Introduction
In Arizona, property law is governed by ARS Title 33. Joint or community property is covered in ARS 33-431.
In a tenancy in common (TIC) agreement, co-owners own a fractional share of the property. Normally the division of interest is equal to the amount paid by each party towards the price of the property, but in the event there are no formal documents to authenticate each party’s share, most states will assume tenants in common own an equal share. The tenants in common are usually listed on the property’s deed, though a formal tenancy in common agreement should be used to supplement the deed and spell out the terms of the agreement.
The various rights and liabilities of tenancy in common vary slightly from state to state, as does the court’s ability to intervene and handle lawsuits regarding joint ownership. However, a joint owner with tenancy in common generally has three essential rights:
- Unimpeded property use
- Property income
- Transfer of ownership
The Right to Unimpeded Property Use
The first and primary right for tenants in common is the ability to access and use the entire property. Regardless of what percentage of the property each co-owner controls, everyone must be allowed unimpeded access to the entire property. Any attempts to withhold access to certain portions would be illegal.
The Right to Property Income
Co-owners are entitled to receive income from the property proportional to their share of ownership. Any rent or leasing fees collected by one co-owner must be distributed to the other co-owners according to their interest.
The Right to Transfer Ownership
Tenants in common have the right to transfer ownership as they see fit. This means a co-owner can sell, gift, and even mortgage their share. Unless the transfer of ownership negatively affects the entire property (e.g. if a security interest, such as a mortgage or deed of trust, affects the value of the property), the co-owners don’t get a say in the matter. If, however, the other owners are negatively affected, the transfer of ownership would require unanimous support from the other tenants in common.
Regarding gifting shares, tenants in common usually transfer ownership to an heir through their will or through a living trust. If a co-owner dies without a will or trust, their share will be transferred to their legal heirs through probate according to the state’s intestate succession laws. Unlike joint tenancy, ownership as a tenant in common does not pass to the other co-owners upon the owner’s death.
In addition to these rights, tenants in common are also subject to four notable liabilities:
- Property expenses
- Lawsuits
- Creditors
- Partition actions
Liability for Property Expenses
All co-owners are responsible for property expenses such as taxes, mortgage payments, maintenance, and repairs. The liability is typically distributed according to ownership stakes, so that each co-owner pays for their portion of the bill. If one of the co-owners pays in full for a property expense, he or she is entitled to repayment from the other co-owners.
Liability for Lawsuits
If a renter or occupant of the property is injured due to negligence, the co-owners are jointly responsible for any judgement imposed by the court. Even if the injury occurred on a particular owner’s portion of the property, or if the injury was only due to one of the owner’s negligence, all tenants in common will be required to satisfy the judgement according to their portion of ownership.
Liability to Creditors
While tenants in common are not responsible for other co-owner’s debts, they can be negatively impacted by the actions of their creditors. For example, if a creditor successfully sues for ownership of the property, the tenants in common will be stuck with the creditor as the new co-owner. Further, if the creditor successfully petitions the court to mandate the sale of the property in order to satisfy the debtor’s bills, the tenants in common may be forced to sell the property against their wishes. The co-owners would be fairly compensated for the sale, but they would not have the ability to halt the sale and retain ownership without buying-out the creditor’s share.
Liability to Partition Actions
On a similar note, the only way to resolve insurmountable disputes between tenants in common is with a partition action. The court can either split the property according to shares of ownership, or, if partitioning the property isn’t feasible (e.g. with a single-family home), the court can force the sale of the entire property. Again, the proceeds of the sale will be rightly distributed and all parties will be fairly compensated, but the co-owners could only retain ownership by buying out the selling co-owner’s share.
How to Protect Against the Liabilities of Tenancy in Common
The most common problem with tenancy in common is discord between co-owners. Rather than leaving relations to chance, draft a formal tenancy in common agreement at the time the property is purchased, and include language that addresses what will happen if disputes arise. For example, the agreement could require mediation before going to court, and it could include provisions to protect against partition actions. Also address how property expenses and income are to be fairly distributed amongst the co-owners.
The second most common problem with tenancy in common is liability for lawsuits and co-owners’ creditors. While it’s impossible to predict either of these scenarios or fully prevent them from occurring, it is possible to structure your ownership position to limit your personal liability. By owning the property through a business entity such as an LLC, or through certain types of trusts, you can ensure that your liability only extends to your ownership share of the property. In a worst-case scenario, you could lose your stake in the property, but you would not be personally liable, and your personal assets would be protected from lawsuits and judgements against the property.
Finally, the simplest measure to protect against liabilities is to only do business with those who are financially secure. Whether the potential co-owner is family, a friend, or an acquaintance, ask to evaluate their financial standing. Be cautious about entering a tenancy in common agreement with someone who is insolvent or overridden with debt, or who has been subject to questionable lawsuits in the past.
Call Our Arizona Estate Team at (480)467-4325 to discuss your case today.
