This article was originally published in the LawCentral Bulletin 390 on 7th November 2011 and is republished with permission of the author, Brett Davies.
Hi Brett. I’m a recent university graduate. I’ve been lucky enough to land a graduate job earning a decent wage. The problem is, with rents so high and house prices even worse I can’t seem to get a foothold in the market. I have a bunch of friends that are in a similar boat. Can we all chip in to buy a house without getting into legal fights later on?
You are not alone. My graduate lawyers constantly ask for a pay rise so they can buy a house. However, it seems with the cost of renting and house prices – some people feel trapped.
Option 1: Buy a house with friends agreement
The ‘buy a house with friends agreement’ is a great way to get a foothold in the property market. You and your Gen-Y mates can pool your resources to buy a house together.
Sounds simple. But, why do you need it when you can just do that without an agreement?
The Buy A House With Friends Agreement clearly sets out the nature of the relationship between all your friends. We call the relationship a syndicate. It just sounds better than calling it a collective of mates.
But, everyone gets along fine. Why do we need legal documents?
Those are famous last words of many people who do business with friends. Just because everyone gets along well now, doesn’t mean that you always will. The buy a house with friends agreement defines:
- Each party’s investment contribution;
- What the property is that the syndicate owns;
- How the property is owned;
- Each party’s share of the capital and income of the venture;
- Whether the parties can borrow against the property;
- How the parties can end the agreement;
- How the parties can transfer their share of the syndicate;
- Whether the parties can force the sale of the property; and
- How the parties can exit the syndicate.
By establishing all of the above details at the beginning – everyone knows where they stand.
We even include a mutual promise that each party is to promptly meet their individual finance obligations. What does that mean? Put simply, everyone agrees to pay their mortgage repayments on time.
Although my litigators hate me for this it saves you more on legal fees to have the agreement in place now. We see disputes over property going to court and in the end both parties spend their share of the property in legal fees. It is such a waste of your time and effort.
Option 2: Investing through a Unit Trust
A unit trust is another great way for a group of people to pool their resources to invest somewhere. In this case, invest in property. The key players in a unit trust are:
- Trustee; and
- Unit Holders.
The unit trust is a ‘relationship’ between the trustee and the unit holders whereby the trustee owns property for the sole benefit of the unit holders. The trustee can either be each unit holder (acting in their personal capacity) jointly or you can set up a corporate trustee.
The unit trust offers greater flexibility for the unit holders. The unit holders are able to freely transfer their unit holdings amongst each other and subject to the terms of the trust, can transfer their units to third parties too. The units are much the same as shares in a company in that respect.
Are you thinking ‘if this all goes well we might buy another place later’?
If your answer to the above question is yes, then a unit trust may be the way to go for you. The unit trust offers the flexibility of acquiring new trust assets without requiring a new agreement. That is because the unit trust lives for at least 80 years.
Once you have set up the structure, it is practically with you for life.
Who do you appoint as the trustee?
It really depends on the number of people you intend to involve in the whole process. Remember, every person that is named as a trustee of the unit trust is required to be named as the registered owner of the property. That can be very cumbersome if you pool together 10 friends. You even need to change the title registration every time a unit holder sells out or a new one comes in. After all, there is no need for a former unit holder to be a trustee.
Another option is to create a corporate trustee. It is a relatively simple process. Just build a company on Law Central and you are on your way. Now the company is shown as the registered owner of the property. Better yet, whenever unit holders change – you don’t need to change the trustee.
Who controls the corporate trustee?
In the normal course, you appoint at least one person to be the director. You also issue shares to each of the unit holders in the same proportions as their unit holding. That way each unit holder has an appropriate degree of influence over the corporate trustee.
Then, when unit holders change or their unit holding changes, they simply transfer the appropriate number of shares in the trustee company to ensure everything remains kosher.
I hope you and your friends manage to make a solid start in the property market. If you are unsure about what is right for you, speak to your accountant and adviser first to get the financial advice you need. Then call me and one of my team can set you in the right structure.