What is a Joint Tenancy?
A joint tenancy is a legal structure for the ownership of real property whereby two or more persons hold an undivided interest in the property, with equal rights of use and occupation and the right of survivorship. When one joint tenant dies, that person’s interest in the property passes immediately to the surviving joint tenants, and so on until only one joint tenant remains, who then retains sole ownership of the property. Joint tenancies are recognized in England and in most common law jurisdictions but also civil law jurisdictions such as France. This "survivorship" is the essential feature, since it leaves no interest to the estate of the first to die and is therefore different from "tenancy in common", which requires that a deceased’s interest in the property passes to his estate for distribution to his heirs. For example, if A and B own the property as joint tenants, upon A or B’s death the survivor acquires the property outright and the estate of the other has nothing to sell or transfer to beneficiaries. A tenant in common on the other hand may sell, transfer, or will away his interest to anyone he chooses including the survivor of joint tenants; without this express agreement, A’s death does not allow the other to sell to someone else. There are two types of joint tenancy – "joint tenancy in law" and "joint tenancy in equity". The intent of the parties to be joint tenants must be clearly stated in the wording of the transfer ("transferor") to one or more persons ("transferees") who acquire the real property concurrent with each other . A basic joint tenancy deed not specifying the type of tenancy, or one that refers to joint tenancy in law, includes the right of survivorship under the common law, and rather serves as a declaration that such was the intention of the transferor. A joint tenancy created by a transfer of real property from a single transferor is a "joint tenancy in law" unless the transfer expressly reserves to the transferor a separate undivided interest. The transfer is generally accepted to mean a transfer by way of gift, but in certain jurisdictions may also include a provision in a contract whereby two parties jointly agree to buy property which is owned by a single party. In the event of a dispute over the type of joint tenancy, extrinsic evidence may be relied on as proof of the intention of the testator. The "joint tenancy in equity" may be used where there is land being purchased concurrently by two or more persons who share the same contribution to mortgage payments and financing, but do not wish to have automatic right of survivorship. In a joint tenancy in equity, the transfer from one or more tenants in common to all or some of the other tenants in common does not carry the right of survivorship. Instead, upon the death of a tenant in common who is joint tenant in equity, his interest passes to his estate rather than to the survivors. A joint tenancy agreement template is critical for real estate investors purchasing properties and shows beneficial interest in property ownership. These legal documents reflect particular understandings between co-owners or are real estate investment contracts that are reviewed by lawyers and used in many real estate transactions.
The Main Characteristics of a Joint Tenancy
The key features of a joint tenancy agreement are easy to understand, cover the most important aspects so as to be a comprehensive legal tool, and yet hard to get right.
That’s because despite being the most commonly used type of co-ownership by those who are not buying together as one legal entity such as a limited company, few understand adequately what it really means.
So what are its essential elements, and do you need to be aware of them in order to ensure that you don’t fall prey to one of the many procedural problems which can de-rail one of the most fundamental benefits of joint ownership: i.e. entitlement in full to capital gains relief on sale of a property?
The most important elements of a joint tenancy agreement
The requirement of joint tenancy is that the co-owners have equal shares of ownership, the shares arise at the same time and in the same deed, the ownership is for the same period of time, and not only must the shares be identical but they must also be inseparable.
The implication of those provisions is that the co-owners do not have the right to separately dispose of their interests in the jointly owned property. This means that when one co-owner dies, his or her share passes automatically to the surviving co-owners, and not as part of a will or estate.
As a result, from the date of execution of the deed of joint tenancy, even if the co-owners change their minds and later want their shares to be separate so that for example on death a will can be effective, they are unable to do so unless they re-float the deed of joint tenancy.
The nature of a family joint tenancy
Typically if you’re buying a house with your spouse or partner, the presumption is that a joint tenancy is what you want. The idea is that if a joint tenant dies, the property ownership passes automatically to the survivor.
However the assumption is just that, and a joint tenancy must never be assumed by buyer or mortgage lender or insurer, as it can cause major problems if for example the buyer later decides to re-mortgage, perhaps to fund a divorce settlement, or the marriage ends, or a will of one spouse leaves their estate to someone outside the marriage.
