Tenancy in common is a mechanism for two or more people to share ownership of a property. Shares of the same size may or may not be owned by tenants in common, and ownership can be freely transferred.
Definition and Examples of Tenants in Common
Tenants in common are co-owners of a piece of real estate. Each owner may own a separate part of the property, but they all have the same rights to the whole thing. Any of the shareholders have the option to sell their shares at any time. Let's say, Joe, Kim, and Steve buy a house together as friends and agree to share it as tenants in common. Joe owns 25%, Kim owns 25%, and Steve owns 50%; however, they are all allowed to use the entire property. Joe decides to sell half of the property to Kim five years after their first arrangement. Kim and Steve now own 50 percent of the property in equal portions.- Acronym: TIC
How Tenancy in Common Works
The laws governing tenants in common vary by state. However, the following are some broad guidelines:- Tenants in common can be linked or unrelated to one another. It makes no difference whether the parties have a relationship or not.
- No tenant or tenants are required to live on the property, and no tenant or tenants are permitted to exclude others.
- If one of the tenants passes away, their interest in the property will transfer to their heirs. Steve would still own 50% of the company if Joe died, and Kim would own 25%, but Joe's 25% would go to whoever he named in his estate plan or to his relatives, according to state law.
- Most lenders require the signatures of all parties who hold title to a TIC property on mortgage documents. To put it another way, you must all take out the loan simultaneously. If a lender made the loan to only one individual, the loan would be secured by that person's share of the ownership. In the event of a default, lenders would not be able to confiscate the entire property.
Joint Tenancy vs. Tenancy in Common
Another typical option for shared ownership is joint tenancy. Unlike tenants in common, joint tenancy usually includes a right of survivorship, which implies that each tenant's interest in the property passes to the others when they die. The TTIP acronym stands for time, title, interest, and possession, and it is required for joint tenancy. Each owner must assume property ownership at the same time and on the same deed. Each is also given the same proportionate and equal share of ownership, as well as the same possession rights. If these four requirements aren't completed, the title typically reverts to a tenancy in common. The joint tenancy is broken, and a tenancy in common is created when a joint tenant sells or conveys the interest created in the joint tenancy to another person. Joint tenants have no power to prevent another tenant from breaching the tenancy agreement.Dissolving Tenancy in Common
To end a tenancy in common, the property can be sold and the proceeds divided among the tenants based on their percentage ownership. It is also possible to file a partition action. This entails going to court and requesting that the property be sold and the revenues distributed among the owners. If one or more co-tenants end the tenancy in common, they can buy out the others. A partition action may be initiated when a tenant dies, and an heir wants to sell the property, but the other co-tenants don't.Pros and Cons of Tenancy in Common
Pros
- Can make property acquisition easier
- Different levels of ownership are possible
- Changes in tenants are possible
Cons
- All tenants share debt liability
- There are no survivorship rights
- One tenant may be able to compel a sale
Pros Explained
- Can make property acquisition easier: When numerous owners are engaged, you have more purchasing power. Your financial holdings and credit score can assist you in getting a better loan.
- Different ownership levels are possible: There is more flexibility for each tenant to own a share that matches their needs because each tenant does not have to own the same piece of the property.
- Tenant changes are possible: No one is obligated to live on the property for the rest of their lives. When a tenant has to sell their portion, they can do so. This makes it far easier to pass on TIC ownership than a joint tenancy agreement.
Cons Explained
- All tenants share debt liability: If one tenant defaults on their portion of the mortgage, the other renters are responsible for the entire amount.
- There are no survivorship rights: Unlike shared tenancy, there are no rights to the property if one of the owners dies. If one of the tenants dies without leaving a will, the court may have to go through a lengthy probate process.
- One tenant may be able to compel a sale: They could impose a sale that the other tenants don't want if agreement amongst tenants breaks down—or if a new tenant comes in and causes conflict.
Other Uses for Tenancy in Common
Instead of forming a limited or general partnership, properties are increasingly being offered as tenancies-in-common. A developer may sell pieces of a new project to several investors, each of whom will own an equal share of the property. If you're thinking of doing something like this, get legal guidance to know exactly what your rights and responsibilities are.Key Takeaways
- A tenancy in common allows two or more people to share ownership of a property.
- All renters must sign the mortgage if the property is financed.
- Tenants in common have no right of survivorship. If one of the tenants dies, their stake in the property falls to their heirs instead of the other tenant (s).
- Tenancy in common can be ended by either selling the property and sharing the money or initiating a partition action.
