If you are considering purchasing property with your family, then there are a few things you need to know. Unfortunately, it isn’t as simple as finding the property you like, handing over the money and living happily ever after.
There are a number of legal processes to go through and documents to complete. Depending on your circumstances, you may have to complete a Tenants In Common Agreement, a Contracting Out Agreement, a Loan Agreement, a Deed of Gift, or a Property Share Agreement.
Let’s look into the different documents involved, what they mean, and when you need to sign them.
Buying Property In The Current Market
It is currently so expensive to buy property in the Auckland market that it is becoming more common for the parents of a young couple to purchase a home together.
When it comes to money, things can turn sour rather quickly if something doesn’t quite go to plan. Especially when families are involved, or if the parents have used their own home as security to finance this purchase. Regardless of who owns what share of the house, who is making the bigger payment contribution, or who is shouldering the responsibility, there needs to be a Property Sharing Agreement in place.
A Property Sharing Agreement is designed to regulate the responsibilities and restrictions in dealing with the property. In short, it protects the interests of both parties by detailing all of the important information to do with the purchase and ongoing financial commitments of the home.
The agreement needs to be drafted correctly to ensure the interests of each party are properly represented. If there are ever any disputes, this is the document that would resolve them, so it is important to get it right. It would include details like who is contributing what amount, who pays for what, what happens if one party passes away, or if one party wants to sell.
There is obviously a risk to their parents if the young couple default on their payments, so provisions need to be made for that in the Property Sharing Agreement also.
This is probably the most important document to have in place when buying a property with family. But it is not the only one needed, the others are…
Tenants In Common Agreement
Often when parents contribute to a property, they would own a bigger share and the younger couple would own a smaller share. In this case, the ownership structure would be called tenants in common.
What that means is the property is owned jointly, but each party owns an unequal share. Each specific share will be detailed in the agreement. This is important to do in case one of the parties happens to pass away.
Law states that with a Tenants In Common Agreement, the deceased person’s share does not get equally divided between the surviving tenants as it would in a Joint Tenants Agreement. Instead, the portion of the home owned by the deceased becomes a part of their estate. That means what happens to their share is dictated by their Will.
It is imperative that for all Wills to be up to date when this kind of agreement is signed so that everyone knows where they stand, and all final wishes can be actioned.
Contracting Out Agreement
The process then becomes even more complicated if the young couple want to enter into a Contracting Out Agreement, which is like a prenuptial. Suddenly, what started out as a purchase of property, has now morphed into something with many facets.
According to the Relationship Act, in most cases property would be divided equally between long term partners if their relationship were to dissolve. But, if a Contracting Out Agreement is in place, then the property would be divided in accordance with that instead.
Loans Or Gifting
Sometimes, instead of buying the property jointly, the parents will provide a loan to the young couple, or gift them the money for the property purchase. Another set of documentation would need to be completed for either of these options - a loan agreement or a deed of gift.
Without a loan agreement in place, parents could lose their money if their child were to divorce (as this could be seen as a divisible asset) or go bankrupt. But the money can be protected in a loan agreement. This would then be mentioned in the property purchase documents as well. If the house is sold when there has been a parental loan, the outstanding mortgage is paid first, then the loan is repaid to the parents, and any remaining profits will go to the young couple.
If the parents are choosing to gift the money, then a Deed of Gift would need to be completed. As it is considered a gift, no duty would be payable and the money would transfer to the young couple.
As you can see, the process of buying property jointly with family becomes quite complicated. That is why it is always best to consult a property lawyer to ensure everyone is protected by the necessary documentation.
Here at Heathcote Legal we are experts in the purchase of property between families and can help you make the process straightforward and stress free. Get in touch with us to ensure that you have dotted all of your I’s and crossed all your T’s!