Shared Ownership of Real Estate: Risks and Countermeasures Investors Should Know
What is Shared Ownership of Real Estate?
Shared ownership of real estate refers to a situation where multiple people jointly own a single property in the form of "shares" (ownership interests). A share represents the proportion of ownership; for example, when two siblings inherit a property together, each typically holds a share of "1/2".
In shared ownership, each co-owner possesses rights corresponding to their share. However, actions regarding the entire property often require agreement among all co-owners, which becomes a breeding ground for various disputes.
From a real estate investment perspective, properties with shared ownership have limited flexibility in management and sale, potentially becoming a major obstacle to long-term revenue management.
Cases Where Shared Ownership Arises
Shared Ownership Through Inheritance
The most common case is when multiple children inherit their parent's real estate. When there is no will and inheritance registration is completed according to statutory shares, shares automatically arise equal to the number of children. While it is fine if all heirs are interested in the property, situations where one wants to sell and another opposes are not uncommon.
Joint Purchase by Married Couples
When married couples purchase a home or investment property together and each takes out a loan using "pair loans," the property becomes jointly owned. At the time of divorce, how to handle the shares as part of property division becomes problematic, and if agreement cannot be reached, the property cannot be sold and the situation becomes deadlocked.
Co-Investment in Real Estate
There are also cases where properties are purchased through joint investment with acquaintances or friends. While co-ownership with investment partners may start smoothly, disputes over management policies or financial issues can turn shared ownership into the source of conflict.
Risks Associated with Shared Ownership
Difficulty in Decision-Making
The greatest disadvantage of shared ownership is that major decisions about the property require agreement from all co-owners or a majority. Situations where independent action is impossible frequently arise, such as rent adjustments, repairs, sales, and use changes.
Consent Issues for Sales and Renovations
To sell the entire property, consent from all co-owners is required. Even if one party wants to sell, if another opposes, the sale cannot proceed. Major renovations also require agreement from all parties as a "substantial change," making it impossible to take action even as the property deteriorates—such situations can occur.
Complication of Inheritance
If a co-owner with shared ownership dies without resolving the ownership, their share is transferred to their heirs. As generations pass, the number of co-owners increases, and eventually the property may become jointly owned with distant relatives one has never met. At this point, reaching consensus becomes virtually impossible, and the property risks becoming a "frozen asset" that can neither be sold nor rented.
Disputes Over Rental Income Distribution
For co-owned properties being rented out, disputes among co-owners can arise over how to distribute rental income. If the proportion of shares does not align with cost-sharing and revenue distribution, dissatisfaction accumulates and the matter can escalate to litigation.
Rules Governing Management of Co-owned Property Under Civil Law
The Civil Code classifies actions regarding co-owned property into three categories. The 2023 Civil Code revision clarified certain rules regarding management acts.
Preservation Acts
Acts to maintain the current state of co-owned property. These include repairs and requests to cease unlawful occupation. Preservation acts can be performed independently by each co-owner.
Management Acts
Acts related to the use and improvement of co-owned property. These include entering into or terminating rental agreements and improvement work exceeding ordinary repairs. Following the 2023 Civil Code revision, management acts can be implemented with the consent of a majority of shares (measured by share percentage, not number of heads).
Substantial Alterations (Major Changes)
Acts that significantly change the form or use of co-owned property. These include demolition of buildings, major use changes, and sale of the entire property. Substantial alterations require the unanimous consent of all co-owners.
Understanding these three categories of acts makes it easier to grasp what can be done independently according to your share percentage and what cannot.
Methods of Resolving Shared Ownership
The following are the main methods for resolving shared ownership disputes:
Selling Your Share to a Third Party
Each co-owner can sell only their own share without the consent of other co-owners. However, buyers for shares alone are typically not ordinary investors but rather share acquisition companies, often resulting in sales at significantly below market prices.
Selling (or Buying) Shares from Other Co-owners
Co-owners can buy and sell shares among themselves so that one becomes the sole owner. This is the smoothest solution if agreement can be reached. The challenge lies in determining the price, but using objective standards such as appraisals by real estate appraisers can be effective.
Selling the Entire Property and Dividing the Proceeds
If all co-owners agree, the entire property can be sold on the market and the proceeds distributed according to each party's share percentage. This is the cleanest solution. If all co-owners agree to the sale, prices close to ordinary market values can be expected.
Action for Partition of Co-owned Property
If negotiations do not succeed, a partition action can be filed with the court. Under the Civil Code, co-owners generally have the right to request partition at any time (unless there is an agreement prohibiting partition).
Overview of Partition Action for Co-owned Property
A partition action for co-owned property is a legal proceeding to terminate the shared ownership state through court judgment when co-owners cannot reach agreement through negotiation.
The court can choose from three main methods of partition:
Physical Partition: Physically dividing land so that each party becomes sole owner. Physical partition is difficult for buildings, so it is rarely used.
Partition by Sale (Auction): The property is put up for auction, and the sale proceeds are distributed according to each co-owner's share. Auctions tend to result in lower prices than market value, making the outcome disadvantageous to all co-owners.
Full Price Compensation: One co-owner compensates the other in cash for their share to become sole owner. Accurate valuation is critical.
Since litigation requires time and expense, the practical approach is to exhaust negotiation among the parties with advice from an attorney beforehand.
Preventive Measures Before Shared Ownership Arises
It is best to take action before shared ownership arises rather than deal with problems after they occur.
Acquiring Properties in Sole Name at Purchase
As a general rule, investment properties should be acquired in the name of a single person. When considering schemes that assume co-ownership, such as pair loans, it is recommended to anticipate future scenarios such as sales, divorce, and inheritance in advance and consult with attorneys and tax accountants.
Documenting Agreement When Joint Purchases Are Unavoidable
When shared ownership cannot be avoided, it is important to create a document equivalent to "co-owned property management rules" among co-owners, clearly stating cost-sharing, revenue distribution, conditions for sale, and procedures if one party wishes to withdraw.
Utilizing Corporate Ownership
When multiple parties make investments, establishing a limited liability company (LLC) or corporation and acquiring the property in the corporate name may make it easier to establish ownership and decision-making structures. Since capital ratios and voting rights can be specified in articles of incorporation, operations are more flexible than with co-ownership.
Preventive Measures Against Shared Ownership Through Inheritance
As inheritance planning, the following measures taken during lifetime are effective in preventing shared ownership:
Creating a Will: By creating a will during lifetime and explicitly stating "who acquires what property," the occurrence of shared ownership can be prevented. Public notarized wills carry high legal force and can minimize disputes among heirs.
Pre-Inheritance Gifting: Gifting real estate to specific heirs during lifetime can prevent shared ownership at inheritance. This approach is worth considering in combination with gift tax planning and inheritance tax acceleration systems.
Utilizing Family Trusts: Designating real estate as trust assets and establishing a trustee (administrator) creates a system where one person can manage and dispose of the property even after inheritance. It is also possible to design a structure that distributes benefits to multiple beneficiaries while avoiding shared ownership.
Conclusion
Co-owned real estate arises in various situations including inheritance, between spouses, and through joint investment, but problems tend to become more complex the longer they are left unaddressed. It is important to understand the Civil Code rules governing management acts and be aware of the options available to resolve shared ownership: selling your share, buying out co-owners' shares, selling the entire property, or pursuing partition action.
Holding shared ownership in real estate investment directly impacts cash flow and sales strategy. While acquiring property in sole name should be the basic principle, when shared ownership cannot be avoided due to inheritance or joint investment, working with legal professionals such as attorneys, tax accountants, and judicial scriveners and mapping out an exit strategy early is key to long-term asset management.