Exit Strategies in Real Estate Co-Ownership

Co-owners must be in agreement about why, how and when the property will be divested (e.g. disposed of, sold, etc.).  There must be  clear answers about the following:

• What event(s) trigger the sale of the entire property?
• What will happen to a co-owner’s share in the event that co-owner has defaulted on their obligations?
• If a co-owner wishes to leave the property for an extended period of time, will this trigger a specific event, such as the of sale or assignment of their ownership share?

In a co-ownership agreement, there should be no ambiguity about the answers to these questions, and how they relate to potential “exit” events. All parties need to be on the same page about events which trigger a sale of the property, events of default, and general exit strategies.

It is crucial that a co-ownership agreement have clear and specific provisions dealing with an event of default and material changes to the arrangement.  What constitutes a ‘default’? And, who decides whether an event qualifies as a ‘default’?  Not only that, but also co-owners more specific issues, such as:

• the duration of the default;
• the nature of the default;
• the liability arising from the default; and,
• the relationship of the defaulting person to other co-owners: is the defaulting person  a spouse of another co-owner? Do they have obligations to other co-owners or parties, such as children or elderly family?

The range of consequences arising from an event of default will depend on the nature of default, and the duration of the default, e.g. the more severe longer the default, the more likely it will trigger a major exit event.

However, not all “exit scenarios” are default scenarios; co-owners may leave of their own accord. As such, a co-ownership agreement should include sections dealing with the treatment of a departing co-owner’s share. Generally, if a co-owner wishes to sell their share in the property, then this will invoke a trigger an exit provision for that co-owner’s share. This provision sets out how  co-owners to deal with the selling co-owner’s share. Will their share be sold back to other co-owners?

Will their share be required to be listed for sale? These questions should be answered along with several others so that the exit provision provides comprehensive guidance on how to dispose of a co-owned share.

Co-ownership is a highly specialized area of law that requires careful attention to the nature of the relationship between the parties.  Make sure you retain a lawyer who is familiar with the ins and outs of co-ownership so that you are not left with a significant legal issue later on.  A co-ownership agreement should be drafted by lawyer who specializes in real estate co-ownership.