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Wednesday Nov 14, 2012

The pitfalls of part ownership of shares in property

The practice of owning a share in property is common between spouses, friends and business colleagues. Forms of ownership will vary from registration in the individual's name or by shares held in a private company or close corporation.

There are many reasons for wanting to share in a property which are all, no doubt, justifiable from the time the deal originated through to closure.

Original home owners have traditionally been motivated by a need to contain the asset within the family structure. Several generations later, it is not unusual to find title deeds containing 1/77th shares held by grandchildren and great grandchildren. But do the original parties ever stop to consider how complicated their legacy may become?

Succession aside, it is most common, even today, for married couples to create equal shares in their primary residence. This may satisfy prenuptial agreements and demonstrate an expression of commitment to a relationship. But do their advisers ever stop to consider the difficulty in measuring the value of the shares?

Practically - "What can I get on the open market for my wife's halfshare in our house?" Or, "Are the shares tied up jointly and severally under mortgage such that they cannot be sold separately?" If not, then where are all the willing buyers for those shares?

Why do we, as married couples, persist with the charade of halfshares just to satisfy prenuptial agreements? Have you ever gone to an agent with a mandate to hold an open day for the half share you own in your house? What rights are you offering? Can the buyer of your half share take up residence with you?

No professional valuer can, with conviction, certify the value of a half share as being 50 percent of the whole. The share is locked into a closed market, with the only potential buyers being the other shareholder or heirs. Worse is the case where unmarried couples have shared in a home and there is a breakup. Disposal of the whole property may satisfy accrual calculations but until then, there can be little security by shareholders or third parties in half or other shares held.

At a business level (formal syndications aside), owning the business premises in which you operate through an "arms-length" lease, and sharing the property with your business partners may also be fraught with succession difficulties. Conflicts of interest; non-market lease terms and the limits imposed on incoming shareholders may often frustrate the growth and success of the business in occupation.

Private shareholders are advised to consider carefully the merits of part ownership and to devise a well conceived exit formula for the valuation of property shares - whether domestic or business.

The Mercury

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