Prior to recording a deed, the buyer should discuss with their attorney how they should take title to the property. The question of ownership interest is extremely important and is posed throughout the purchase process beginning with the sales contract and loan application, if funds are being borrowed to purchase the property.
As a real estate closing attorney, it has been my experience that many buyers do not consider its implications until the day of closing, and the ownership interest question should be thoroughly examined to ensure the buyer receives their intended result.
In North Carolina, there are many forms of ownership interest in real property. In the residential forum, the three most common interests are tenancy in common, joint tenancy, and tenancy by the entirety. Each form of ownership interest serves a very specific purpose, and it matters which one the buyer ultimately selects.
Tenancy in Common
When an individual purchases property solely, the default form of ownership is tenancy in common. The buyer owns 100% of the real property, and upon death, the property transfers to their descendant(s) by will or intestate succession if there is no will. This is typically a fairly straightforward path.
The road becomes a bit more winding when multiple buyers are involved. When this is the case, a concept in property law known as concurrent estates allows more than one buyer to own a single property at one time. The buyers can own the property as tenants in common, joint tenants, or tenants by the entirety.
Ownership in a property as tenants in common with other buyers means that each party owns an undivided “fractional” interest in the property. An example of this type of interest is as follows:
Kim, Leona, and Bobby purchase Lot 22 in Subdivision X as tenants in common. They agree that each party will own an equal share of the property. This does not mean they each live in one-third of the house, but rather, Kim, Leona, and Bobby will each own an undivided one-third interest in the property.
Carlita, Rosa, and Laura purchase Lot 8 in Subdivision Y as tenants in common. Carlita contributes more down payment money than Rosa and Laura. All parties agree that Carlita will own one-half of the property, and the other two will split the ownership of the other half equally. Therefore, Carlita will own an undivided fifty percent interest, and Rosa and Laura will each own an undivided twenty-five percent interest in the property.
The ownership interest in both of the above scenarios is referred to as “undivided” because each owner has the right to use and possess the entire property. No owner, regardless to the percentage conveyed, has the legal right to deny any other owner access to the property.
Further, ownership as tenants in common provides each party with the right to sell, gift, devise, or otherwise convey their interest in the property without the permission of the other owners. This means that the ownership interest is freely alienable or transferable. As a result, an owner may sell or give their interest in the property to anyone they want, or they may willingly or by judgment use their interest in the property to secure or satisfy a debt with a creditor. Therefore, parties entering into an agreement to purchase property as tenants in common should be aware that they may ultimately end up owning the property with a stranger. If this were to happen, there is a way out, but it may be costly. At any time, if the parties can't agree, any owner may petition the court for a partition of the property. The court could require one owner to buy another out or force the sale of the property. The court will decide the ultimate outcome based on equity.
Holding interest as tenants in common provides the owner with flexibility in conveying their interest to others, and parties holding interest as joint tenants enjoy that same right. As a matter of fact, holding interest as a joint tenant means that co-owners own an undivided interest in the property, and the interest may be unequally distributed. It means that upon the death of a co-owner, their interest shall be devised or inherited in the same manner as an interest held as tenants in common. Moreover, it means that unless agreed to by all parties in writing, when a joint tenant conveys their interest to a third party, the joint tenancy is severed, and a tenant in common ownership is created. As a result, it appears that there is virtually no difference between holding interest as a tenant in common and holding it as a joint tenant.
That is true, unless the parties add to the conveying instrument the language that they intend to hold title as joint tenants “with a right of survivorship.” By adding the survivorship language, the parties are putting the world on notice that upon the death of any joint tenant, the decedent’s interest will be automatically assumed by the surviving owner. Therefore, if the intent of co-owners holding interest as joint tenants is to automatically transfer their interest at death to the survivor, the language must be on the conveying instrument as right of survivorship is not automatic with joint tenancy in North Carolina and if the language in not included, the decedent's interest will pass to his heirs.
An example of joint tenants with right of survivorship is as follows:
Chris and Emily are brother and sister, and both are unmarried. They have decided to go into the home investing business together, and they want to insure that if either dies the property purchased will be owned solely by the other sibling. Each will own the property equally. The conveying instrument will read:
“Chris, an unmarried man, an undivided fifty percent interest, and Emily, an unmarried woman, an undivided fifty percent interest, as Joint Tenants with Right of Survivorship.”
However, any owner has the right to convey their ownership interest during their life; and if they do, the survivorship agreement ends, and owners simply become joint tenants by operation of law.
So in the example above, if Emily decides this is not for her, and she sells her interest to Janine, then Chris and Janine become joint tenants, each owning 50% that will pass as they direct in their will should they still hold the interest when they pass.
Tenants by the Entirety
Lastly, tenants by the entirety is the default interest when a married couple take an interest in property; however, it is not required that a married person hold interest in this manner. They may select tenants in common or joint tenants with or without survivorship. Just keep in mind that tenants by the entirety is the highest form of interest, and it blocks judgment creditors from attaching liens to real property when the lien is not against both spouses. The only judgment creditor that can penetrate the tenants by the entirety barrier is the Internal Revenue Service. It is important to note here that if a federal tax lien is filed against one spouse, it will attach to the interest held by that spouse, and not the entire property.
There are a few additional points to keep in mind when determining whether or not tenants by the entirety is the right form of interest to choose:
- Tenants by the entirety is for married persons only. Parties must be married to each other at the time of recordation for it to apply. If the parties are unmarried at the time of recordation, a new conveying instrument to themselves must be executed and recorded to create the ownership.
- Both spouses must take title by the conveying instrument.
- Survivorship is automatic in tenants by the entirety. Selecting another interest form may be best if survivorship is not desired.
- Property rights cannot be severed by only one spouse. Both spouses must join in together.
- Tenants by the entirety is destroyed only by death, an absolute divorce, or by execution of a deed by the married person expressing intent to change the interest to another form.
- Upon divorce, a tenant in common ownership interest is formed, and if one spouse is relinquishing ownership, a deed must be recorded showing the relinquishing party conveying their interest to the other. A separation agreement does not do the trick.
Deciding what type of ownership best fits your situation is not always simple. It may take some time, and professional consultation may be necessary to insure that the right form has been selected.
The above information may help you understand why interest forms matter. If further assistance is needed, I encourage you to reach out to an attorney experienced in real estate law for assistance.