Tenants in Common Agreement: An Essential Insurance Policy for Unmarried Co-Owners

These days, people are getting married later and later in life — if at all. And for the last few decades, housing costs have outstripped inflation, making housing a very big cost of living. Owning as tenants in common (or as joint tenants) can be an attractive solution.

It is no surprise that unmarried people might be thinking about buying a home together. Maybe they’re in a committed relationship, and “pooling life resources” seems like a good idea. Maybe they’re just good friends who feel comfortable entering into a very close relationship in order to get a better home.

Walking the path towards home ownership is easier with somebody else. But do it with your eyes open, and protect yourself. Consider a tenants in common agreement.

Just understand: Co-owning property — particularly your home — is about as personal as it gets. It is also a legal relationship that is difficult to sever. So preparation is essential for avoiding a much bigger problem down the road.

Tenants in Common, or Joint Tenants

When two or more people own real estate together, they do so in one of two ways: tenants in common, or joint tenants. The word “tenants” here is used in an old-fashioned sense, meaning any person with the right to a piece of property.

Joint tenancy is more particular and less common. To own as joint tenants, the owners must own in equal percentages. When one joint tenant dies, that person’s ownership automatically passes in equal parts to the surviving tenants.

In contrast, tenants in common can own in unequal percentages. When one tenant in common dies, that person’s interest passes to her heirs, and not to the surviving co-owners (unless of course that person is also an heir).

As a result, joint tenancy is appropriate generally only for people in a committed life relationship. It is a very basic “estate planning” tool that does not require being married. Tenancy in common works best in every other situation, including co-owning simply with good friends.

Be proactive and prepare today. Or pay tomorrow.

Here is the problem: While the law makes it easy to co-own property, it is extremely difficult to sever that relationship. Owning property means bills to pay (mortgage, taxes, insurance), and represents money “in the bank” (since hopefully the house is worth more than what you owe on it). If you want to sell and move on, you’ll really want the other owners’ cooperation.

Absent agreement on a path forward, the only way to force the sale of the house is by lawsuit. Called a “partition action,” one owner demands that the court sell the property, pay all associated debts, and distribute the proceeds to the owners in their ownership percentages. The property is then sold by the sheriff at a public auction (i.e. a “distressed sale.)

A partition action is long and complicated, you can easily incur tens of thousands of dollars in legal fees. And at the end, the property is sold for less than full market value. So a partition action is a little like using a sledge hammer to kill a fly. Yes it will work, but expect a lot of collateral damage.

Tenants in Common Issues to Address

Instead, prudent co-owners enter into a tenants in common agreement (or, if they are joint tenants, a joint tenants agreement, essentially the same thing). This is a written document that addresses those issues that can arise between co-owners. Here are just some of those issues.

  • What are the ownership percentages? Are the owners able to use the whole house, or are they limited to their own spaces (e.g. upstairs and downstairs units)?
  • Who pays the costs of ownership (e.g. mortgage, taxes, insurance, maintenance, improvements, etc.)? What if the owners can’t agree on what those costs need to be? What if one owner doesn’t pay his share of those costs?
  • What if one owner wants to sell and “get out”? What if an owner dies? What are the terms of a sale from one party to the other? What determines the “purchase price”? What if another owner can’t pay for a buy-out?
  • Can an owner borrow against the property? Or lease it to someone else?
  • What happens if one party has to enforce the terms of the agreement? Is a lawsuit required, or arbitration? Will the winner be entitled to attorney fees?

By addressing these issues, a tenants on common (or TIC) agreement provides the parties with an agreed framework for resolving most possible disputes. Setting expectations up front is the best way to head off misunderstandings and disputes in the future.

And if there is a complete breakdown and legal action is required, it will be simpler than a partition action. Best of all, under a TIC agreement the prevailing party should be able to recover her legal fees and costs incurred. Which is otherwise not true in a partition action.

Use a lawyer to draft your TIC agreement.

Finally, this is a complex legal document. While lawyers are expensive, they are sometimes necessary. If you scrimp and “save” this cost, you run a very serious risk of failing to properly address these issues in the first place. Meaning the agreement may not provide the very framework upon which you were relying.

A lawyer will make sure all of your issues are addressed. He will make sure the final document is binding and fully enforceable. An experienced attorney can provide these services efficiently and for a reasonable fee (perhaps $1-2k). Like an insurance policy, this will be money well spent if things go wrong. And in the meantime, it will hopefully prevent problems from arising in the first place.

As an attorney, I’ve helped lots of people on the other end of this problem. They didn’t have a TIC agreement — and now must clean up the wreckage. Expensive, unpleasant… and entirely avoidable. Co-own real property without a TIC agreement at your peril.

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