Common Problems with Tenant in Common (TIC) Agreements

What are Some Common Problems with Tenant in Common (TIC) Agreements?

Tenant in Common (TIC) agreements often face challenges such as disagreements over property management and decision-making, financial disputes related to unequal contributions or payment responsibilities, and differing investment goals among co-owners. Co-owners also face difficulties with selling their shares, shared liability risks, and potential forced sales through partition actions. Additionally, tax implications and conflicts over property use can create further complications, making a clear and comprehensive TIC agreement important.

Here's a more detailed breakdown of the most common problems associated with TIC agreements:

1. Disagreements Among Co-Owners

Management and Decision-Making: Since TIC co-owners share ownership, disputes may arise regarding how the property should be managed. Co-owners might disagree on issues such as maintenance, repairs, improvements, or renting out the property.
Unequal Control: Even if owners have equal ownership shares, they may not have equal control over decisions. This can cause friction, especially if one party feels they are being overruled or sidelined.

2. Financial Disputes

Payment Responsibilities: All co-owners are usually responsible for their share of property expenses, such as taxes, insurance, and maintenance costs. If one owner fails to contribute, it may lead to financial strain on the others.
Unequal Contributions: Co-owners may contribute unequally to the upkeep or improvements of the property. Without clear guidelines, disputes over these contributions can arise, especially when selling or distributing profits.

3. Differing Investment Goals

Holding Periods: Some co-owners may want to sell the property for profit after a certain period, while others may prefer to hold onto it for longer-term investment. This misalignment of objectives can create tension, particularly when trying to exit or liquidate the property.
Exit Strategy: TIC agreements should outline procedures for when a co-owner wants to sell their share. However, selling a TIC share can be difficult, and finding buyers willing to buy partial ownership can be challenging, leading to liquidity issues.

4. Partition Actions

Forced Sales: Any TIC co-owner typically has the legal right to file a partition action, which can force the sale of the property if disagreements cannot be resolved. This can lead to an unfavorable sale for some owners who don’t want to sell or who believe the property’s value will increase over time.

5. Liability Risks

Shared Liability: Each TIC co-owner is individually responsible for the liabilities associated with the property. If one co-owner is sued or defaults on obligations like mortgage payments, it could impact all the other owners.
Foreclosure Risk: If one owner defaults on their share of a mortgage or other financial obligation, the entire property could face foreclosure, putting all co-owners at risk.

6. Transferability and Selling Ownership Interest

Finding Buyers for a Partial Interest: Selling a fractional interest in a TIC property can be harder than selling the entire property. The market for partial ownership is limited, and potential buyers may be deterred by the shared nature of ownership and decision-making.
Right of First Refusal: Many TIC agreements include a right of first refusal clause, which means co-owners must offer their share to other co-owners before selling to an outside party. This can slow down the sale process or lead to disputes over valuation.

7. Tax Implications

1031 Exchange Issues: TIC ownership is often used in 1031 exchanges to defer capital gains taxes. However, ensuring compliance with 1031 exchange rules can be complicated, and any misstep could result in unintended tax consequences.
Depreciation and Deductions: Co-owners may face challenges in determining how to split depreciation, deductions, and other tax benefits associated with the property, especially if their shares or use of the property differ.

8. Property Use Conflicts

Personal vs. Commercial Use: In some TIC agreements, owners may use the property for different purposes, such as personal use versus renting out units. This can create conflicts, especially if one co-owner’s use negatively impacts the others.
Exclusive Use Agreements: Some TIC agreements attempt to allocate specific portions of the property to certain owners for exclusive use, but this can lead to disputes over fairness and the division of space.

Addressing these issues in a well-drafted TIC agreement can help mitigate many of the potential problems. Provisions should cover decision-making processes, financial contributions, exit strategies, and dispute resolution mechanisms to avoid litigation or forced sales.