How to draft a sharing agreement
Creating a co-ownership contract—while everyone’s still friendly—can save you much heartache
With the escalating cost of waterfront property over the last decade and the uncertainties of the new economy, it can be nerve-racking to make such a large financial commitment as buying a cottage. What may be a daunting leap for one individual or couple, however, may be much less difficult for a group.
Frequently, like-minded friends, neighbours, and relatives are agreeing to share the financial burden and the work of a cottage along with the pleasures.
The problem is that when co-owners are equal, no one individual can outvote the others; however, if they sit down together and craft a formal cottage agreement—many problems can be avoided. As part of a family succession plan, the contract can be set up for a co-ownership among siblings, perhaps facilitated by the parents before they pass the cottage to their children. Negotiated at an early stage of the process, an agreement among owners provides a secure and continuing structure for enjoyment of the cottage.
Share the joy, share the load
During the negotiations, co-owners need to ask some significant questions. For example:
- Can all owners use the cottage all the time, or will there be periods of exclusive use?
- If there are exclusive periods, how are they allocated?
- Can owners bring friends as guests?
- Can an owner rent or lend out the cottage if they’re unable to use the cottage personally during their turn?
When it comes to looking after the cottage:
- Who will open and close it?
- Who is responsible for making sure the utility bills, municipal taxes, and insurance premiums are paid on time?
- How are collective decisions for changes, improvements, or additions made without generating tension?
- How will costs be shared? Should the ongoing costs of the cottage be split equally, or shared in proportion to usage?
If the septic system packs it in, there’s no real alternative but to repair or replace it, even though the cost can be many thousands of dollars. One owner may be able to pay his share out of his petty cash, while another may be too strapped to contribute. So does the cottage go unused until the struggling one saves up enough money? Are the strapped owners forced to take out a loan to contribute? Or, do the better-off partners pay for everything?
Any of these approaches could lead to resentment and guilt. A cottage agreement, on the other hand, could provide for a discretionary reserve to be built into the ongoing shared cottage budget, preserving group harmony and relieving the stress when unexpected expenses come up.
Keeping the cottage
No one wants a discontented or financially pressured owner to be able to sell his share outside the group without involving the others. The reality, however, is that any one owner has the legal right to apply to court to have the property sold and his share paid out. The solution is for all the owners—for their mutual protection and benefit—to agree to give up this right to force a sale.
One way to do this is to prohibit the sale entirely, but a time may come when one of the owners has a legitimate need to be released from cottage ownership, such as relocation to another province or country, serious health issues, or as a consequence of divorce. A preferable approach is to create a responsible exit strategy, such as providing for a right of first refusal by the other owners and a reasonable payout mechanism for the withdrawing owner. If the remaining partners can’t afford to take over the departing owner’s share, they could be given a veto over any proposed new co-owner. If the others refuse to buy out the departing owner and reject all proposed replacements, then as a last resort the agreement can provide for the sale of the cottage. With the possibility of a sale as a consequence, the remaining owners are usually well-motivated to either find the funds or co-owner themselves, or be accepting of the proposed fresh face.
Making decisions and establishing rules
When there are choices about how to proceed, and differences of opinion among the owners, a simple majority-rule could be the best way to deal with some matters. This may work for decisions such as how to redecorate or divvy up periods of exclusive usage. Larger and more complicated issues, such as additions to the cottage, inviting new owners, or the sale of the cottage, require a higher level of agreement, perhaps unanimous approval.
An agreement should clearly identify which issues will be resolved by a simple majority-rule vote, and which require unanimous agreement. It can also provide for amicable resolution, such as mediation in times of disagreement. For example, if one owner believes the cottage is in urgent need of a new roof and the other does not, the agreement could allow for a knowledgeable, independent third party to provide an unbiased opinion on which the decision would be based. In a situation where there are only two owners, and so “majority rules” is impractical, the cottage agreement can provide for arbitration. Again, an independent person is agreed to by the owners to address the issue, but the decision of that arbitrator isn’t just an opinion, it settles the impasse.
Roofs and redecorating are usually the easy issues. It is the seemingly minor disagreements, such as leaving perishable food in the fridge or empty gas tanks for the next owner’s arrival, or even what goes into the blue box, that are often the real sand in the gears.
A set of cottage rules and regulations that exist within the agreement, and are drawn up at the outset of shared ownership, can clarify expectations and prevent unnecessary headaches later.
Some cottage agreements provide for a “council,” where owners get together at a routine time or on a regular date to discuss and decide cottage matters. Often these are annual meetings, usually in the winter off-season. Significant issues, such as the need for maintenance or improvements to cottage facilities that haven’t previously been discussed, can be covered during the council. Important business items include setting a budget for payment of the operating expenses and any repairs and improvements that have been agreed upon. Each owner will then know how much must be contributed to the cottage coffers to keep everything ticking along for the rest of the year—and can adjust his own finances accordingly.
At the council, owners can determine how responsibilities are to be allocated for the upcoming year—same as last year, or is it someone else’s turn to pay the bills, plan the work weekend, or attend the lake association meeting? If the cottage agreement provides for periods of exclusive usage, the council is the time to figure out who gets which block of time. It’s a good idea to have someone take notes so there’s a record of what was decided if issues arise later. And remember, things always go more smoothly if someone brings snacks!
Achieving a cottage agreement may seem like an intimidating and complex task, but the process can be broken down into bite-sized pieces. Setting a realistic timeline to check off the stages will help keep the process moving along.
Sharing ownership offers many positive benefits. Think of putting an agreement in place as simply another one of the many tasks that have to be done, and keep in mind that with everything down on paper and signed in a healthy spirit of co-operation, it will be much easier to keep your valued friendships, as well as your cherished cottage.
See also: Cottage agreeement checklist
This article was originally published on November 23, 2010