A memorandum of agreement is designed to be used along with a real estate co-ownership agreement to provide additional protection for the parties. Recording the memorandum of agreement protects the parties against certain kinds of actions by people that did not sign the agreement but have some claim against the property or against one of the owners. The most common problem of this type is when a creditor seeks to collect from one of the owners, and the most dangerous situation is where there is a bankruptcy or tax lien. The memorandum of agreement protects an owner who is not bankrupt or in debt from creditors, bankruptcies and liens involving the other owner.
The memorandum of agreement functions in two ways. First, it provides “constructive notice” of the existence of the agreement so that creditors or others who become owners through a court proceeding or lien process cannot claim that they are not bound by the agreement because they did not sign it. Second, it prevents a creditor, bankruptcy trustee, or other non-signing owner from using a legal process called partition that forces a sale of the property followed by a division of the money according to title percentage (without regard to what the agreement says).
To illustrate a fairly common disaster that the memorandum of agreement is intended to prevent, imagine a situation where two people agree to equally share a property, but owner pays 80% of the down payment. The co-owners have an agreement stating that the owner who paid less of the down payment will repay the other owner when the property is sold. Later, the owner who paid less down payment goes bankrupt, and his share of the property is taken over by a bankruptcy trustee. In general, under Federal law, the trustee is not bound by the agreement, meaning the trustee could force a sale of the property and take half of the proceeds without paying back the down payment loan. A properly prepared and recorded memorandum of agreement prevents this disastrous result in most cases.
For the memorandum of agreement to function, Notarized, and recorded in the public records of the county where the property is located. If the memorandum of agreement is not recorded in the county records, it will be useless. Also, there must be a signed agreement that is separate from the memorandum of agreement. Note that the memorandum of agreement does not describe what the parties have agreed to; their agreement is private, and should not appear in the public records. The memorandum of agreement only contains the important legal language that creates the “constructive notice” effect and makes the waiver of partition rights more effective.