When it comes to owning property with others, there are several ways to go about it. One common option is to hold the property as tenants in common. But what exactly does that mean? In this guide, we’ll break down everything you need to know about tenants in common, including how it works, its advantages and disadvantages, and how to dissolve a tenancy in common.
What is Tenancy in Common?
Tenancy in common is a form of co-ownership where two or more individuals own equal or unequal shares of a piece of property. Each owner has the right to possess and use the entire property, regardless of their ownership percentage. This means that if one tenant in common dies, their share of the property passes to their heirs or beneficiaries.
1.1 How It Works
Let’s say three people decide to buy a house together as tenants in common. Person A puts up 60% of the down payment, person B contributes 30%, and person C contributes 10%. As tenants in common, all three individuals have an undivided interest in the entire property. Person A, B, and C can each use and occupy the property, but they do not have exclusive rights to any specific portion of the property.
1.2 Advantages of Tenancy in Common
- Flexibility: Tenancy in common allows for different ownership percentages, which can be attractive to individuals with varying financial situations. It also allows for different types of properties to be owned jointly, such as commercial or residential real estate.
- Estate planning: When one tenant in common dies, their share of the property can pass to their heirs or beneficiaries, regardless of whether they have a will. This can make estate planning simpler and more straightforward.
- Investment opportunities: Tenancy in common can allow investors to pool their resources and invest in larger, more expensive properties than they could individually.
1.3 Disadvantages of Tenancy in Common
- Potential for conflict: Because each tenant in common has an equal right to use and occupy the property, disputes can arise over who should get to use which portion of the property.
- Division of proceeds: If one tenant in common wants to sell their share of the property, they may have difficulty finding a buyer or agreeing on a fair price with the other tenants. Additionally, if the property is sold, the proceeds are divided based on each tenant’s ownership percentage, which may not align with their contributions to the property.
- Liability: Each tenant in common is liable for any debts or judgments against the property, regardless of their ownership percentage. This means that if one tenant defaults on a mortgage or is sued, the other tenants may be held responsible.
How to Dissolve a Tenancy in Common
If one or more tenants in common want to sell their share of the property or dissolve the tenancy in common altogether, there are several steps they must follow.
2.1 Buyout Agreement
First, the tenants in common must reach a buyout agreement that outlines the terms of the sale or dissolution. This should include the sale price, how the proceeds will be divided, and any conditions of the sale. If all parties agree to the terms, the buyout can proceed.
2.2 Partition Action
If the tenants in common cannot agree on a buyout, they may need to file a partition action. This is a legal process where a court orders the property to be sold and the proceeds distributed among the owners. The court may also order a physical division of the property if it can be split into separate parcels without significantly reducing its value.
2.3 Sale of Property
Once a buyout agreement has been reached or a partition action has been completed, the property can be sold. The proceeds are distributed according to the terms of the buyout agreement or court order.
Conclusion
Tenancy in common can be a flexible and useful way for individuals to co-own property. However, it’s important to understand both the advantages and disadvantages before entering into this type of arrangement. Additionally, knowing how to dissolve a tenancy in common can help avoid conflicts and ensure a smooth transition if one or more tenants decide to sell their share of the property.