When your co-owner goes bankrupt

What rights do you have when the person you own a property with gets into serious financial trouble?

I had just stepped off the stage after delivering a presentation on asset protection at a property seminar, during which I discussed the effect that no asset protection had on an investor who ended up going bankrupt.  

As I walked off the stage I was approached by a young man who advised me that his long-term investment strategy of direct ownership of commercial properties in co-ownership with others had just turned sour.

One of the co-owners of a property he co-owned with two others had been dabbling in share option trading and after the stock market moved in the wrong direction his fortunes changed, resulting in the co-owner declaring bankruptcy.

His question to me was, “what can I expect to happen from here and what rights do the other co-owners and I have?”

As I explained to him, the procedure from here is usually as follows:

Firstly, the trustee in bankruptcy will usually approach the other co-owners and give them the chance to buy the bankrupt’s interest in the property at a fair market price. 

Secondly, if the co-owners can’t do or don’t want to purchase a greater interest in the property – after all, the property was bought by a group because it was outside the reach of any one of the individuals – the trustee will normally ask you if you wish to combine forces and market the sale of the property together.

Finally, if you can’t come to an agreement with the trustee and the other co-owners then the trustee will have no choice but to apply to a court to have a ‘statutory trustee for sale’ appointed over the interest of the bankrupt person and this process will force a sale of the property through the legal system.

Now that response from me really put this investor ‘off their tea’ and underlined the important of having co-ownership agreement in these circumstances.

A well-prepared co-ownership agreement will provide that the bankruptcy of one of the co-owners will trigger the right of first refusal for the co-owners to purchase the bankrupt’s interest in the property at a price to be agreed on or, failing agreement, to be determined by an independent valuer.

About Rob Balanda Rob is a lawyer, who is now retired and living off his property portfolio. He was formerly a partner in the Gold Coast based law firm MBA Lawyers.