Property Sharing Agreements – Guidance Note

INTRODUCTION

So, you have decided to buy a property together with your family or friends. In most situations, this will
be a rewarding and fun experience.
The first thing you should consider is owning the property title as "tenants in common" in shares that
reflect your financial contributions.
This will mean that your share will become an asset of your Estate if you pass away. It will also mean
that, when the property sells one day, the net cash left over will be divided in accordance with your
separate "tenants in common" shares noted on the land title. That means any capital gain will accrue to
the owners in proportion to their ownership interest on the title. For more information on ways to own a
property title, see our Guidance Note at https://www.alaw.nz/free-guides/

This is a good start. However, it is recommended that you consider adding another important layer to the
relationship between you and your co-owners: a Property Sharing Agreement ("PSA").

The following is not legal advice specific to your situation. It is general information on PSA's which we
commonly give in response to questions we get asked regularly. If your specific query isn't covered, or if
you need advice on your situation, please get in touch (see contact details at the end of this Guidance
Note).

WHAT IS A PROPERTY SHARING AGREEMENT?

A PSA is an agreement between different owners of a property that sets out those owners' rights and
obligations.
It adds an overlay to the ownership structure represented on the land title and deals with the following
important aspects of the joint ownership arrangement:

1. Ownership Share / Initial Contributions: Who owns what proportion of the property (generally
expressed in %), or who contributed what to the purchase.

2. Outgoings: Who pays the mortgage, rates, insurance premiums, utilities, and in what proportion.
3. Occupation: Who gets to live in / use the property and what their obligations are in relation to
maintenance.

4. Income: Who gets the benefit of any rent / income from boarders / short-term letting and in what
proportion.
5. Decision making: What decisions can and cannot be made by the parties regarding the property,
such as capital repairs, alterations or renovations.

6. Lock in: The minimum period for which the owners will be committed to ownership of the property.

7. No Transfer / mortgage: Restrictions on transferring a share in the property, or granting a mortgage

over a party's separate share in the land title.
8. Buy Out: A mechanism for allowing one party to buy out the other.

9. Sale: How one party can require that the property be sold, and how a sale will be handled.

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10. Costs of Sale: What costs will be met on a sale of the property?
11. Net Cash on Sale: How the net cash left over on a sale will be divided between the owners (usually
refers to initial contributions or % ownership interest – refer 1 above).
12. Joint Bank Account: Operation of a joint bank account to meet outgoings / receive income.

13. Dispute Resolution: A mechanism to try and resolve disputes between the parties.

IN WHAT SITUATIONS COULD A PROPERTY SHARING AGREEMENT BE USED?

A PSA can be used to help regulate the relationship between owners of a property in any of the following
situations:

• A group of friends / family pooling money together to purchase their first home.

• Two or more families who wish to purchase a bach / crib.

• Property inherited by siblings from a parent's estates which they wish to retain (could be the family
bach, rentals, or even the farm).

• Parents who help their kids buy their first home where the parents are either initially the outright
owners on the title, or are part-owners with the kids.

• Families with adult children buying a property for all of them to live in.

• Adult children buying into their parents’ property.

A PSA can also easily be adapted to regulate the relationship between owners of boats, planes, horses,
and even steam powered traction engines (yes, over the years we have drafted PSA's for all of these
situations).

IS A PROPERTY SHARING AGREEMENT THE SAME AS A PRE-NUP OR CONTRACTING OUT

AGREEMENT?

No.
A Pre-Nup is entered into between people who are (hopefully) in a romantic relationship.

These agreements have a specific statutory basis (the Property (Relationships) Act) and say what
happens if the relationship becomes so unromantic that the parties separate. It determines what property
falls into the pool of relationship property (to be divided equally) and what is the separate property of each
party. For more information on Pre-Nups / Contracting Out Agreements, see our separate Guidance Note
available on https://www.alaw.nz/free-guides/

A PSA on the other hand has no statutory basis and is just a commercial agreement between owners of
a property.
Critically, a PSA will not result in a couple contracting out of the effected of the Property (Relationships)
Act. This can only be done by means of a s.21 Contracting Out Agreement. However, there is no reason
why a couple with a Contracting Out Agreement in place (or a couple who accept that a property is
relationship property) cannot also enter into a PSA to regulate how they will deal with that jointly owned
asset.