In each of these cases a transfer out to release the equity is needed, but the title to it is locked under the joint tenancy as it stands, so that legal ownership cannot be disposed of by a single party.
What’s more, although it appears to be more difficult for a property to be sold or re-mortgaged if held in a joint tenancy, the reality is that it provides a false sense of security rather than genuine protection. If one party to a marriage were to abscond, for example, taking their share of the equity with them, and leaving the other spouse liable for the mortgage debt, the asset may still have to be dealt with.
As a result, the value of the joint tenancy is in the presumption that the parties will remain together long enough for its provisions to be fulfilled.
Keen to create a tenancy-in-common?
If you’re clear that you want to avoid the pitfalls above and create a tenancy in common instead, you can expressly stipulate this in writing when you purchase the property.
You must also use a clear unambiguous expression to refer to the shares as separate, so as to avoid any inference that you mean them to be joint. A case some years ago where the term to express the share was "home allocation" is a good example of how even very well-intentioned words and terms can still fail to create the desired legal status.
The terms of your joint tenancy agreement
The flexibility of a joint tenancy lies in the fact that even if it is not a good fit at the time of purchase, there is always room for the deed to be unpicked by the joint tenants should they wish it.
However, in addition to the potential for disruption that entails, there are also times when particular provisions in the deed of joint tenancy may be unclear. Where this happens it is vital to obtain legal advice to understand the implications of the wording used in a joint tenancy agreement and to enable amendment if required.
Crucially – and by far the best way to ensure that it does what you intend it to do – is to have joint tenancy documents drafted and checked by solicitors. This way the wording can be tailored, rather than prepared from a template with matched terms and phrases.
The joint tenant agreement also needs to be specific to the property in question, and to the persons involved, to provide the necessary protection as, for example, a standard template which does not take into consideration the relationship or precise property details may have the opposite effect.
Pros and Cons of Joint Tenancy
It’s helpful to balance the benefits of a joint tenancy with some drawbacks. While a joint tenancy agreement has certain advantages, it is wise to fully understand these before making a major commitment.
Easy to transfer
A property held in joint tenancy is easy to transfer. The deed is simply signed by both parties and any third party can simply rely on the deed and accept it as evidence of ownership. This is important if the property is to be sold, rented, mortgaged, or otherwise encumbered.
A joint tenancy can be severed
Even if a joint tenancy exists, the owner of undivided title can always sever the joint tenancy. In that case, the parties become tenants-in-common, unless the other party can point to language in the deed establishing a joint tenancy.
Detrimental exposure to creditors
A joint tenancy exposes each party to creditors of the other party. Upon the death of one party, the property passes to the surviving joint tenant by operation of the right of survivorship. Although the property may pass outside of probate, it will still be included in the estate of the deceased parent to the extent necessary to satisfy creditors.
When Should You Use a Joint Tenancy Agreement Template?
When entering into a joint property ownership arrangement, it is important to have thoroughly defined agreements to mitigate your potential liability and possible future disputes. When parties are able to clearly identify their intentions in writing, the risks are more easily minimized. By using a joint tenancy agreement template as a starting point to record ownership terms, you can better protect your interests. A few examples of when a joint tenancy agreement can be used are when family members are purchasing property together for a personal residence, or when investment partners are purchasing commercial properties for profit.
If you are looking to buy a home, you may find yourself entering into a joint property agreement with friends or family members. When choosing the right joint ownership structure for your needs, you’ll want to consider what you are trying to achieve with your investment. You may be looking to simply purchase an investment property, in which case equal names on the title may be best in the clear division of profits and responsibilities. Alternatively, you may be simply looking to purchase property as a family or inter-generational investment, in which case a simple agreement to equally divide everything may be appropriate. Either way, use of a template will help make sure you get the terms right.
Similarly, in a commercial situation, you may be looking to make a big investment with a partner. In this case, you may want to divide the profits and responsibilities equally, meaning that equal ownership and signature power would be seen as the best option. Alternatively, if the businesses differ in complexity or industry, you may want to make sure that control of the entity and the ability to sign on behalf of the company rests with those who are operating it and have the expertise, with only an equal split of profits. Whichever situation fits your needs, use of a template will help make sure you’re covered.
