Co-ownership of commercial property – what you should do if you can’t agree on what happens to it – Small Business UK
Most people have heard about co-ownership of property in a personal context (unmarried couples, friends and the bank of Mum and Dad) – usually because of personal experiences or what’s in the news. What isn’t so commonly known is that the same rules apply to commercial properties (including industrial or agricultural land).
More often than not, businesses will own some form of asset: plant and machinery, physical property, etc. Sometimes that property is owned by the company itself (note: a company in law is its own legal entity) and sometimes it is not, usually cropping up in partnerships or unincorporated businesses.
So, what happens if commercial property owners have a dispute and want to go their own ways?
Understand the legal position first
When parties co-own a property, they do so on trust for each other. You cannot physically separate a property so instead each party holds the other’s share on trust for them. A trust and beneficiary relationship is therefore created, and the powers and responsibilities under that trust are governed by the Trust of Land and Appointment of Trustees Act 1996 (“TOLATA”). How each party holds the trust will depend on the facts.
The first step is to look at who owns the property and in what way. In England and Wales, property is owned legally and/or beneficially. The legal owner will be the person(s) registered on the title deeds whereas the beneficial owner holds a share of the equity, usually by making financial contributions towards it. Sometimes they are the same person(s), and sometimes they are not.
If the property is registered in multiple names, the next step is to look at how that property is held, i.e. as joint tenants or tenants in common. Joint tenancy means that regardless of each owner’s financial contribution (even if that is not equal), they will each own a 50% beneficial share of that property. Joint tenants are also bound by the concept of survivorship, meaning that if one joint tenant dies, their interest will automatically pass to the other by law, even in a commercial property context. (NB: this article does not cover what happens in the instance the parties are married or in a civil partnership.)
Conversely, tenants in common means that each co-owner will hold a beneficial share equal to what they contributed towards the property. This will almost always be recorded in a declaration of trust or in the Form TR1 (the form signed at the point of purchase and filed with HM Land Registry). It may also be recorded in the company’s articles of association or other incorporation documents. Tenants in common are held in either equal or unequal shares. The concept of survivorship does not apply to properties held as tenants in common meaning that if a co-owner dies, their beneficial share in the property falls to their estate.
If parties hold a property as joint tenants, they can sever that tenancy by serving notice onto the other co-owner. When this is done (commonly in a dispute), the tenancy converts to a tenancy in common held in equal shares. Tenants in common can convert to joint tenancy but this is more complicated and will require certain formalities to be complied with.
If the parties do not hold a declaration of trust, or the details of that trust were not recorded in the Form TR1, then an equitable accounting exercise may be required to calculate what proportion of the equity each beneficial owner has.
Exchange correspondence and consider alternative dispute resolution before litigating
Once the parties understand their position on the legal and beneficial ownership, they should exchange pre-action correspondence to narrow the issues between them and to help work towards finding a resolution. That could involve settlement discussions between them or holding a mediation with a neutral, third-party mediator. Before issuing court proceedings, the parties are required to complete this exercise under the pre-action protocol set out in the Civil Procedure Rules. The courts see litigation very much as the last resort.
In the event pre-action conduct does not result in the parties resolving matters, then an application to the court can be made under TOLATA. The usual remedies sought are a declaration as to how the property is held beneficially and an order for sale; the latter can include selling the property on the open market or to one of the existing owners.
If litigation is ensued, the usual cost position is that the winner has their legal fees paid for by the loser. How that applies in practice depends on what the parties issue their claim for and the outcome.
Litigation on average takes two years to reach trial. In that time, a lot may have happened between the parties if they are still in the midst of a dispute (i.e. separate proceedings under company law, for example), as well as what that means for the business itself. More often than not, partnership, boardroom and shareholder disputes can have an adverse effect on the business and its day to day running, particularly for smaller companies.
It is therefore critical for anyone prospectively in this position to take legal advice as soon as possible to understand their legal position, but also to consider what tactical steps can be taken to seek a swift and inexpensive conclusion to the dispute. That is even more prevalent when the commercial property owners are very likely to also be business owners.
Katarina Morgan is a partner at Taylor Walton Solicitors.
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