THE DANGERS OF CO-OWNERSHIP
Article written by Clive Hill, Legal Adviser, Sanlam Trust
Many business people are involved in commercial partnerships, and are familiar with their rights and obligations in relation to their partners. However, not everyone is familiar with the rights and obligations flowing from co-ownership of an asset, as a recent court case demonstrates.¹
Business people should not assume that, simply because they own a share of an asset along with another co-owner or -owners, they may apply the usual partnership principles to this situation. During the years leading up to the court case one co-owner paid a large share of the expenses relating to the purchase and upkeep of an immovable property, including mortgage bond repayments, maintenance and municipal rates. When he eventually got around to claiming these back from the other owner, his claim was met with the defence of prescription.
Prescription is a defence which a person from whom an amount of money (or other specific performance) is claimed, may use to resist such claim. The Prescription Act 68 of 1969 sets out various periods of prescription for debts or claims. The default period is 3 years, unless another period is specified. An example is where the creditor and debtor are partners and the debt arose out of that relationship. The Act provides that the debt will not prescribe before a period of one year has elapsed after the partnership has dissolved or terminated. The reason underlying this appears to flow from the nature of the partnership relationship wherein partners often try to help each other by contributing money, or skills, or assets to the commercial venture. When it comes to lodging claims, it is therefore important to be able to classify a relationship as either that of co-ownership, or of partnership.
The distinguishing characteristics of a partnership, as referred to by the court are:
A partnership arises from an agreement between parties.
It involves community of profit and loss.
A partner cannot unilaterally sell his/her interest in the jointly owned partnership property.
A partner is an agent of the other partner(s).
A partnership has the making of a profit as a fundamental principle.
If the nature of the relationship is not that of partnership, but two or more people own an asset jointly, then their relationship is that of co-ownership. People can become co-owners without entering into an agreement. For example, if two heirs inherit the same property in equal shares, they will own it jointly in undivided shares. Or if two people jointly buy a property, and there is no subsequent agreement to let it out for a rental income, or to sell it for a capital gain, they are not partners, but co-owners. One co-owner can sell his/her share in the property without the other’s consent and does not act as the agent of the other. If one of them contributes more than half the expenses, he/she has 3 years to claim reimbursement, otherwise the defence of prescription may be raised. If the co-owners are also partners in a profit making venture, then their claims against each other won’t prescribe until one year has elapsed after the partnership has ended.
Documenting each party’s expectations in an agreement is usually the best (and cheapest) way to ensure that there are no misunderstandings. Given the time pressures under which business people operate, it is not always the easiest route. A call to your professional or fiduciary adviser is a great first step on the road to peace of mind.