What Is An Ownership Contract Agreement?
Ownership Contract Agreements are legal documents that outline all terms of the relationship between co-owners of property. With respect to citizens of the United States, ownership contract agreements allow for clear and precise definition of property rights and responsibilities, and are crucial in helping to formalize and standardize such arrangements. Considerations like sharing expenses, management responsibility or scheduling becomes written in order to prevent disputes among the group of named owners . In some situations, there may be an unrecorded and implied understanding between property owners concerning rights and obligations when it comes to use of the property. Ownership agreements help avoid blurring between implied permission, established duties and the responsibilities of an ownership group. Ownership agreements allow all parties involved to understand and agree in writing on what each member is agreeing to and expecting from other owners and themselves.
Basic Components Of An Ownership Agreement
An ownership agreement should generally include the following provisions:
The parties. Who are the owners and how may new owners be admitted?
The property description. What is owned?
The rights and obligations of the owners. What may each owner do and not do with the property? What joint owner may exclude the other(s) from using the property? Who is responsible for paying taxes and expenses and what happens if a tax or other bill is not paid on time?
Dispute resolution. How will disputes among the owners be handled? What happens if an owner dies, becomes incompetent, some owners wish to sell and others do not, or an owner is in need of cash?
Why You Should Always Draft A Clear Ownership Agreement
One of the most common disputes I see regarding ownership of real estate involves money: people typically don’t like to spend money and infringing on their pocketbooks and money is always a hot-button issue for disputes in relationships or between family members. Spending money to review, draft and negotiate an ownership contract is one smart step that can prevent all those disputes from occurring in the first place or allow for a simplified resolution should the property need to be sold or even if there is a "forced sale" (as outlined above).
A well drafted ownership contract can also serve to avoid disputes over the terms of ownership. For example, if two investors pay a certain amount towards a property, what is their percentage ownership? What happens if one owner wants to sell out? Does the other investor have the right of first refusal? If so, what happens if they want to buy out the selling owner, but do not have the funds to do so? Will the selling owner take payments? How will payments be structured? What if one owner wants to sell, but the other does not – because interest rates are lower and the property has appreciated in value, wouldn’t it be in both owners’ interests to sell? What if the property is not appreciating in value – wouldn’t you want to get out as soon as possible?
While it is impossible for a contract to anticipate every possible situation, there are numerous ways the contract can handle the situation ahead of time, avoiding a dispute later on. For example, a contract can require the owners to list the property for sale if they can’t resolve their differences. The smart move for the owners to make at that point would be to sell the property, regardless of interest rates and current values. If it is actually the owners’ desire to keep the property, the smart thing to do is to have a buy-out provision in the contract in the first place, or put the decision in the hands of a mediator who can look at the facts objectively and come up with a solution that is fair, and enforceable. After all, if both owners agree to sell the property, it is much more likely that they will resolve their issues on the sale price than if the sale were simply court ordered.
Ownership Contracts: Common Errors To Sidestep
Mistakes to Avoid in Your Ownership Contract
Overly broad terms. Crafting a contract that is too broad means that it covers too many things and sometimes issues that are not intended to be covered under the contract or that are outside of the real scope of the agreement. Broadeness can also mean that the requirements of the covenant are so unclear that it becomes impossible to comply with them. There should always be a level of specificity. There are some things that you want to be broad, but when you employ terms such as "reasonable" or "appropriate", make sure there is a reason why you are doing so and that it is necessary. No pre-agreement due diligence or up-to-date obligations: there are many things you can get wrong if you do not do your due diligence when preparing an ownership in the first place, including not being legally allowed to enter into an agreement at the time, improper voting rights, and insufficient information provision. Too much burden on one party. If you try to implement too many requirements on one party in the ownership contract, the cooperation in the joint venture may not happen. The interests of both parties need to be protected in their investments in the entity. While it is okay to have obligations to produce financial reports or quarterly statements, it is not okay to assign those obligations to member that only has a very small stake in the company.
Legal Issues In Ownership Agreements
Several legal considerations should be kept in mind when drafting an ownership contract. For example, to ensure that the agreement meets any required contract provisions, it should be reviewed by a lawyer familiar with the appropriate use restrictions and other legal requirements of the applicable jurisdictions.