How to Prepare a Joint Tenancy Agreement: A Step-by-Step Process
When it comes to creating a joint tenancy, a tailored approach is often critical. Take the time to customize a joint tenancy agreement template for your property or rental situation to avoid future disputes. Add the relevant details. Typically, the first section of a joint tenancy agreement outlines the name, address, and other contact information of the involved parties. While this may seem straightforward, you don’t want any room for confusion if spouses, partners, or adult children are involved.
Keep in mind that extra names can lead to complications if one of the partners dies, or subsequently gives up their share. If a house belongs to Mary and her husband Paul, for example, any real estate documents naming Paul or his estate may cause trouble later. Is there a step-son with the same name who will be entitled to a share of the house, and does the joint tenancy agreement cover this situation? Spend some time addressing this in your agreement, or consider an attorney-advised revision of the estate plan.
Identify your rights and obligations. The second section of your agreement specifies the duties and rights enjoyed by each party. This should include payment of costs (usually rent or utilities), the amount of rent each party should pay, common areas or property that each party has access to, and what happens to the property after a party dies, becomes ill , or moves away.
It’s worth including details about what to do if one party wishes to bring in a roommate, or use the property for a home business, or even use it for unfixed purposes at all. Is permission required? Or does one party hold veto power over certain activities? Failing to address these issues may lead to unexpected conflicts later on.
Outline your exit strategy. Figure out how the joint tenancy ends before entering into your agreement. Does the property go up for sale if one party moves out? Can the remaining party buy the other’s share?
Make plans for modifications. Last but not least, carefully consider how to modify or renew your agreement, and how to enforce its terms or terminate it. Who’s responsible for documenting the change? What happens if a party fails to uphold their responsibilities? This section allows you to state whether and under what circumstances the parties can make changes, and if there are any penalties.
What comes next? The final step is to finalize the agreement. A witness, notary, or both can help you do this. After all parties have signed, make copies. Keep one with your regular property documents. It’s also wise to share copies with family members. Whatever property you wish to rent, the potential for conflict and complications doesn’t have to come with it. With a well-tailored, specific agreement, you can avoid many common pitfalls.
Legal Implications and Pitfalls
Joint tenancy agreements are not without their legal considerations. While the number of issues that might arise is too much for a single blog post, there are some important ones to be aware of.
Do You Need Legal Advice?
Similar to any contract, a joint tenancy agreement can be subject to negotiation and dispute. Additionally, the intent behind a joint tenancy agreement is not always clear. Imagine two people living together for a year and then deciding to move to a new house together and sell the original home. What rights do each of them have? If nothing has been put in writing or agreed upon, they may both expect something different. A dispute could arise as a result.
Paying for the entire mortgage on a joint mortgage agreement entitles the person to equity. However, if someone has been maintaining the property and has put in considerable labour into repairs, they may also feel entitled to a portion of the equity in the home. Oftentimes joint tenancy agreements do not take the contributions of parties into account, meaning that one party could potentially be left with a disadvantage.
Disputes and misunderstandings are not the only legal consideration when it comes to joint tenancy agreements. Their use is often misunderstood in a non-tenancy context, and can lead to significant tax advantages or disadvantages. This requires the counsel of an accountant when deciding whether or not to make use of a joint tenancy agreement.
Finally, a joint tenancy agreement can be drafted in a way that is overly beneficial to one party. If a joint tenancy is drafted in a manner that makes future decisions particularly onesided, it may be considered unconscionable and therefore void.
These potential legal pitfalls mean that when drafting even the simplest joint tenancy agreements, it is often in your best interest to consult a legal professional.
Common Errors to Avoid
Executing a joint tenancy agreement is an important decision with significant legal implications, mistakes in recognition of your interest in property held in this manner after your co-owner has died are costly. It is therefore essential to handle all aspects of a joint ownership agreement with proper attention and care and avoid common mistakes.
