This agreement template is designed for situations where two parties will co-own investment property as tenants in common, or where there are more parties but they will be effectively separated into no more than two subgroups. For example, it will work for two couples, or for one couple and one individual, but will not work for three people (or more) that each intend to act autonomously. (For that type of arrangement, use our “Sample Property Co-Ownership Agreement For Three or More Parties Investing Together” [link here].) This form agreement can be used for property in any U.S. state.
Note that this agreement form is not suitable for use where any owner will live in the property. It is also inappropriate for situations where the property will be held by a limited liability company (an “LLC”, which requires an LLC Operating Agreement), limited partnership (an “LP”, which requires a limited partnership agreement), or corporation (which requires corporate bylaws and also, generally, a shareholders agreement). The agreement template is suitable for the increasingly common arrangement where the property will be held in tenancy in common, but one or more of the tenant in common investors will hold/her her TIC share in an LLC. Each of these various legal forms of ownership has pros and cons from an owner liability, asset protection, tax, and operating cost perspective, and there is no structure that is best for every property and every ownership group. Investors should carefully consider the options before making a final decision
This sample agreement is comprehensive and complete, and is designed to protect the parties in case of unforeseen events or disagreements, as well as following death. It is plain English designed to be easy to understand and customize. The agreement is eighteen pages in length and includes a detailed table of contents for easy reference.
This sample agreement includes the following sections:
CO-OWNERSHIP SHARES AND CO-OWNERS
OWNERSHIP, TITLE, AND ALLOCATIONS
OWNER USAGE RIGHTS WAIVER
ESTABLISHING RENTAL AMOUNT
RENTAL INCOME ALLOCATION
EXPENSE AUTHORIZATIONS AND ALLOCATIONS
SPECIAL ASSESSMENTS/CASH CALLS
DISTRIBUTION OF OPERATING SURPLUS
MEETINGS AND AGENDA
VOTING POWER AND ABSTENTION
MAINTENANCE, REPAIR, REPLACEMENT AND IMPROVEMENT
REMOVAL OR RESIGNATION OF MANAGER
TRANSFEREE AND SUCCESSOR OBLIGATIONS
MANDATORY SALE OR BUYOUT
DEFAULT AND ENFORCEMENT PROCEDURE
MEMORANDUM OF AGREEMENT
DISTRIBUTION OF SALE PROCEEDS
OTHER GENERAL PROVISIONS
Important issues covered by this agreement template include:
- Rental Procedures: How is the asking and acceptable rent amount determined? Who prepares vacant units for rentals, advertises and shows the unit to tenants, evaluates tenant qualifications, selects the tenant, and handles the rental agreement and move in? Who collects rent and responds to tenant complaints? What if the owners disagree about rent amount of tenant selection?
- Allocations: How will rental income and ownership expenses be shared? How will proceeds from the sale of the property be split? This form agreement is structured so that all income and expenses can be shared according to the same percentages, or so that different items can be shared according to different percentages (as when, for example, one party invests a disproportionate share of the down payment).
- Budgeting: How can the owners ensure that there is always money on hand to pay the bills? If the property is cash-flow positive, who decides whether and when income will be distributed to owners?
- Assessments and Cash Calls: If the property is expected to be cash-flow negative, how and when are owner contributions made? If vacancies or other problems cause net cash flow to be less than expected or create unforeseen cash needs, what are the procedures for establishing owner contributions, notifying owners, and collecting funds?
- Management and Accounting: Who is responsible for day-to-day operation of the property? How much decision-making autonomy does the manager have? What happens if an owner is unhappy with the way the property is being operated? What records must be kept, and how and when are records distributed to owners?
- Decision-Making and Disputes: How are decisions made? What happens if the owners disagree? How does the percentage of ownership affect owner voting power? What happens if an owner refuses to participate in decision-making or simply stops responding to calls or emails from the other owner? This form agreement is specifically designed for two-owner relationships and specifically structured to deal with the fact that there are only two votes. It provides fast and cost-effective “tie-breaking” solutions for the vast majority of situations that do not involve going to mediation, arbitration or court.
- Enforcement: What happens when one co-owner is not paying or doing his/her share? What happens when an owner is violating the agreement in another way? This sample agreement provides a variety of remedies for owner default including loans from one owner to another, dilution of a defaulting owner’s interest, and the right of a non-defaulting owner to buy out a defaulting owner.
- Exit Strategy: Can one owner sell his/her share? What restrictions apply to a partial sale? When and how will the property be sold? Can one owner force the other to co-own the property forever? Under what circumstances can one owner force a sale? How will the pricing and sale process work if one owner is more anxious to sell?
- Death: What happens if an owner dies? Can the deceased owner’s heirs force a sale of the property?
This agreement template will require only fill-in-the-blank modifications for the vast majority of investments. It can be used as a stand-alone document, or together with our Memorandum of Agreement [link here] for even greater protection. For those co-owners with more complicated arrangements, our attorneys can assist with suggestions and modifications for a modest additional fee.