Property Co-Ownership Agreement – Logic, Principles and Registration with the Land Registry

Introduction

In many cases, the co-ownership of property is not specific to a particular part of the property, but rather applies to the property as a whole (Musha). In these cases, the ownership of each of the co-owners of the property does not allow a co-owner to exercise their interest on a specific part of the property separately from the rest of the property.

Therefore, the need arises to arrange the co-owners’ rights in the property in a way that would allow each co-owner to use their share of the property as they see fit, independently of their co-owners. To this end, among other reasons, a co-ownership agreement should be made.

It should be noted that there are different types of property co-ownership agreements. The most common agreement is where a building with separate units (for different uses – residential, offices, or commercial space) has not yet been registered as a condominium. In this case, it is highly important to assign rights in the individual units to each of the co-owners.

Other cases may involve an agreement linked to a purchasing group or to a group of buyers who buy land on which they intend to build a property with separate units. In this case, the co-ownership agreement provides the relationship among land co-owners in a way that anticipates the forming of the group, the building of the property, and assigning the units specifically to each of the co-owners.

Alternatively, some co-ownership agreements are made between the owners of an existing building who intent to submit a plan to increase building rights in the property, subsequently carrying out a construction project. In this case, too, a co-ownership agreement should be made to establish the property co-owners’ development process and the assignment of rights to be built under the new plan.

Each of the co-ownership agreements described above is tailored to the needs of each case in view of the changing circumstances.

Property Co-Ownership Agreements – Overview

The Real Estate Law, 5729-1969 (“the Real Estate Law“) provides that the ownership of each property co-owner is non-specific (Musha), and that the basic presumption is that the shares of the co-owners are equal (see Articles 27 and 28 of the Real Estate Law). The law further provides that an agreement between the property co-owners may be made to establish the management and joint use of the property.

The basic logic for preparing a co-ownership agreement involves assigning a specific part of the property to be owned specifically by one of the co-owners, which the specific co-owner may use as they see fit as long as they do not detract from the other co-owners’ rights to their assigned parts. Of course, assigning specific parts of the property to specific co-owners requires them to agree on a drawing on which each part of the property must be drawn, and to specify which separate parts are to be owned individually by each co-owner. In this context, it is noteworthy that in many cases, balancing arrangements need to be made between the parties, if the location of one specific part of the property affects its value (the front or back side of a plot, nearby nuisance, etc.).

A co-ownership agreement is doubly important in cases where the co-owners wish to establish a joint development project on the property. In these cases, the co-ownership agreement establishes the entire relationship between the parties regarding the development, from planning, development, and construction, to project completion and sale. A co-ownership agreement in these cases is also important for allowing and facilitating the introduction of third parties into the project, be it developers or any other partner, as well as for establishing mechanisms for taking up financing to build the project. It should be noted that in these cases, the units in the project cannot be distributed among the co-owners of the property until the planning authorities have approved the detailed plans of the project. In addition, after the detailed plans are approved, it will also be necessary to establish appraisal mechanisms for balancing the co-owners’ shares (again, this would be formulated in advance in the co-ownership agreement).

One important example for the need to make a co-ownership agreement is in the case of establishing a purchasing group which forms in order to buy land and develop jointly a project on that land. Other than the joint agreement to purchase the land, the parties also sign a broad co-ownership agreement which establishes all of the co-owners’ rights and obligations towards one another as well as toward external service providers (architects, lawyers, accountants, etc.) with regard to the project development.

Common Mechanisms in Co-Ownership Agreements

The scope of co-ownership and the nature of its mechanisms are affected (naturally) by many factors. Issues such as the circumstances of purchasing the property, the size of the plot, availability of rights, number of co-owners, etc., all affect the need for a co-ownership agreement and its nature.

Nonetheless, several common mechanisms detailed in co-ownership agreements can be identified:

– Ongoing management of the property

– Assigning specific parts of the property

– Decision-making mechanism

– Mechanisms for resolving disagreements and/or disputes

– Jointly appointing professionals

– Irrevocable power of attorney to service providers

– Future dilution if any of the co-owners doesn’t make payments

– Ways to dissolve the property co-ownership (below)

One main part of a co-ownership agreement discusses restrictions on the co-owners’ rights to seek the dissolution of the property co-ownership. Given that real-estate development processes take many years, the need often arises to establish an agreement among the co-owners that if a decision is made to launch a joint real-estate development project (especially large-scale projects), the parties must agree not to seek to dissolve the co-ownership during the project development period. The Real Estate Law provides in Article 37(b) that parties to a co-ownership agreement may stipulate that if a non-dissolution covenant has been set in a co-ownership agreement for a period exceeding 3 years, the court may void it if it finds that it would be right and just under the circumstances of the matter. We should note that we believe that this period should be extended by law in order to allow the co-owners of large land plots, which require considerable planning processes, the time needed for the project to materialize, or alternatively, to allow the period limiting the dissolution of co-ownership under certain conditions.

Registration of a Co-Ownership Agreement with the Land Registry (Tabu)

There are significant advantages in registering the co-ownership agreement with the Land Registry (Tabu). Once the agreement has been registered with the Tabu, it applies also to any third party who may replace any of the current co-owners by buying or receiving that co-owner’s share, subject to their rights and obligations with regard to the property as detailed in the co-ownership agreement. Therefore, where the co-ownership agreement is not registered with the Land Registry, there may be considerable difficulties in enforcing the agreement on future co-owners who would buy their share in the property at a later stage.

It should be noted that, on more than one occasion, the courts have ruled this not to be a negative arrangement, and that not registering the agreement with the Tabu does not detract from its validity toward a third party, so long as it can be established that that party was aware of the agreement.

In this context it should be noted that, in principle, registering a co-ownership agreement with the Tabu is not considered a real-estate transaction for tax purposes, as long as the agreement only establishes rights among the co-owners and does not in fact transfer shares of the property from one co-owner to another or assigns rights in the property to any of the co-owners or removes any of their rights. In such a case, the registration of the agreement would not have any tax implications.

Conclusion

Many properties are co-owned by their owners (Musha), strongly limiting the co-owners’ ability to maximize the value of their share of the property, much less so to make basic transactions involving the property. Co-ownership agreements allow the co-owners to establish clear agreements on developing their property, making decisions on its management, as well as separation procedures.

Prior to entering a complex property transaction involving several co-owners, or before entering a development process involving co-owned property, the relationship between the co-owners should be established in a property co-ownership agreement.

As described above, the agreement should be drafted in light of the circumstances and purpose of the agreement. Therefore, there is great importance in the manner in which the agreement is drafted, taking into account all future scenarios of managing and developing the property, so that they may be addressed by the provisions and mechanisms of the agreement.

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