The first thing to know about tenants in common and joint tenants, is they are not tenants at all. (Well not as we normally think of tenants). They are actually co-owners
If you and your partner or friend own a property together, you are either tenants in common or joint tenants.
These terms can be confusing. They are legal terms meaning types of co-owners under different structures.
There are important differences between the two and the best option for you depends on the relationship between the owners. They may be your life partner, a friend, your family, or even the government in the case of the shared equity schemes.
So, what is the difference, and which one is best for you?
Joint tenants
This is the usual ownership structure when a couple in a relationship buy a property together. The property title says it is owned by Minnie and Micky Mouse of 1313 Disneyland Drive, Anaheim, California. They both own the property in equal undivided shares.
Neither can sell their share separately, nor sell the entire property without the others consent. If either of them get taken by a large cat, or overdoses on fromage de Chèvre, their interest in the mouse house automatically passes to the other. They jointly own the Mouse House in every way.
Tenants in Common
This is a more commercial or business type of ownership structure. Say Snow White and Cinderella team up to buy a small villa. Each own an agreed percentage or share of the property. There can be many owners with varying percentage ownership.
The ownership agreement sets out all the rules. Importantly it includes lots of possible future situations, no matter how unlikely. Like what would happen if one of them marries a handsome Prince and wants to sell or buy the other one out. Or if one of the owners want to convert the villa into a 7-room boarding house with short beds.
Every possibility needs to be agreed including what the sale process is, how the price is determined, is there a reciprocal last right to buy, who else can buy in, when can it be sold, etc. etc. Usually under a tenants in common ownership structure, if one owner dies after eating a poison apple, their ownership share goes to their beneficiaries as per their will (all 7 of them). It does not automatically pass to the other owner as it does with joint tenants.
Other co-ownership issues
The banks have an interesting view about co-ownership when it comes to borrowing. Banks assume you are liable for the total debt and not just your share. For example, if Cinderella and Snow White have a $500,000 mortgage on their villa, it would be reasonable to think they each have a separate liability of $250,000. Let’s assume Cinderella’s total borrowing capacity is only $750,000 (Price Charming made her sign a prenup). She will assume she can buy a second property and borrow a further $500,000. (Not so fast Princess). The bank will assume her liability on the first property is $500,000. Not $250,000. Under most co-ownership structures if your partner in the first property dies, then you become responsible for the total debt.
The different ownership structures impact other things like land tax, first homebuyer grants, borrowing capacity, income tax and much more.
There have been attempts to set up secondary markets where parts or shares of specific properties can be traded under tenant in common structures, but they have had limited success.
The bank of Mum and Dad (or the Fairy Godmother) interest could be set up as a loan to the owner or Mum and Dad could be tenants in common with their child depending on broader considerations.
The government shared equity schemes like Victoria’s Homebuyer Fund or the Federal Help to Buy scheme use a type of tenant in common ownership structure. The government own a share in the property. The agreement lets the owner pay them back over time if they wish. Otherwise, when the property is sold, the government is paid back their share of the equity.
There are lots of other issues to consider when buying a property with another person. Specific legal and financial advice is important. As is a detailed and clear agreement. Tenants in common ownership structures don’t include wedding vows or the like so there is less binding the owners together. This makes the co-ownership agreement even more critical.
Buying a property with a friend can be a good idea and a clever solution to accessing the property market. Property is a long-term hold and lots of life events can happen over the course of your ownership. Remember, the person you buy the property with, may not be the same person you end up owning it with. This is especially the case with a tenants in common structure so don’t rely on a handshake.
