Intentions Matter When Co-Owning Property
When co-owning real property, it is crucial to address the intention of the co-owners in owning and managing the property. This requires an understanding of how the law of partnerships might affect the relationships between the co-owners.
Section 3.1 of the Partnerships Act provides that holding property in some form of common ownership does not, of itself, create a partnership in relation to the property, even if the co-owners share profits made from the use of the property.
However, co-ownership may arise in a variety of circumstances where the relationship would not be considered a partnership.
For example, co-ownership in relation to property may arise by the operation of law, such as the passing of title to real estate from one person to several others on the owner’s death. In this case, the new co-owners may not even be aware that they had become co-owners. Meaning, they would have no intention of carrying on a business in common with a view to profit, and so would not be partners.
Unlike partners, co-owners are not agents of each other. One co-owner is free to deal with his interest in the common property as his own without the consent of others. This is not true in a business partnership, where a partner’s ability to transfer an interest is limited (absent agreement, a partner cannot transfer their interest, rather only their right to receive profits).
Where in addition to co-owning property, co-owners share profits from the use of the property, is that relationship still a business partnership? Not necessarily. There must be something more than simply owning property and sharing its profits in order to create a partnership: there must be some management or other business activity must exist. How much activity must exist? There is no clear standard here. The mere fact that co-owners intend to acquire, hold and sell property does not make them partners. Practically speaking, this means that the intention of the co-owners is paramount. This should be expressly defined in a co-ownership agreement.
In some legal cases, co-owners of real property were held not to be partners, even though, in addition to co-ownership, the parties had put in place the following arrangements:
- Profits were to be paid to each co-owner in proportion to her interests and each was liable to pay any deficiency in the same proportions;
- No co-owners could sell her interests without offering it first to the other co-owners (right of first refusal); and,
- Any sale or other dealing with the property required approval by majority vote of the co-owners.
The court held that the ability of co-owners to deal with her individual interests separately was incompatible with an intention that the property become part of the partnership. The co-owners’ intention to keep their property separate was confirmed by their individual treatment of their respective interests for income tax purposes. They made individual decisions regarding whether to deduct the capital cost allowance relating to the property against their personal income.
By contrast, where in addition to co-ownership of real property and sharing profits, there is a substantial participation in the activities associated with managing the property, a partnership will likely to be found. For example, in Volzke Construction v. Westlock Foods Ltd, the use of a common bank account, an agreement to share the costs of developing the business, and common participation in financing the business and in dealing with tenants’ concerns have all been held to be indicative of a partnership.
So, to sum up, when co-owning real property, it is crucial to address how the law of partnerships might affect the relationships between the co-owners. It is highly recommended to put into place a co-ownership agreement. Aura LLP’s real estate lawyers are Ontario’s leaders in co-ownership of residential real estate. Contact us for a consultation, and let us help you.
