Co-Ownership of Real Estate - Community Property, Joint Tenancy and Tenancies-in-Common

A Tenancy in Common, or “TIC”, is a form of title ownership generally common among non-spouse co-owners. Unlike spouses, who in their property deeds frequently take legal title to real estate either in “joint tenancy” or as community property, non-spouses — whether they are simply friends joining together to purchase an investment property or life partners who own their home together — usually hold title as tenants in common. Unlike a tenancy in common, a joint tenancy carries with it an automatic “right of survivorship,” meaning that when one joint tenant dies, the survivor automatically gets the entire property. In California, we also have a relatively new form of title ownership for spouses, called Community Property with Right of Survivorship, which adds a joint tenancy’s automatic survivorship right at death to what is otherwise 50/50 community property ownership.

It can be said that married couples enjoy a degree of legal certainty about their title ownership to property, that unmarried co-owners do not. (For purposes of this discussion, though, note that by “unmarried” here we are also not referring to registered domestic partners in California. For example, spouses holding title in joint tenancy know that when the first spouse dies, the property will pass to the survivor automatically. Similarly, spouses holding their home as community property, can generally predict with certainty that upon either the death of a spouse or upon divorce, the property will be split 50/50 between the spouses, or between one spouse and the other spouse’s heirs, as the case may be.

Unmarried co-owners who hold title as tenants in common, on the other hand, do not necessarily have a predictable, legally predefined exit strategy for how their respective property interests might be transferred or bought-out, for example. In a divorce, the couple know that the property will be divided under the supervision of the court, with either one spouse’s interest being “bought out” by the other, or with the entire property sold and the proceeds divided.

Tenants in common, must to a large extent fend for themselves when it comes to defining their rights with respect to each other, however. If one co-owner wants to sell his or her interest in the property, shouldn’t the other have an option to buy-out the departing co-owner before he offers it to a stranger? Or to put it another way, if one co-owner could sell her undivided interest to a stranger without first offering it to her housemate, he could end up co-owning his home with a stranger.

Also unlike a joint tenancy, a tenancy in common is not presumed to equate to 50/50 ownership. Tenants in Common can own varying respective shares of a parcel of real estate together, such as 50/50, 60/40, 25/25/50, or whatever.

Rights and Responsibilities of Tenants in Common: Get It in Writing!

A Tenancy-in-Common Agreement, or TIC Agreement is very much like a business partnership buy-sell or buy-out agreement. It defines the respective ownership interests of the co-owners, and sets out their respective obligations and duties to each other and the property. A TIC Agreement should be carefully drafted by a knowledgeable real estate lawyer and should spell out, among other things, the co-owners’ obligations to pay the mortgage, and their pro-rata shares of payments toward property taxes, maintenance and repairs, and property insurance. A well drafted TIC Agreement will also provide clear terms regarding how a co-owner may sell his or her interest in the property. As alluded to above, most co-owners of residential property prefer that their other co-owners (or tenants in common) be prohibited from freely selling their interest in the property to a stranger. Most will instead prefer that their co-owner first offer their interest in the property to them under what is referred to as a right of first refusal. A right of first refusal under a TIC Agreement simply means that before any tenant in common can sell her interest in the property to a third party, she has to first offer it to her co-owner(s) on at terms at least as good as she could obtain from the stranger. By imposing such a restriction on transfer, the tenants in common can obtain a greater degree of certainty over their co-owned real estate.

Another important aspect of tenancy in common agreements and of this form of title ownership to property in general is that it is much better suited to unmarried co-owners of property than is joint tenancy property. Unfortunately, many title companies affix joint tenancy title to deeds of co-owned property often without much thought or explanation of the legal implications of joint tenancy title. The right of survivorship is often an unintended consequence of joint tenancy. For example, suppose two friends Emily and Lauren purchase a condo together. Emily has two adult children. Lauren is ten years younger with no children but several siblings, nieces and nephews. If Emily and Lauren own their condo together as joint tenants, and Emily died in an accident, the entire condo will pass automatically – without a probate – to Lauren, no matter what Emily’s will says about the condo. Emily’s children will not inherit her half interest in the condo.

Planning for the Inevitable Division of Jointly Owned Property: How to Stay Friends with Your Co-Owner
Suppose instead that Emily and Lauren each owned an undivided one-half interest in the Condo as tenants in common and they had entered into a carefully drafted TIC Agreement which spelled out that in the event of one owner’s death, the remaining owner could choose to buy-out the interest of her deceased co-owner now held by her estate. The TIC Agreement should give a structure to the procedures for obtaining the appraisal, the buy-out itself and the timing of the closing. It might also give the remaining owner the ability to opt sell the entire property and divide the proceeds.

It’s pretty obvious why the latter scenario is preferable to most unmarried co-owners who are not domestic partners. If you’re simply investing in a property together with a friend, you most likely do not want your friend to automatically inherit your interest in the property if you die. Similarly, you probably do not want your co-owner to be able to sell his interest without offering it to you, mortgage his interest separately from yours and without your input, or stiff you for his portion of repair expenditures, upkeep, taxes or insurance. A Tenancy in Common Agreement can provide a clear roadmap for the co-owners to follow in all common scenarios of co-ownership.

It is best to contact a real estate attorney at our firm before you enter into a purchase with a friend, relative or other non-spouse so that we may advise you on the best form of title for you to take on the deed at closing. Even if you have already purchased a home or investment property with a friend, we urge you still to contact us to see if a Tenancy in Common Agreement (and possibly an amended deed) will help protect your investment in this property.