Agreement can minimise property co-ownership risks
Trustees wanting to invest in property with co-owners through their SMSF should engage in a special agreement to increase the funds available to invest and to minimise a range of risks, according to a law firm.
In a blog, DBA Lawyers director Daniel Butler and lawyer Shaun Backhaus said the tenants in common (TIC) agreement is a prudent way to ensure that each owner’s rights and obligations in respect of various events are considered and clearly set out from the commencement of the investment.
They said a TIC agreement can also assist the trustee in maintaining compliance with superannuation legislation and formulating an appropriate exit strategy for a co-owner.
Potential pitfalls for trustees without a TIC agreement
Mr Butler and Mr Backhaus warned that many things can happen to a person, company or trustee of a trust (or the persons controlling such an entity) that could cause problems for other co-owners.
As examples, that could include the co-owner or their controllers:
- in the case of an individual, this includes getting divorced, experiencing other familial or personal issues, dying or losing capacity;
- becoming bankrupt, insolvent or being placed under administration;
- defaulting under an agreement that secures their interest in the real estate (noting that an SMSF cannot secure or charge its assets);
- being sued or otherwise caught up in litigation; or
- simply wanting to sell their interest in the real estate.
“Investments with other co-owners often commence with parties communicating and agreeing on the above issues. However, the sort of events outlined above may arise when different persons or entities hold an interest in the property compared to the original investment,” Mr Butler and Mr Backhaus said.
“Accordingly, a dispute may arise between the parties, and without a TIC agreement, there would be no agreed way to resolve disputes.”
Issues that can be addressed in a TIC agreement
According to Mr Butler and Mr Backhaus, a TIC agreement could address some of the following issues or provide the following mechanisms:
Adrian Flores
Adrian Flores is the deputy editor of SMSF Adviser. Before that, he was the features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.
You can email Adrian at [email protected].
