For instance, let’s say Joe, Kim, and Steve buy a property as friends and set up an agreement to be tenants in common. Joe owns 25%, Kim owns 25%, and Steve owns 50%, but they all can use the entire property. Five years after their initial agreement, Joe decides to sell his share of the property to Kim. Now, Kim and Steve own equal 50% shares of the property.
Acronym: TIC
How Tenancy in Common Works
Laws for tenants in common vary by state, but some general rules include:
Tenants in common can be related to each other or unrelated. The relationship between the parties, if any, makes no difference. Not all tenants have to live in the property, and no tenant or tenants can exclude the others. Should one of the tenants die, their interest would pass to their heirs. If Joe died, Steve would still hold 50% and Kim would still own 25%, but Joe’s 25% would pass to whomever he designated in his estate plan or to his relatives, according to state law. Most lenders require that mortgage documents include the signatures of all the parties who hold title in a TIC property. In other words, you must all take out the loan together. If a lender made the loan to only one party, only one person’s portion of ownership would act as security for the loan. Lenders would not be able to seize the entire property in the event of default.
Joint Tenancy vs. Tenancy in Common
Joint tenancy is another common option for shared ownership. Unlike tenants in common, joint tenancy typically involves a right of survivorship, which means that the interest held by each tenant would pass to the others upon death. Joint tenancy requires four unities known as TTIP, which stands for time, title, interest, and possession. Each owner must take title to the property at the same time and receive the title on the same deed. Each also receives the same proportionate and equal share of ownership, along with identical rights of possession. The title usually reverts to a tenancy in common if these four unities aren’t met. If a joint tenant sells or conveys the interest created in a joint tenancy to another party, the joint tenancy is broken and a tenancy in common is created.
Dissolving Tenancy in Common
To dissolve tenancy in common, the property can be sold and the proceeds can be distributed among the tenants according to their ownership percentage. A partition action can also be filed. This involves going to court and asking a judge to order that the property be sold so the proceeds can be distributed among the owners. You might see a partition action filed after a tenant dies when an heir wants to sell the property and the other co-tenants do not. One or more co-tenants can buy out the others if they elect to dissolve the tenancy in common.
Pros and Cons of Tenancy in Common
Pros Explained
Can make purchasing property easier: With multiple owners involved, you have greater purchasing power for the property. Everyone’s financial assets and credit can help you secure a better loan.Possibility of different degrees of ownership: Since each tenant does not have to own the same size share of the property, there is more flexibility for each to own a share that suits their needs.Tenants can change: No one is bound to the property for life. Any tenant can decide to sell their share when they need to. This makes TIC ownership much easier to pass on than a joint tenancy agreement.
Cons Explained
Debt liability for all tenants: If any tenant defaults on their share of the mortgage, the other tenants are liable for the full amount. No rights of survivorship: Unlike with joint tenancy, no owner has rights to the property if another owner dies. If one of the tenants dies without a will, this could lead to a lengthy probate process in court. One tenant could force sale: If agreement breaks down between tenants—or a new tenant steps in and causes disagreement—they could force a sale that the other tenants don’t want.
Other Uses for Tenancy in Common
Properties are increasingly being sold under a tenancy-in-common arrangement instead of a limited or general partnership. A builder might sell portions of a new project to a number of investors who will all share an undivided interest in the property. Seek the advice of legal counsel if you’re considering a venture of this nature so you thoroughly understand your rights and liabilities.