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WHAT IS THE BEST TIME TO ENTER INTO A PROPERTY SHARING AGREEMENT?

Easy answer to this one: before you buy the property.

The main reason for this is that at that time everyone is focused on the purchase and therefore there is
a better chance that it will get completed and signed by everyone. The risk is that it gets put into the
bottom drawer until an issue arises several years later and then it's too late.

The PSA is also likely to determine how the land title is to be held (joint tenants, or tenants in common,
and if the latter, in what shares) – something that your lawyer will need to know in the run-up to settling
the purchase.

Most importantly, you may not be able to live by your obligations under a purchase agreement to a 3 rd
party vendor without the PSA being signed by all parties. For instance, the PSA may be the document
that allows you as the purchaser under the purchase agreement to confirm your finance condition. That
is where the risk can become real and substantial for you as the named purchaser in the agreement with
the vendor.

HOW LONG DO PROPERTY SHARING AGREEMENTS LAST?

As long as you want them to. As noted above, PSA's are a commercial arrangement, and the parties can
decide on whatever terms they would like included.
Generally, it is recommended that PSA's have an initial 'lock in' period. This means that all parties accept
that they will remain owners during this minimum period. This gives the relationship / enterprise stability
in the initial term, which can allow time for the mortgage to be paid down, and for the property to increase
in value.
After the initial lock in period has come and gone, PSA's generally continue for a long as the parties
remain in joint ownership of the property.

Incoming owners (for instance, if someone sells a part-share of a bach) can become a party to the existing
PSA by means of a simple Deed of Adherence. There should be no need to do a new PSA.

Sometimes PSA's include an obligation for the parties, in good faith, to review how things are working
every few years or so. Of course, the leverage of any party to the relationship is expressed ultimately in
the right to either require that their share be purchased, or that the property be sold.

This 'deadlock release' provision of PSA's is arguable the most valuable aspect of these agreements.
They mean that litigation can be avoided. Litigation is slow, stressful, and expensive – and often results
in family members unfriending each other on FaceBook, and worse.

WHAT INFORMATION WOULD YOU NEED TO DRAFT A PROPERTY SHARING AGREEMENT?

We mainly need you to tell us the commercial terms of the arrangement.

As these are really for you and your co-owners to agree, we recommend that you all sit down around the
kitchen table and get agreement in principle on the following:

• Ownership Structure / Proportions / Contributions: How will the property be owned and what will
each person’s individual ownership share be? What will be your respective contributions to the
purchase?

• Borrowing: How much are you going to borrow against the property (the mortgage) for which you
will all, as co-owners, likely be jointly and severally liable to the bank?

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• Occupation: Who is going to have occupation of the property and what will their obligations be in
relation to maintenance? If a bach, how will bookings between owners be handled?

• Outgoings: Who is going to pay the mortgage, rates, insurance premiums, and in what proportion?

• Income: How will income be dealt with (rent / boarders / airbnb)?

• Lock in period: What minimum period (if any) will the parties remain owners of the property for?

• Sale Proceeds: Who will get what when the property sells one day? (Note: the same credits and
debits generally apply when one party buys out another).

• Joint bank account: Are you going to operate a joint bank account, and if so, will that account be
pre-funded by the parties, by how much, and in what proportion?

If you would like us to draft a Property Sharing Agreement for you, please complete the simple info-
capture within the Forms section of our website (https://www.alaw.nz/instructionspropertysharing/).

WHAT PROBLEMS MAY ARISE IF WE DO NOT HAVE A PROPERTY SHARING AGREEMENT?

