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| WHAT HAPPENS IF A CO-OWNER DOESN’T FULFILL HIS/HER OBLIGATIONS? |
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© March 16, 2007 by D. Andrew Sirkin.
Any reproduction or use of this document or any part of its content
requires the written consent of the author. Mr. Sirkin is chief attorney for Paris Pied-à-Terre Fractional Ownership. Contact Mr. Sirkin at
dasirkin@earthlink.net, or visit www.andysirkin.com
While co-owner default is a major potential risk of co-ownership, it is important to keep the problem in perspective. In my experience, the type of default that co-owners are most worried about, failure to make a required payment, is extremely rare. Far more common, but still rare, are defaults related to usage of the property, such as damaging the property, failing to keep it clean, using it at unauthorized times or in improper ways, and altering or cluttering it without group approval.
While it is necessary (from both a legal and an ethical point of view) to protect the rights and equity of each co-owner even if he/she has defaulted, it is also important that a co-ownership agreement give the group the power to deal with a default quickly and effectively. The group can always decide not to use all of its power if the circumstances warrant leniency, but the group should not be forced to be lenient if one member is ignoring the rules or putting the property or the investment at risk.
A typical co-ownership agreement will provide that an owner who has been accused of a violation be given notice of the accusation and a limited time to either contest it or cure it. If the accused co-owner chooses to contest the allegation, the matter is submitted to dispute resolution, which is typically mediation, or if that is unsuccessful, binding arbitration. If the accused co-owner does not cure the violation or initiate dispute resolution within the specified time, his/her interest in the property is sold at market price using a carefully described procedure. Sale proceeds are applied to pay any arrearages, transaction costs, legal fees and penalties, and any remaining amounts go to the defaulting co-owner. Note that a procedure which causes a co-owner to simply forfeit his/her ownership, investment or equity, is generally unenforceable and therefore useless to the group.
As mentioned above, it is advisable for co-owner groups to establish a default reserve fund that will be used to pay mortgage interest, property tax or insurance if a co-owner fails to contribute his/her share. But it is important to understand that this fund is not intended to be a pool from which an defaulting co-owner can borrow at will. If a co-owner fails to make a payment, and the group chooses to use a portion of the fund to make up the shortfall, the defaulting co-owner has still defaulted and the group should still have the power to take the same remedial action that it would be entitled to take if the default reserve fund had not been used. In other words, the defaulting owner should not be able to escape responsibility by claiming that since it was his/her own money in the default reserve fund that was used, he/she has not really defaulted.
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