Don’t use a pre-printed form. These are often incomplete or incorrect, usually remaining too general in scope. A "one-size-fits-all’ template rarely suffices when it comes to such a complex and very highly individualized transaction. As for using a commercial form, even if it’s been designed for family property interests, it’s still not advisable. Usually those documents are designed to strictly serve the interests of the person selling these forms rather than the needs of the consumer.
For example, a company form may state that the owners must mutually agree to sell their interests, however, if one owner does not wish to sell, in the end it may be impossible to sell as the law provides that the only way to forcibly sell such a property is to file a court application. This can be a costly process and can take a long time, especially where the parties cannot agree on what needs to be done with the property.
A simple conversation between the co-owners to deal with all aspects of the deal can be sufficient to avoid many problems. From the above example, it does not require great intellectual exercise for one to understand the underlying issues that arise with the joint ownership of a property. Careful thought and planning can easily save you from expensive mistakes.
Joint Tenancy Alternatives
While joint tenancy is a popular form of co-ownership in property and estate planning, it’s not the only option. Two alternatives to joint tenancy include an estate freeze and a living trust.
Estate Freeze
Contingent interest in property refers to the interest that a beneficiary (or beneficiaries) becomes entitled to in every estate any time the interest of owners is diminished. Contingent interest is similar to the interest of a joint tenant in real estate property. It essentially means that the surviving spouse (or other interest holder) has a contingent interest in the property owned as part of the decedent spouse’s estate. Such property would include property included in the estate by right of survivorship at death. Those co-owners with contingent interest would receive their portion of the estate through the will or the laws of intestate succession. The problem with contingent interests in property is that the property vests pursuant to the terms of the estate plan—either the will or the laws of intestate succession—as payment of debts is prioritized. For this reason, certain estate planning attorneys fail to encourage real estate owners to execute deeds to create ownership interests pursuant to the law of survivorship. Unfortunately, this creates problems when the property must be sold—particularly in disaster cases. When real estate and homeowners cannot pay a mortgage or homeowners association dues, they oftentimes lose their home as a result of the foreclosure process. As the following description explains, foreclosure creates a lot of uncertainty and financial loss for property owners and financial institutions. Tenants that are purchasing real estate property under contract for deed or lease-to-own arrangements can fall victim to foreclosure even if they are making timely payments under the contract. This is because the interest they hold is viewed as less than ownership for purposes of foreclosure. The terms of the contract provide the purchasing tenant with a right to the property provided that the tenant makes the contract payments. In the event of default on their obligations, however, the interests of the tenant fall to the bank that holds the mortgage—meaning they could lose their money and property . Many property owners hold a mortgage on their property. As long as these obligations are being paid, most lenders don’t care if the owners own their homes as joint tenants or tenants in common. However, when mortgage obligations or homeowners’ dues are not paid, the banks and homeowners associations do not look kindly on their owners’ interests in the properties. As stated above, because contingent interests are treated as having lost their interest based upon the original terms of the estate plan, this means that the bank foreclosing on the property may not be aware that other owners (other than the person in default) actually have a greater interest in the property. Because the mortgage was initially granted based on the value of the house and the fact that the owner had outstanding credit, nobody ever bothered to check any other claims on the property. Unfortunately, this means that other owners will lost their interests along with the defaulted owner.
Living Trusts
An alternative to joint tenancy for spouses is the creation of a living trust or family trust. Family trusts typically provide for the establishment of a "revocable trust" such that the beneficiaries may make revisions to the terms of the trust or its assets as long as both spouses are alive. This means that spouses can transfer property during their lifetimes in order to maintain control of joint assets without having to worry about mistakes resulting in loss. The terms of the living trust can provide for the transfer of property interests to children or other individuals upon the death of the surviving spouse. This means that the children (or other beneficiaries) of the trust receive their interests in property without having to be subjected to the same kind of insecurities associated with death and probate proceedings. When dealing with joint tenancy agreement templates, individuals should carefully examine the forms available online in order to determine whether the forms meet their particular needs. In certain instances, it may be more beneficial to establish a living trust, narrowly tailored to their specific circumstances.