnership but when one party seeks to end it.