Part 1 – Commercial aspects of co-ownership
Why Co-own property?
In our experience, there are various reasons for this including:
● Insufficient available equity – a party's lack of capital required to acquire the commercial property alone. It can also be viewed from the perspective of maximising the utility of limited equity resources.
● Experience sharing – often a party inexperienced in property ownership in a particular jurisdiction (such as a foreign party) or sector will wish to partner with a party with a track record for successful property ownership in that jurisdiction or sector.
● Strategic alliances – this is a variation on the experience sharing model, where the intention is that the particular property ownership opportunity under consideration will allow the parties to "get to know each other" with the prospect of more extensive and mutually beneficial opportunities in other jurisdictions in the future.
There are many other valid reasons why it might make sense in any given situation to co-own property. The overarching factor, of course, is the need to give serious consideration to the added commercial and management stress that co-ownership can bring to property ownership. This is to ensure that the union will be both harmonious and beneficial for all concerned.
Good and bad co-owner qualities
Obviously, the best prospective co-owner is a party with whom property has been successfully co-owned in the past. However, for new participants, this tends to be less of a black and white question to be viewed in absolute terms and more of a question of relative compatibility of the particular co-owners.
In our view, there should be an alignment of approach both as to matters which need to be dealt with whilst the property is co-owned and also on an appropriate exit strategy. While comprehensive legal documents are beneficial to help manage this alignment, we do not consider that this should substitute for ensuring that the "chemistry" is right between the parties, and determining this fit at first will take a significant commitment of time and resources on both sides.
Ideally, each party will undertake appropriate due diligence enquiries of the other to ensure that the evidence suggests that there will be a positive alignment of interests, and to properly assess the strengths and weaknesses of each other.
Factors which should be taken into consideration in determining the suitability of a potential co-owner include:
● A history of conflict with business partners and associates, particularly an overzealous desire to litigate in conflict situations. This will usually be a fairly rare occurrence. More often, this will manifest through a difficulty to find any past business associate prepared to comment favourably on their business dealings.
● The business and operational cultures of the prospective co-owner. Every organisation has a specific way of conducting business. In a co-ownership situation, it is important that the business processes of the co-owners are sufficiently harmonious to minimise the risk that differences will cause irritation or outright dispute. We have witnessed this disparity most acutely in situations where an entrepreneurial organisation seeks to team up with an institutional investor in circumstances where they each have completely different decision making processes and/or investment horizons.
● A desire by a potential co-owner to primarily focus on matters, which are specific to that co-owner (such as the maximising of fees for services provided on the property) at the cost of maximising the value of the property as a whole.
● The systems a party has in place for dealing with, and responding to, enquiries and general communications. In our experience, there is nothing worse or potentially destructive to a successful co-ownership experience than a co-owner who lacks the ability to communicate positively and effectively.
Attributes of a workable and effective arrangement
Anecdotal evidence suggests that this is a combination of two key factors. First, there needs to be an open and frank approach by representatives of each of the co-owners to discuss issues, and particularly divisive issues, at the earliest possible opportunity in a positive and thoughtful manner. Secondly, while a comprehensive and carefully drafted co-ownership agreement is generally considered to be necessary, it should not contain any "hair trigger" default provisions, which would incline either of the parties to resort to a legal solution in preference to a negotiated outcome when disputes arise.
There is a balance to be achieved here. On the one hand, if a problem arises then the parties should be motivated to pick up the phone and seek to resolve it informally, rather than resort to more formal and potentially less predictable avenues. On the other hand, if after a reasonable amount of discussion, it appears clear that the co-owners have reached a position of irreconcilable differences, the co-ownership agreement should provide a swift and definitive strategy for resolution or exit.
In our experience, one of the most effective strategies is to entrench a regular informal forum of key executives from each co-owner, which is convened for the purpose of discussing all relevant potential issues. This tends to identify potential disputes at a fairly early stage and maximise the prospect that they will be resolved before escalating. If this forum is unable to resolve any matters then, before recourse to external dispute resolution, there should be a mechanism to elevate the dispute to more senior executives representing each co-owner, ideally people who are not involved in the day to day dealings between the co-owners.
Dealings with financiers and other third parties
Dealings between a lender and a borrower always need to be undertaken with a degree of finesse and skill. This is increased if the borrower happens to be two or more co-owners, or even where only one co-owner is involved, but the parties are looking to tie the lender (or syndicate of lenders) into the legal co-ownership arrangements in the event of them stepping into the shoes of the co-owner in a default situation.
Once again, in our experience, thoughtful and positive communication augmented by well thought through documentation appears to be the most successful means to deal with the dynamics of such a potentially volatile situation.