Investing in real estate with a partner, friend, or family member is a savvy way to enter the Philippine property market, but it is also a legal minefield if not documented correctly. Under the Civil Code of the Philippines (Articles 484 to 501), co-ownership exists whenever the ownership of an undivided thing or right belongs to different persons.
Without a written agreement, you are governed by default legal provisions which may not align with your specific intentions. Here is a comprehensive guide to drafting a Co-Ownership Agreement tailored to the Philippine context.
1. Defining the Ownership Structure
The first step is to move beyond the assumption of a 50/50 split. The agreement must explicitly state the percentage of ownership held by each party.
- Contributions: Clearly define if the ownership is based on the cash downpayment, the total contract price, or sweat equity.
- Proportionate Rights: In Philippine law, the benefits and charges related to the co-ownership are proportional to the respective interests. If one person owns 70%, they generally shoulder 70% of the taxes and expenses, but also receive 70% of the rental income.
2. Management and Use of the Property
A common point of friction is how the property is actually used. Your agreement should address:
- Purpose: Is the property for residential use by one co-owner, a vacation home for both, or a pure rental investment?
- Administration: Who is responsible for paying the Real Property Tax (RPT) and Homeowners Association (HOA) dues?
- Maintenance: Define "necessary repairs" versus "luxury improvements." Under the Civil Code, necessary repairs can be undertaken by one owner, but they must notify the others if possible. For embellishments or improvements, the consent of the majority (representing the controlling interest) is usually required.
3. Financial Responsibilities and Defaults
To protect the investment, the agreement must outline what happens when the bills come due.
| Category | Description |
|---|---|
| Fixed Costs | Real Property Tax (Amilyar), insurance, and HOA dues. |
| Variable Costs | Utilities, minor repairs, and emergency fixes. |
| The "Default" Clause | What happens if one owner fails to pay their share? (e.g., the other owner pays and it becomes a loan with interest, or the defaulting owner's share is reduced). |
4. Restrictions on Alienation (Selling Shares)
One of the most vital sections involves "Right of First Refusal." In the Philippines, a co-owner has the right to sell their share to a third party, but the other co-owners have a legal right of redemption under Article 1620 of the Civil Code.
- Right of First Refusal: Require the selling owner to offer their share to the existing co-owners first at a specified price or based on an independent appraisal.
- Prohibition on Partition: While the law says no co-owner is obliged to remain in the co-ownership, you can legally agree to keep the property undivided for a certain period, not exceeding 10 years (renewable).
5. The "Exit Strategy" or Dissolution
Every agreement needs an end-game. Define the "Trigger Events" for a sale:
- Death of a co-owner (addressing how heirs take over).
- Mutual agreement to liquidate.
- Marriage or legal separation of a co-owner.
- A "Buy-Sell" or "Texas Shootout" clause to resolve deadlocks.
6. Formal Requirements for Enforceability
To be legally binding and protect against third parties in the Philippines, the agreement should follow these steps:
- Written Instrument: It must be in writing.
- Notarization: The document must be acknowledged before a Notary Public. This transforms it from a private document into a public instrument, which is required for certain actions involving real property.
- Annotation: For maximum protection, the Co-Ownership Agreement (or a summary of its restrictive covenants) should be annotated on the Transfer Certificate of Title (TCT) at the Registry of Deeds. This puts the whole world on notice regarding the restrictions on the property.
Note on Conjugal Property: If a co-owner is married under the regime of Absolute Community of Property, their spouse may need to sign the agreement as well, as the "share" in the co-ownership may be considered community property.
Would you like me to draft a basic template for the Right of First Refusal clause specifically for this agreement?