What is Undivided Property?
– Definition of undivided property
– Management of an undivided property
– Owning an undivided property or holding shares?
An undivided property is the property of several persons.
Definition of an undivided property
An undivided property – also called an undivided asset – is owned by several people; each person’s share of the property is identified in value but not in kind.
Any property can be in joint ownership: it can be money, a piece of furniture (work of art, car, etc.), a building (house, land, etc.) or an intangible title (share, stock, etc.). Property is in joint ownership either by law (for example, in the case of inheritance) or by will (for example, when several people decide to buy a property together).
Each co-owner holds a share of the property(ies) without the property(ies) being physically divisible.
You become the freehold owner of a property when you purchase it. There are two categories of ownership for this freehold: “bare ownership” refers to the property’s ownership but not its possession. The right to utilize and enjoy an asset is for the “beneficial owner”. Note: When property ownership is split, the beneficial owner is one person, and a bare owner is different.
In some cases, the donor reserves the beneficial owner on the given property:
– this is notably the case when the donor personally uses the property or receives indispensable income from it;
– in these conditions, keeping the beneficial owner allows the donor to give the property while continuing to use it personally or derive from its benefits.
Example: A lives in an apartment; he wants to give the apartment to his children B and C to avoid high inheritance taxes, but he wants to continue living on the property. A donates with reservation of beneficial owner: A has the beneficial ownership, and B and C have the bare ownership of the apartment; at the death of A, B and C recover the beneficial ownership and then hold the full ownership of the apartment in joint ownership.
It should be remembered that the beneficial owner is not in joint ownership with the bare owner: the beneficial owner has his rights on the property (the right to use it and reap its benefits), and the bare owner has his rights on the property (the right to dispose of it).
On the other hand:
– if there are several beneficial owners, they are in joint ownership;
– if there are several bare owners, they are in joint ownership.
Management of an undivided property
Insofar as each co-owner holds a share of the property, all co-owners must manage the undivided property simultaneously, in compliance with the legal rules of undivided management.
In addition, a property may bring in money and cost money; in these conditions, the co-owners must keep an undivided account.
Finally, to get out of the undivided ownership, the co-owners have several possibilities:
– sell the property and share the price in proportion to their respective shares;
– share the property of the undivided estate between the co-owners;
– one of the co-owners sells his or her share to another co-owner or a third party.
Important: the distribution of property rights in a property purchased in undivided ownership is made per the shares indicated in the acquisition deed and not according to the financing. Suppose two purchasers each buy a property in joint ownership. In that case, they will have acquired the property in the same proportion without considering the property’s terms and sources of financing. The fact that one of the purchasers has contributed more than the other does not affect their respective ownership rights.
To hold property in joint ownership or to hold shares in a company?
A company is often preferable to undivided ownership in a real estate investment. Notaries often advise setting up a real estate non-trading company, which remains a preferred solution for long-term investments.
There are two main reasons for this choice:
– the company makes it possible to organize the management and ownership of the real estate, whether it is for use or profit;
– the company is a tool that facilitates the transmission of the acquired real estate by donation or succession.
Long-term management of the property
Compared to undivided ownership, the constitution of a real estate investment company has several advantages, which we present to you below:
the articles of association of the real estate investment company contain provisions concerning the majority required to make decisions. Under the undivided ownership regime, disposition acts (e.g. sale) are taken unanimously, whereas a two-thirds majority takes management decisions;
setting up a real estate investment company allows you to determine freely and precisely adapt in the articles of association the majority conditions that will be the most appropriate according to the objectives of the undivided owners;
drafting the articles of association of a real estate investment company also makes it possible to organize the decision-making process within the framework of the general meeting (the rules of convocation) while implementing an honest discussion between the partners, thanks to the agenda. The system of undivided ownership does not include such a procedure (except in the case of drafting an undivided ownership agreement);
thanks to the real estate investment company, it is possible to set up joint management to share the administration with one’s spouse or ascendant (because of a future transmission, for example).
The anticipation of heritage succession
Using a real estate investment company allows organizing, during the lifetime of the founder(s), the organization and management of the company for the day when the parents will no longer be around. Rules of procedure can also be drawn up to set out as precisely as possible the rules for living together and decision-making.
Good to know: the existence of a company also has the effect of avoiding a freeze on the bank account following a death. Indeed, the bank account of the real estate investment company continues to function under the signature of the managers, independently of the death of one of the partners.
Finally, setting up a real estate investment company facilitates the donation of the property during the parents’ lifetime. Indeed, the company enables the donation with beneficial owner reserve (possibly reversible on the spouse’s head). The clauses of the articles of association make it possible to organize the respective rights of the beneficial owner and the bare owner.
As far as voting rights are concerned, they belong to the bare owner, except for decisions concerning the allocation of profits. They are reserved for the beneficial owner (the articles of association may derogate from this provision).
However, for other decisions, the bare owner and the beneficial owner may agree that the beneficial owner will exercise the voting right. Therefore, it is possible to give extensive voting rights to the beneficial owner and give significant powers to the property manager (the right to sell an asset, for example, and buy back another).