Ex-Files with Jeremy Sutton: Buying property with a friend? How to avoid a bust-up

Mates who go in together to buy a house need to have an agreement in place. Photo / 123rf

Q. I am planning on gifting my son $400,000 for the purchase of a property. He is young (23) and he and his friend wish to purchase the property together. My son’s friend is going to contribute $200,000. The total purchase price is $1,500,000 and a mortgage will be taken out in their joint names to meet the balance of the purchase price. The property is in relatively poor condition, but my son is a builder and will undertake some renovations himself in his spare time. What precautions would you suggest my son takes in the circumstances?

A: Your son will need to have a Property Sharing Agreement prepared to document the terms of the arrangement with his friend. This agreement is an enforceable contract that covers the rights and obligations of co-owners of a property.

An agreement is critical in these circumstances, given that your son and his friend are contributing unequal amounts to the deposit. Will your son expect to receive a greater share of any increase in value of the property, given his higher contribution to the deposit? If so, this should be reflected in the agreement and on the title to the property, with him owning a greater share (see point one below).

Common terms of these agreements that are relevant in your son’s case include:

1. What the ownership structure will be. In New Zealand, property can be owned by parties in a “joint tenancy” or in a “tenancy in common” in equal or unequal shares. With a joint tenancy (common with married or de facto couples), the property is owned by the parties in undivided shares and in the event of the death of either party, the property passes to the remaining owner. With a tenancy in common, the parties own distinct shares of the property. This would be more appropriate in your son’s case and the shares could be listed on the title as a 66/34 ownership structure. If your son and his friend elect to have the title specify that they are to be tenants in common in equal shares (50/50), then the agreement should specify that in the event of the sale of the property, your son is to be repaid the additional amount he contributed towards the deposit.

2. Who will be responsible for meeting the mortgage repayments and the consequences if either party defaults.

3. Who will be responsible for any other ongoing costs such as insurance, rates, power, water, repairs etc.

4. The mechanism should either party wish to sell their share of the property. For example, whether the other party should have first option to purchase it, with the price being determined by a registered valuation.

5. A dispute resolution clause. This could specify that if a dispute arises, the parties must attend mediation before either is able to file Court proceedings. Otherwise, a trusted third party could be nominated in the first instance. If they cannot agree on a trusted third party then it could specify that a senior lawyer be nominated by the New Zealand Law Society to act as umpire.

6. A review clause. The agreement could specify that the parties will review the agreement after three years (or any other agreed period of time) to consider whether any change in circumstance warrants an amendment to the terms of the agreement.

Given your son is intending to undertake renovations to the property, the agreement should specify that he is to be refunded a portion (in line with any agreed profit-sharing arrangement) of the cost of any renovation materials, by his friend.

The agreement could also specify whether he is to receive a greater share of any increase in the value of the property (based on the fact he has contributed more to the deposit).

However, determining what portion of the increase in value is attributable to market rates, and what portion is attributable to the renovations, could be difficult. Alternatively, his friend could contribute towards an agreed hourly rate for any time he spends undertaking renovations.

If the contributing son is going to get repaid the difference in the deposit (which is not time-adjusted), that value is going to decrease over time. The $200,000 might be fair now, but in 10 years’ time that might only be worth the equivalent of $100,000.

To try to ensure the agreement is fair and enforceable, both parties should obtain independent legal advice. It is always good to include as much detail in relation to the background of the agreement as you can. You may need to amend the agreement over time to ensure it stays valid.

You should also be careful that the friendship doesn’t ever become more than friends (including FWB), because that will trigger relationship property issues.

Property Sharing Agreements can take time (months rather than weeks) to be prepared and negotiated, so both parties should engage a lawyer well ahead of any potential purchase.

- Jeremy Sutton is a barrister and family lawyer at Bastion Chambers.