Common (and sometimes horrible) problems include:

• Deadlock: If one person wants to sell the property and the other parties do not. A horrible situation
to be in, and can result in everyone having to go off to Court.

• Disputes over sale proceeds: Disputes over who gets what when the property sells. Money ends
up stuck in the solicitor's trust account for months and maybe even years while the parties try and
resolve the dispute.

• Outgoings disputes: Who pays what share of the mortgage and other outgoings. Worst case is that
you end up having to pay the whole mortgage to preserve your credit rating when the other parties
decline to / cannot meet the mortgage.

• Disputes over capital improvements: One party installed in a (pointless) spa pool without asking
the other owners and now wants credit for this improvement when the property sells. Alternatively,
the property sustained damage to the roof and the other parties decline to meet their share of the
insurance excess.

• Secret Transfer / Mortgage: You hold the property title as tenants in common in separate shares,
and one party transfers their share to a new owner without your consent or knowledge. Alternatively,
one party grants a mortgage over their separate share, and then defaults / goes bankrupt. Suddenly
you are in a co-owner relationship with the Official Assignee or 3rd party mortgagee / new owner who
wants the property sold and is threatening to go to Court if you don’t agree.

• Family disintegration: Where parents and kids are in joint ownership, unclear expectations at the
outset as to who is to pay for what / who is going to receive what when the property sells can cause
serious, and often sadly irreparable, damage to the relationships.

• Death of owner: One of your co-owners passes away. You as the remaining owner are now having
to deal with an Estate as co-owner. If you had entered into a PSA, the Estate would be bound by the
terms of the PSA just as the original co-owner was. Equally, if you pass away, your own executors
would have had rights under a PSA to request the Estate's share be purchased by the other owners,
or the property be sold, thereby releasing cash easily to the Estate.

• Separation of owners: A couple who owned jointly a share in the property separate. Without a PSA
you get caught up in the bitter and resentful negotiations between the former couple. With a PSA,

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both the individuals in that former couple would remain bound by the PSA (jointly and severally) even
though they have separated. That means you could stand back and let them sort out their division.

HOW MUCH WOULD IT COST TO DO A PROPERTY SHARING AGREEMENT?

In their simplest form, generally about $850.00 (all incl).

A note about independent legal advice: While there is no statutory obligation for parties to obtain
independent legal advice (like there is with a Pre-Nup), we always recommend each party does get their
own independent legal advice on the proposed PSA.

The provision of this independent legal advice will likely increase the final costs by about $450.00 per
person independently advised. But this will depend to an extent on which lawyers a party chooses to
consult and when in the process they seek advice.
With the foregoing in mind, we approach drafting PSA's on a 'standard, balanced and fair' basis. We also
recommend that, before a party seeks independent legal advice, they get to the point where they are
happy with the commercial terms, and also that they are happy with the draft PSA. Taking these
approaches to getting things done will save time and money.

In relation to the investment needed to complete a PSA, even if the costs seem off-putting as an additional
expense at the time of purchasing the property, the investment can easily pay for itself if disputes arise
further down the track (in terms of reduced stress and hellish litigation costs if things get that bad).

No one expects to crash. But we still take the time to put on our safety belts before we head out on SH1.

COSTS OF PROPERTY SHARING AGREEMENTS

As noted above, if a logical and timely approach is taken to drafting a Property Sharing Agreement, then
the exercise tends not to be very costly. We'd estimated between $695.00 and $1,295.00 (all incl).

The final cost will depend on how 'standard' the agreement will be, and whether negotiations are
undertaken through another solicitor. These costs also do not include independent legal advice provided
by another law firm at a party to the agreement who wishes to receive independent legal advice.
If your would like us to draft up a Property Sharing Agreement for you, please get in touch, or complete
the simple info-capture within the Forms section of our website:
(https://www.alaw.nz/instructionspropertysharing/).

alaw.nz
163 West Street Ashburton 7700
9 / 21 Humphreys Drive Christchurch 8023
Telephone (03) 928 8165
office@alaw.nz

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