Tenancy in Common: How does it work?

November 19, 2020 / 6 minutes of reading

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What is a tenancy in common?

The tenancy in common is a term used when multiple individuals share the ownership of a property, according to the Legal Information Institute (LII). In this arrangement, owners of a property such as a house can have the same percentage or different depending on their contribution and agreement.

Each owner’s name must be on the title, according to Redfin. In addition, all owners will share responsibilities associated with the property. All partners have equal rights to occupy the property and their shares cannot be affected by actions taken by other owners. For example, if I own 75% of a tenancy in common, my percentage will not change when other owners sell their shares.

Example of tenancy in common

Let’s say that you want to invest in real estate but you do not have enough capital to purchase a house. So, you approached a couple of your friends (Mike and Mark) and asked them if they can join you in this adventure.

If you had only had 60% of the total value of the property, Mike and Mark must contribute 40%. Let’s say that Mike found 30% and Mark came up with the remaining 10%. At this point, you can go ahead and buy the house.

Since each one of you contributed different amounts, it would make sense to divide the ownership, expenses, and revenues based on each one’s contribution.

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How would they share expenses and revenues in this example?

To make the numbers easy for this tenancy in common, you can draft the agreement as follow.

(1) You contributed 60% to the house: For this reason, you can pay 60% of all expenses and management, and earn 60% of the total revenues(cash flows)

(2) Mike contributed 30% to the house: For this reason, Mike will pay 30% of total house expenses and management, and earn 30% of total cash flows.

(3) Mark contributed 10% to the house: For this reason, Mark will pay 10% of total house expenses and management, and earn 10% of total cash flows.

People who are engaged in a tenancy in common must have rules and terms that govern all activities. Having a detailed agreement that includes terms and conditions will help manage and avoid conflicts.

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What would happen if one of the participants of a tenancy in common dies?

It is possible that one of the owners of a tenancy in common can die. More importantly, it is unlikely that all owners will die at the same time.

So, what would happen to shares of a deceased one?

The answer to this question will come from the contract that binds together all owners. Each owner should include what will happen to their shares when they pass away. For example, some owners designate beneficiaries. That is once they die, their shares go directly to the beneficiaries. The beneficiaries can then decide whether they can stay with the team or get out.

What if some owners later change their minds?

Image by Venita Oberholster from Pixabay

Just because all partners are working together it does not mean that their visions will stay the same. There are times when one owner can decide to end the contract. So, what would happen in this case?

If the contract was written well, it should have included steps to be taken if one, two, more, or all partners decide to end the contract. If one person wants to leave, it would be easy to sell his shares to those who are staying in the group.

Back to our example, if Mark decides to leave, the remaining partners can buy his shares (10%). Their new ownership will depend on how much each one paid to acquire Mike’s shares.

Note: When deciding how much to give Mike, his shares could be evaluated based on the current market value of the house. This is due to appreciation or depreciation. An appraisal could help determine the value of the home and 10% of the appraised value will become Mark’s share.

It is also possible that tenants may not want to come to an agreement. As noted by Investopedia, the court could be used to help solve the matter. That is the court will decide how to divide the property among its owners and have them part ways. The property will most likely be liquidated so that owners can share the net proceeds.

What are the benefits of tenancy in common?

The tenancy in common benefits all partners. The following are some of the benefits that come with this agreement.

Affordability: Buying an estate as a team is a lot cheaper than going in alone. Each partner needs to bring only their own percentage. Even those who cannot afford a house alone can own a portion of a property. So, tenancy in common works even for those with a much smaller budget.

Maximum returns with low risks: Although the returns will be shared among all partners, the returns will be maximized due to a collaboration between owners. This is due to high-level marketing of the property, brainstorming, evaluation of new ideas, etc. As a result, the returns on this investment will be maximized.

Loss sharing: Having a small percentage in the property means the loss related to the property will be shared among its owners. Hence, minimizing individual losses.

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Cons of tenancy in common

Although tenancy in common has a lot of benefits, it also has some setbacks. The following are some of the cons of this agreement.

Profits can be minimal: Your return on the property will most likely be proportional to the shares you own in the property. If you own a small percentage, your returns will be small.

Legal issues: Sometimes all owners will not come to a mutual understanding on some matters. When this happens, conflicts will most likely arise and this will lead to legal actions.

A lot of rules to follow: Being a part of the team means that you are bound by its rules. Tenancy in common comes with a lot of rules and you must follow all of them.

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What to consider before joining a tenancy in common?

Have a common goal
Have enough capital to cover all expenses (including ongoing expenses such as property taxes, insurances, etc)
Agree to have a contract that includes everything from terms, contributions, penalties, etc
Know your beneficiaries since you don’t know when you will die
Think through everything and make sure that it is something you want to do