Understanding Tenancy in Common in Real Estate
When real property is owned by a single owner, the owner is said to have ownership in severalty. For many of you, this may be a new word, but you can remember it by thinking of the word “severed.” When you have ownership in severalty, you are severed, or separate from any other owners; you stand alone.
Sole Ownership and Rights
A sole owner by their own choosing can sell, mortgage, transfer, lease, grant easements. The sole owner pays the taxes and retains all the legal rights and responsibilities associated with the property. When a single property has multiple owners, things get a little more complicated. There is now concurrent ownership or multiple owners with title to the same piece of dirt.
Tenants in Common Explained
One way in which multiple owners take title to the same property is as tenants in common. As tenants in common, the property owners, aka co-tenants, have an undivided interest in the land without a right of survivorship. And undivided interest means that the owners have a right to possess and use the entire property, each one of them, and that no right of survivorship means that when a co-tenant dies, their interest in the property passes to their estate, rather than to the surviving co-tenants.
Different Ownership Interests and Non-Human Owners
So one key difference between a tenancy in common and other forms of concurrent ownership is that the co-tenants can have different ownership interests in the land. Three co-tenants can have a 60%, 30%, and 10% ownership interest in the land. It equals 100%. But they have different title percentages of ownership. There is, in fact, no legal limit to the number of CO tenants allowed, but as they say, three’s a crowd. Another characteristic unique to co-tenancy is that not all owners need to be human beings. In the previous example, an LLC could own 60%, a trust could own 30%, and an individual person could own the 10%.
Transferability, Financial Responsibilities, and Joint Liability
But remember, although co-tenants may own different shares of the property title, each co-tenant still has the right to use and possess the entire property only when the land is sold or partitioned. Will each co-tenant receive an amount proportional to his actual title interest in the land. Ownership interest in a tenancy in common are also freely alienable, which means owners can sell their interest in the land without any approval of their co-tenants. The buyer takes a seat at the table as a tenant in common with the existing co-tenants inheriting all the rights and responsibilities of his predecessor co-tenant. A tenant in common can even unilaterally subdivide his own interest and make further conveyances. So remember our owner with a 10% ownership interest, the owner could make nine conveyances of 1% to each of his nine cousins, in titling nine more people to use and possess the entire parcel of land. As you can imagine, this could be very unwieldy. Although tenants in common may own different shares of the property title, all owners are jointly and severally liable for financial obligations to upkeep and pay taxes on the land. What this means is that even if your ownership interest is only 5%, if your co-tenants aren’t paying the taxes on the property, you can foot 100% of the tax bill and be liable for it not just the amount relative to your ownership interest.
Legal Remedies: Partition
The common law offers the remedy of partition for an owner who wants out of a joint tenancy where the CO tenants or a free buyer will not buy in or let them out. Joint tenants have the right to petition the court to order a partition of the land, and if feasible, the court will order a partitioning kind where the land is split up relative to each owner’s interest. If an owner had a one-quarter interest in 10 equally valuable acres of farmland, he would receive two and a half acres under a partitioning kind. If a partition in kind is not feasible, a court will not order the physical partition of a single-family dwelling; the court will order a partition by sale whereby the property is sold, and the owners receive an amount of the sale price relative to their ownership interest. This is actually the more common solution because it is difficult to divide real property and still meet the zoning requirements of where the land is located. But in a sale, co-tenants that do not support a partition and do not want to dissolve the tenancy in common have little recourse; it just happens by court order.
Importance of a Tenancy in Common Agreement
Fortunately, most issues that arise in a tenancy in common can be dealt with by having a tenancy in common agreement. A tenancy in common agreement is just a contract between co-tenants that provides well-defined rights and responsibilities of each co-tenant beyond what is required by the common law. This may seem unnecessary if you’re buying a property with your cousin or a friend, but it may be what saves your relationship when issues not addressed by the common law inevitably arise.
Customizing Ownership Arrangements
A tenancy in common agreement can contradict the common law presumption that each owner has the right to beneficial use of the entire property. You can specify in your agreement that one owner will live in maintain the house while another owner will use the woodworking shop as his place of business. The tenancy in common agreement can also specify their property taxes will be divided 70/30, with each owner entitled to claim tax deductions on his share of the taxes paid, but that when you Airbnb the property, the rental profits will be split 50/50. In other words, you have a much larger measure of control over how the tenancy in common actually functions day to day.
Planning for Contingencies and Legal Enforceability
In a tenancy in common agreement, it is important to not only consider the present state of affairs but plan for contingencies, the big three being the three Ds: death, divorce, and disability. Although you may trust your cousin to come up with his share of the mortgage payment, what happens if he dies, and the property goes to his sister who wants to partition by sale? What happens if he becomes disabled, is no longer able to operate his shop, and sells his interest to someone looking to open up a nightclub next to your house? In addressing situations like these, you may want a buy-sell agreement giving you the right of first refusal to purchase his interest in the property for fair market value before it can be sold to a third party and other restrictions on when a partition action may be brought. Important to note, however, is that a stipulation completely barring the sale of his interest or complete waiver of his right to partition would very likely be found unenforceable by a court. Restrictions such as these are disfavored under the law because they go against the public policy goal of having land able to be freely bought and sold so that it can always be put to its best use.
Termination of Tenancy in Common
We already discussed two ways in which a tenancy in common can be terminated: partition by sale and partitioning kind. There is one final way in which a tenancy in common can be terminated, which is by an ouster. An ouster is a wrongful exclusion of a person entitled to possession of the property. For example, if you return from vacation to find your cousin has moved into the house and changed the locks, he has committed an ouster. The recourse for an ouster is for the ousted party to sue for wrongful ejectment and at the very least be compensated for the fair rental value of the property. And so you may have an eviction action between co-tenants. In rare situations, if you do not defend your right to use your property over a long period of being ousted, your co-tenant may even be able to satisfy the requirements for an adverse possession claim and bring an action for quiet title, permanently depriving you of your ownership interest in the land. Now these time periods are long. For example, in Idaho, the time period is 20 years; in Washington, it’s 10 years.
Timely Contract Solutions
These are the things that good planning can help you avoid before entering into a tenancy in common. Use TC Review if you’ve already signed, or TC Drafting if you are looking for a custom-drafted document, to ensure that your interests are protected now and down the road with a tenancy in common agreement.
This information in this Post is not legal advice. Legal advice is based on specific facts. This information is necessarily general in nature.