Cabin Co-Ownership Agreements: A Plan to Preserve Harmony
The family lake cottage or hunting cabin calls to mind a pleasant and care-free escape for friends and family where summer days are spent relaxing, fishing, swimming and boating and evenings are enjoyed by a campfire listening to the call of the loon. Most people who grow up with a place on the lake have a storehouse of happy and cherished memories.
When the family cottage will not be owned by a single individual or a couple, extra planning is required to ensure that the lake can be the idyllic getaway of the owner's dreams. There are several situations in which a family cabin might end up being shared by joint owners who are not a couple. Many owners of Minnesota and Wisconsin lake cabins and cottages are reaching a time in life when they are ready to downsize, or are making plans to pass the cherished property on to the next generation. Sometimes siblings find themselves as joint owners after their parents have passed away. For some, the only feasible way to own a lake property is to share the expense and upkeep with other family members or friends. At first these informal arrangements seem like the best way to make owning the lake cabin possible for everyone; or to allow the special place to be enjoyed by the next generation. Like most idyllic musings, owning a cabin among a group of siblings or friends has its unique challenges. When a cottage or lake cabin will be shared, it is very often the case that "failing to plan is planning to fail."
When a family cottage or lake cabin is owned by a single person or a couple, all of the questions about who pays the bills, who mows the lawn and who fixes the clogged toilet are answered naturally. The owner is in charge, and the owner and their family make decisions and take care of responsibilities according to the family's usual habits and routines. When a single family or sole owner is completely responsible for a cabin, the question of who gets to use the cabin over the 4th of July and Labor Day weekends usually isn't an issue. The parent owners and their kids, if any (along with grandkids, in-laws and guests), are subject to the rules of the parents or owners in charge. The same goes for paying the bills, hiring a plumber and paying the property tax bill: the owners pay and the owners are in charge. This natural hierarchical structure of responsibility and decision-making does not usually exist among groups of friends or second generation co-owners of a property.
In order to preserve happiness and harmony between co-owners of a family cabin who are siblings or friends, it is important to have an agreement worked out that covers a variety of issues that may arise during the course of owning the property. Having the agreement worked out in advance makes it much more feasible for co-owners to enjoy the property while ensuring that it will remain a place where co-owners and future generations continue to enjoy carefree days and a lifetime of cherished memories. A carefully planned and well-written agreement can help to solve problems before they occur.
There are a number of topics that an agreement between co-owners should address. The first set of considerations is how decisions will be made. A cabin may need an addition or remodeling, and it is certain to need repair and maintenance. Does everyone get an equal vote in making these decisions? In the case of siblings who own a property together, do their spouses get a vote?
Some families are able to pass a cabin to the next generation along with a fund of money to cover the expenses of maintaining the property and some owners are not strapped for extra cash. Families and friends who must plan and save to have cash available need to ensure that the agreement answers the question of how expenses will be paid. For example, all owners can contribute monthly, or a planned collection can be made when money is needed. The agreement should also address whether the owners who contribute "sweat equity" will get credit for their labor and the sticky issue of the co-owner who cannot or will not contribute as required by the agreement. There are a number of options to consider including the gentle approach of having a co-owners cover the cost and consider it to be a loan to the non-contributing party that will be repaid to paying owner upon the sale of the property or when cash is available. Another option is to require the non-contributing co-owner to sell their share to the remaining owners.
Depending on the number of co-owners and the relationship between them, advanced decisions may need to be made about allocating use of the property. In some situations, there is enough room for everyone to be present all of the time. For those who don't plan for everyone to use the cabin at once, it is important to establish a system to ensure that lake time can be shared and scheduling decisions can be made easily. It often works well to establish a rotating calendar to assign time. Even if the whole summer doesn't need to be scheduled in advance, many co-owners need to plan in advance to alternate use for the "big dates" such at Memorial Day, the 4th of July, Labor Day Weekend or even for a certain month of the summer.
