First comes love, then comes marriage – or does the house come after love? More and more frequently, couples are moving in together and purchasing real estate without imminent plans to get married (or, with same sex couples, without a clear understanding of how their out-of-state marriage may affect property ownership). When a married couple gets divorced, the distribution of their marital property is governed by Domestic Relations law. But, what happens if unmarried property owners call it quits?
The answer depends on two things. The first is how the couple takes title to the property; the second is whether or not those couples have a written agreement regarding their rights and obligations in the event of a break-up. To understand the issues that such an agreement should address, it is necessary to understand the differences between the various types of co-tenancies.
Three Types of Co-Tenancy
In New York, unless stated otherwise, property conveyed to a husband and wife automatically creates a tenancy by the entirety; that is, each person has an undivided interest in the entire property. Each spouse has a right of survivorship and the property automatically passes to the surviving spouse.
Historically, the concept of a tenancy by the entirety derived from fact that a husband had exclusive control over his wife’s property, and thus the husband’s creditors had access to the whole property and not just a one-half interest. As various jurisdictions began to recognize property rights of women, the spouses’ interest in the property became sheltered so that a husband could no longer encumber the property without his wife’s consent and vice versa. New York Law states that neither spouse has the right to unilaterally encumber, convey or partition the property. A tenancy by the entirety may only be severed by agreement, divorce or death.
Tenancy in common is the default form of ownership between two or more parties. Unless specifically stated otherwise, real property conveyed to an unmarried couple creates a tenancy in common in which each person has an undivided interest in the entire property, but with no right of survivorship. Upon death, a tenant in common’s interest will be part of his estate and pass to his heirs. Without a written agreement between the parties otherwise, a tenant in common can sell, mortgage or otherwise convey his ownership interest in the property. A tenant in common can also move to partition the property, having it physically subdivided or even sold. The proceeds would then be divided between the parties.
As with tenants by the entirety, but in contrast to tenants in common, joint tenants do have a right of survivorship. In order to take title to property as joint tenants, the deed must clearly convey title to the parties as joint tenants. For example, the deed must specify that title is taken by A and B as joint tenants with right of survivorship. Upon the death of one joint tenant, ownership will pass to the survivor automatically and outside of the estate. Unmarried couples can hold title to real property as tenants in common or as joint tenants with a right of survivorship, but not as tenants by the entirety.
Joint tenants can unilaterally encumber and convey their property interest and the resulting tenancy is a tenancy in common. Like a tenant in common, a joint tenant may sever the tenancy by filing a petition to partition. When a court grants a partition action, the property is either physically broken into parts with each owner given a part of equal value, or the property is sold and the proceeds distributed equally regardless of contribution to purchase price.
Contracts That Define Rights
So how do unmarried couples protect themselves from the unilateral actions of their partners? Any couple, married or unmarried, traditional or same sex, has the ability to enter into a contract defining their rights and responsibilities towards each other. When a couple plans on marrying, that agreement is called a prenuptial agreement. Since the law is established on the rights to martial property in the event of a divorce, it is equally, if not more, important that unmarried couples enter into an agreement in which they specifically define their rights and obligations. Such an agreement must be in writing in order to be binding.
Before purchasing property, couples need to consider the “what-ifs”. If they break up, will the property be sold? (The parties may want to consider designating up front an impartial third party to handle the valuation and sale of the property should it become necessary.) Will one party have a first right to buy out the other party? If one person stays, will the other party be compensated over time through rent-like payments, or will the selling party be paid in full? If there is a mortgage, will both parties remain obligated under the note or will the bank permit an assignment to one party and a release of the other? When working through the options, it is imperative that couples also receive counsel on the tax consequences of any future property transfer and structure their agreement to minimize tax exposure to both parties.
Nobody likes to focus on the possibility of a relationship ending and this is especially true when the parties are in the process of buying a condo, co-op or house together. It is important, however, to know that a carefully drafted agreement that contemplates the worst case scenario can save everyone time, money and, at least, some of the heartache if the couple does break up.
Tracey L. Daniels is a partner with the Manhattan-based law firm of Hartman & Craven LLP. She specializes in real estate and general corporate law.
Courtesy of Realty Times