With Valentine’s Day behind us, it’s an appropriate time to write about something no one wants to think about — the break up — real estate break up, that is. A large part of our practice involves real estate-related litigation and, more specifically, couples who purchase real estate together and later break up under difficult circumstances. So how do you enter into a business transaction with someone you love and perhaps even intend to spend the rest of your life with but protect yourself at the same time? Besides clear communication at the outset, there are other key considerations, such as: how will you hold the property?; how do you reflect your initial and ongoing contributions?; and how will you unwind things if necessary without resorting to litigation?
When you are in love, it is difficult to remove your heart-shaped rose-colored glasses and to put on your business cap. Good news - this is where lawyers excel as we are trained to anticipate the worst and “play it through.” Ideally, you should each consult with a lawyer regarding your initial financial contribution, how the property will be legally held, and how you will continue to maintain, repair, and improve the property. Although this sounds expensive, it is money well spent. Keep in mind a litigation retainer is typically $7,500-$10,000.
How to start: Discuss your contributions to the purchase. Enter into a written agreement which clarifies anticipated issues and the role each of you will play – both financially and physically. This is particularly critical if a family member from whom you are purchasing the property is selling to you at a discount or with a gift of equity. Any such agreement should also specify what happens in the event the agreed obligations are not upheld, whether one of you can buy out the other and on what terms, and an agreement that otherwise, the property will immediately be listed for sale.
Question One: How to Hold the Property
There are different ways you can initially acquire real property with your partner — the most common is to hold it either as tenants in common or as joint tenants with rights of survivorship. If you are later married, you can hold it as “tenants by the entirety”, which holds certain advantages as well. As tenants in common, typically, each of you owns 50% of the property with no survivorship rights. On the other hand, if you hold the property as joint tenants with rights of survivorship, your half passes to the other owner immediately upon your death. If only one of you is going to purchase the property, and the other is going to live there and “contribute”, it should be made very clear that there is no leasehold interest, that any interest in the property is being waived, and that the contribution is not a “buy in” to the equity — unless you both agree it is so.
Question Two: Considerations in Financing the Property
Only one of you is qualifying for the mortgage? Proceed with caution. We have seen numerous scenarios where only one person is ultimately responsible for the mortgage payment while both still have ownership interests. Despite oral agreements to “split” expenses and payments, loss of job or commitment to the relationship oftentimes result in the one on the Note holding the bag. That person may struggle to pay for everything and then, in order to get relief, has the added expense of hiring an attorney to file a partition action.
Question Three: Who is Responsible for What?
In addition to the mortgage payment, home ownership requires maintenance and repair and other expense. Add to that furnishing and preparing the space to live in initially. How will you divide the responsibilities and account for disparate investments? Specifying the agreed division in writing is the best way to ensure your investment is preserved.
Question Four: We Broke Up – Now What?
In the event one of you no longer meets the obligations initially agreed, you do not have a written agreement, and cannot reach an agreement amicably, you will need to file a partition action in Court to divide the property physically, if possible, or to order a fair division of proceeds after the sale.