To avoid misunderstandings which could lead to fights, it is often appropriate for joint owners to set ground rules for using the cabin or cottage. The Agreement should allow the co-owners to adopt rules that can be revised from time to time. Rules can establish whether guests will be allowed, how many, and who they can be, or can require permission from the group to allow outside guests. It may be necessary to establish rules to ensure safety, especially if the dwelling is located on a lake or used for hunting. If there are boats, ATV's, a jetski, a canoe or a dock, rules for their use should be contemplated in advance, especially if recreational equipment is used by people other than its owner. An agreement should be reached about sharing labor such as the task of putting in the dock and boat in the spring and closing up the cottage at the end of the season. When children are a part of the group, a rule can cover supervision requirements, and whether older children and college-age kids have to be supervised. It may be necessary to set rules to address even the seemingly small details such as doing laundry and dishes, restocking the refrigerator and pantry and mowing the lawn. Preparing a simple set of rules in advance is one of the most effective ways that co-owners can establish expectations and make sure that those expectations will be met.
There is always the possibility that a dispute will come up that parties cannot solve according to a prior agreement. Most people intend to be able to work things out through a simple discussion, but when owners reach an impasse, the agreement can include provisions for dispute resolution if there is a deadlock between the co-owners.
An agreement for a cabin or cottage should also lay out a plan for the transfer of ownership. There are many situations in which one owner may need or want to sell their share of the property. An agreement should address how the owners will deal with the share of a person who no longer wishes to use the property. An agreement among co-owners should also address other events that would trigger a transfer of an owner's interest including incapacity, divorce or even the failure to contribute to expenses. It is necessary to determine whether a deceased co-owner's share will be transferred to his or her heirs, or whether a deceased owner's share would be sold to the co-owners or an outside party. Depending on the co-owners individual situations, the agreement could require remaining co-owners to buy a departing member's share, or could give them an option to do so. The agreement can also establish how the purchase price will be determined either through an agreed upon formula, or for the property's appraised fair market value. Provisions for financing the purchase of a departing owner's share can also be established. Some parties will choose to require cash at closing, others will use a promissory note to cover all or a portion of the purchase price for an established term. In some cases, parties choose to purchase life insurance to make cash available to purchase a deceased owner's share from their estate. Finally, the agreement can establish the terms of selling the property to the public if the owners are forced to sell, or if they agree that they no longer want to own the property.
Setting up a cabin co-ownership agreement gives those involved an opportunity to consider the most legally appropriate way to own the property. The agreement can stand on its own as a written contract, or can be included in the provisions of a Trust or as an agreement between the members of a Limited Liability Company. Depending on the owners' individual situations and goals, it may be worthwhile to transfer ownership of the property to either a Limited Liability Company or a Trust. If a property is owned by a Limited Liability Company, the co-owners are Members of the company and the agreement between them is housed in a Member Control Agreement. Having a Limited Liability Company own a property has the advantage of providing liability protection for the personal assets of members if a situation arose where the Limited Liability Company was involved in a lawsuit. For some properties, particularly where there are multiple generations involved in owning a property, a Trust is a good option for owning a cabin or lake cottage. A Trust can contain the terms of the agreement for the property and is a manner of holding title to the property and transferring it between generations without the requirement of a probate. Using a Trust to hold title to a property has the advantages of keeping the terms of the agreement private, and allows a long-term savings that avoids costs, delays and attorney's fees associated with a probate. Whether a stand alone contract, a Trust or a Limited Liability Company is the most appropriate will depend on the situation of the owners and their intentions for use and should be considered an important part of the discussion among co-owners.
Most people who have the need for an agreement for a shared vacation property will need some assistance in getting an agreement in place. With the great variety of issues, and the challenges of making decisions as a group, working with an attorney is usually more efficient than attempting to create an agreement alone. Working with an attorney experienced in preparing cabin co-ownership and lake cottage agreements ensures that plans are made to address the legal needs and goals of the owners' individual situations. An attorney can make recommendations for addressing co-owners concerns so that the agreement can be tailored to the particular needs of the owners. An attorney can also facilitate a discussion between co-owners or between generations and can guide the discussion through the variety of issues that the agreement will cover. Once a well-drafted agreement is in place, co-owners should be left with a sense of preparedness and peace of mind in knowing that a plan has been made to allow the family lake cottage or hunting cabin will be used, enjoyed and cherished as intended.