Supplied by Third Age New Zealand magazine for GrownUps
It has become increasingly common for different generations of a family to have a financial stake in the same property. Whatever the nature of the arrangement, they must all have one thing in common. They need to be carefully thought through and properly recorded before any money is committed. Inter-family property sharing may take the form of the traditional granny flat, where an elderly parent provides funds to enable alterations or additions to be made to a child′s property to provide accommodation for that parent. At the opposite end of the spectrum it can be an arrangement where parents and children jointly purchase a large house to live in as a long-term property investment. In the buoyant property market of recent years it has become popular for family members to join together to buy investment properties. Sometimes the investment property is also intended to be a step towards first home ownership for younger family members.
Where you are contributing a significant amount of money to any property dealing, the first question to be answered is whether you are just a lender of money or a purchaser of a defined share in the property. There is much more protection and control if your name is on the land title. If this is the case, you must be consulted before the property can be sold or further mortgaged. Any legal proceedings affecting the property will be served on you. (It is technically possible to separately mortgage only a part share in a property but this is not very common.)When the arrangement with the property comes to an end do you just get back the money you originally advanced or do you share in any capital appreciation? These issues and how they are dealt with largely depend upon personal circumstances and intentions that will differ from family to family.
In the granny flat situation the parties might be more concerned with issues of occupation and personal care rather than investment. It might not be appropriate for the parent to become a part owner of an existing property. However, to secure any money advanced it is still desirable to have a registered mortgage in place. Granny will at least be a secured lender in the event that any financial problems arise in regard to the property. A proper legal agreement should record the payment of the money and clearly establish any occupation rights that result from the payment. Who is responsible for making other payments (share of rates, utilities, repairs, etc) and how the money advanced is to be dealt with in the long term, after the occupation ceases, also need to be recorded. Sometimes granny flats have special legal requirements under local authority district schemes. Stand-alone units can often only be occupied by a relative and must be removed from the property when the relative dies or ceases to live there. The property owners and Granny should receive separate and independent legal advice about all the implications of the proposed living and financial arrangements. The situation will be different where all the parties are entering into a joint property purchase as an investment or technology choice. Usually all the owners will have their names on the land title as tenants in common for their respective shares, which may equate with their initial cash input. However, a carefully worked through legal agreement is still required. The agreement should deal with the same sorts of issues as mentioned above, but might also record more detail to cover possible later changes in circumstances. There should be provisions for valuing interests and giving options to purchase the shares of owners who wish to leave the arrangement. A carefully thought-out exit strategy is as important as the initial purchase arrangements. If there is a mortgage, details of who pays it and how the reducing principal is reflected in any future sale and distribution of the capital are required. Clauses relating to the use of the property, repairs and renovations should also be included.
Parents investing large sums of money in a property venture with only some of their children need to be aware of how this will affect their entire estate when they die. Will their other children be unfairly disadvantaged? Updating wills to treat all the children fairly may be necessary, and informing the other children of what is going on may avoid disputes and grievances later.
Individual′s needs change over time. People grow older, die, separate, divorce, change their minds and fall in and out of love. When many thousands of dollars are tied up in a joint property venture, even with close relatives, all those "what if?" questions need to be considered at the outset to avoid future headaches.
Disclaimer: The information contained in this article is of a general and summarised nature only.It should not be used as a substitute for obtaining personal legal advice.
Author details: Terry Carson LLB, David Rice & Associates