The agreement must be drafted in such a way that its provisions are enforceable. The parties should avoid any terms that are against public policy or in violation of statutory law. It is best to consult an attorney about this particular issue. In addition, the parties should ensure that the agreement reflects the desired intent behind all operational procedures. The parties should also ensure that the contract terms do not conflict with other property restrictions or obligations (for instance , the terms of a leasehold recorded elsewhere for an underlying property).
As in any business arrangement, it is important that the drafting and negotiating parties not attempt to create their own contract terms without good reason. For example, any provisions the drafting party wishes to include into the agreement should be shown to be reasonable. The parties can expect that the courts will enforce a provision as being reasonable only if such provision is essential to the protection of a sufficiently compelling economic interest of the party asserting its reasonableness. Further, it is likely an agreement’s arbitrator will make a finding based upon the facts of the case about what is reasonable in that situation. Overly aggressive use of legal technicalities could backfire against the party attempting to impose these terms in the agreement.
Dispute Resolution In An Ownership Contract
The final consideration in the negotiation of an ownership contract is how to resolve disputes that may arise in the future. Many contracts now include provisions for mediation or arbitration of disputes. "Mediation" is a facilitated discussion with a mediator present, and in which the parties attempt to reach a mediated settlement that they can then sign as an enforceable contract. "Arbitration" is in essence a private trial before an Arbitrator as a substitute for court, in which the parties present their respective documents and witnesses and argument to the Arbitrator as if they were in court, and the Arbitrator reaches a decision and makes an award. The award is enforceable as a judgment or decree of any court of competent jurisdiction for enforcement and disciplinary purposes (such as contempt), but is subject to court review under the rules of appellate jurisdiction. Courts have held that it is enforcement of the award itself and not the actual agreement to be in dispute that is subject to appellate review. Such review is not a de novo review but is hand tied by the terms of the contract and the evidence presented to the Arbitrator. Decisions as whether the arbitrator exceeded his/her authority in making an award, or whether fraud or other malpractice has been committed by counsel, are exclusive to the court and so outside the scope of appellate review. The contract should specify details such as the time and place for dispute resolution, whether to mediate first (and for how long) before proceeding to arbitration, and the specific location(s) of mediation and arbitration. Of course, all parties may reasonably expect to pay their share of the mediator’s and/or Arbitrator’s fees as well as their own costs in presenting the dispute.
Disputes arise in all kinds of situations; many of which should be apparent upon document review, but some may not. Issues with behavior of the other party in violation of an enforceable covenant in the ownership contract, or with a failure to make timely and proper payments, for example. Such disputes may be addressed with a lawsuit for enforcement of the covenant or the contract for payment of sums due under the contract. Similarly, such disputes may be resolved successfully through mediation or arbitration, or by way of voluntary discontinuance or joint stipulation to the effect that the dispute is resolved. This may be useful, for example, for getting time to pay past due amounts or time to cure a default of covenant violations.
How To Draft An Ownership Agreement: The Basics
In negotiating the terms of an ownership agreement, start by defining the business structure and its owners. Owners can be individual or corporate persons, or a combination. Then discuss whether they will each own the same number of shares and whether the business will be managed by its owners. If it will not, then establish precise roles for the officers and employees. After that, the parties are ready to consider the provisions for management meetings, voting, distribution of profits, and restrictions on the transfer of shares. The next step involves drafting the terms of resolving disagreements, and whether the business will have a "buyout" option for a departing or deceased owner.
As for the detailed provisions that an ownership agreement requires, some of the issues to be addressed include the owners’ names and addresses; the number of shares within the business; each member’s respective ownership percentage and relevant details, such as when an owner cannot sell his or her shares without first offering them to his or her fellow owners, limiting outside ownership percentages, and requiring a majority vote of the owners before admission of new owners .
In addition, an ownership agreement should name the statutory agent; set forth whether the business will be audited and any uniform or highly compensated business executives; require advance notice for owners to invoke a buy-sell option; and establish rules for determining a fair market valuation for shares in the event of disagreement among the owners.
Although the parties now may file an ownership agreement with the Department of Corporations and Taxation without formal approval by that office, nonetheless they should seek the department’s advice on their plan because any non-conformity can lead to severe tax consequences. In doing so, however, beware that the tax office won’t actually approve the agreement. Although the parties will be able to confirm that the department has received their filing, they will nonetheless bear the legal consequences of its terms until and unless a dispute arises.