Home Sweet Home: The Perils of Co-Ownership for Unmarried Couples

By: Bridget Gallagher

You found the perfect home, well, not perfect but it has potential. You and your partner can scrape up enough for the deposit and your combined income will allow you to manage the hefty mortgage payments. So why are you anxious? It’s not buyer’s remorse, it’s your common sense reminding you of one important fact: you and your partner are not married. Perhaps you are both previously divorced. Maybe you have philosophical objections to marriage. Whatever the reason, your marital status is a relevant factor in this transaction and you should consider the risks carefully.

What happens if you part ways or if one of you dies? The law often does not provide clarity for such situations. But if you both sign a mortgage note you will both be liable for the full amount of the loan until it is paid in full, often projected to take place thirty years from now.

Let’s imagine the worst case scenario. Fast forward five years and your situation may be vastly different. Your relationship has soured and you want out of this situation. Your partner is uncooperative about selling the property, refuses to move out and cannot afford to pay the monthly expenses associated with the property on their own. All conversations with your partner have become emotionally charged and heated. What is your liability? What is your recourse?

Your legal exposure can be significant, especially considering that in most areas buying a home involves borrowing several hundred thousand dollars. If the mortgage goes into default the lender will eventually foreclose, seriously jeopardizing your credit and leaving you subject to a possible deficiency judgment for the difference between the value of the property and the debt when the foreclosure occurs. Any investment you made in the property is at risk of being lost, as foreclosure actions can quickly eat up some or all of your equity. You may also have personal responsibility for other expenses associated with the property such as association fees, taxes and utilities that are in your name.

What are your rights? Can you force your partner to move out? Can you force them to contribute monthly to the carrying costs? Only with a court order. And what’s the legal authority that allows courts to enter such orders? That is where it gets tricky. Co-habitation cases, as they are often called, are a newly evolving area of the law. There is not a lot of legal precedent for these types of cases, therefore, not a lot of certainty exists in terms of the possible outcome. There may also be unique tax consequences for unmarried couples. One thing you will know from the outset is that it will be expensive, with the legal costs of each side capable of escalating quickly into tens of thousands of dollars.

Co-habitation cases are not cookie-cutter court actions similar to no-fault divorce actions where judges routinely divide up a couples’ property according to well-established legal principals. Co-habitation cases are civil actions, each with their own unique factual claims, such as who put in how much, who paid the mortgage, who paid for improvements, what was the "deal" at the outset. And while the law will continue to evolve in this area, it may take decades to become somewhat uniform and the specific circumstances of each case will still be subject to dispute and interpretation. So how do you protect yourself now, before you commit? You invest in a pound of prevention. Consult with an attorney who has experience in drafting co-tenancy agreements. Have a contract drawn up which recites in detail how the deposit is being paid, how closing costs are being paid and how the monthly expenses are to be paid going forward. Address how improvements you make to the property will be managed. Consider how you will hold title, as tenants in common so that your respective estates will take your share if you pass, or as joint tenants with rights of survivorship. If one or both of you have children from a prior relationship you may feel conflicted about allowing what may be your most significant asset to go to your current partner. You can possibly remedy this by each taking out a life insurance policy on one another that would let you "buy out" the other persons estate if one of you should pass. The agreement should address what happens if one person moves out, including how the monthly carrying costs should be paid and whether either partner has a right to buy the other out and, if so, how the buy-out price will be calculated and paid.

If you are uncomfortable raising this suggestion with your partner consider the fact that a co-tenancy agreement can benefit both parties. A home is a serious investment with many responsibilities. You owe it to each other to handle it in a responsible way. Think about it, you would not let your automobile insurance lapse, risk losing your health insurance benefits or gamble with your retirement fund. Why? Because you know the possible cost for taking such risks could be more than you can afford to absorb. So why take unnecessary risks when buying a home?

For most people housing is their largest recurring expense and sharing that expense with your partner can be financially beneficial. Co-ownership may be the best choice for you, but it’s important that you and your partner discuss your expectations and, ideally, reduce it to writing with the assistance of legal counsel. It’s always best to be informed, and whenever possible, prepared. You cannot provide for every possibility, but at least you can address the most obvious sources of potential conflict. Address this issue before closing and you can move on to more pleasant topics, such as what color to paint the kitchen.