Tuesday, June 23, 2009

SELLING A PROPERTY IN THE PHILIPPINES: CO-OWNERSHIP

Aside from the usual sales discussions & presentations on real estate subdivisions projects & brokerage, be it lot for sale or house and lot or a condo or a townhouse, in Bacolod, Iloilo & Cebu, a lot of customers and even non-customers & friends consult me on matters regarding real property ownership in the Philippines. Since land ownership is a real touchy issue, especially among Filipinos (think of the numerous rebellions, insurgencies, family feuds, court cases & other disputes all rooted on land & its ownership), I usually refer sensitive legal issues to the experts (meaning...lawyers). However, as a practicing licensed real estate broker/realtor (in Bacolod, Iloilo & Cebu), I feel it is my obligation also to share whatever knowledge I have on the subject as the law is quite clear with regards to property ownership. For this post, I will focus more on what is called co-ownership.

The Philippine Civil Code (Article 484) states that co-ownership or tenancy-in-common occurs when the ownership of an undivided thing or property belongs to different persons. As such, it means that rights of the co-owners are inseparable, as if they are one; therefore one may not dispose of his or her interest in the co-ownership without the consent of other. The concept of co-ownership arises only when the property or thing is undivided and doesn’t apply when the portions or shares of the different co-owners are readily identifiable, delineated or concretely determined even if there are no ready technical descriptions yet available[i].

Co-ownership is also a form of a trust wherein the co-owners are the trustee of the other. When a co-owner dies, the surviving co-owner or co-owners is subrogated (or automatically assigned) to the rights of the deceased owner.

Rights of Co-owners

A co-owner’s rights or interests are classified into 2 categories. First is the ideal or abstract (non-physical) part of the undivided object, thing or property and second, rights over the physical thing itself. The co-owner enjoys full ownership of his/her portion or share and is entitled to enjoy all the fruits & benefits pertaining to that object or property. He or she can mortgage, sell, exchange, lease or even assign his share to another to another party[ii]. However, the mortgage, sale or assignment of the property or thing is limited only to the portion allotted to him or her[iii].

The Civil Code states that no co-owner shall be obliged to remain in the co-ownership (Article 494). Each co-owner may demand at any time the partition of the thing or property owned in common, insofar as his share is concerned. However, co-owners also cannot demand a physical division of the thing or property owned in common, when to do so would render in unserviceable for the use it was intended (Article 495).

Sale or alienation of property by a Co-Owner

Acts of alienation or sale of a thing/property owned in common are decided on the basis of unanimity. A co-owner as a rule must seek consent of other co-owners is he/she intends to sell his share but this doesn’t mean that a co-owner cannot sell his portion or share. He/She always has the right to do so. If, the withholding of consent by one or some co-owners is clearly prejudicial to the common interest, the courts may grant adequate relief in this case (Article 491, Civil Code)

What are the effects of a sale of the whole property without the consent of the others, or if they do not give consent? The Philippine Supreme Court gave the following rulings[iv]:

a.) The sale will affect only the share of the selling co-owner or co-owners but not those of the other co-owners who did not give consent to the sale;
b.) The co-owners may seek a partition of the thing or property;
c.) Laches (a principle of law wherein a party asserts that an opposing party has "slept on its rights’) may not stop the other co-owners from claiming their rights on the co-ownership if they are unaware of the sale and there is absence of opportunity to oppose or take proper action;

The Philippine Supreme Court also ruled on a case wherein a co-owner sold the entire property without the consent of the other co-owners. The Court said it will not render the sale null and void since a co-owner is entitled to sell his undivided share. Only the rights and share of the selling co-owner is transferred to the buyer, thereby making the buyer a co-owner of the thing or property. A remedy of the complaining co-owner is the partition of the property in question and not an action for the nullification of the sale of the property or for the recovery of possession thereof[v].

Options and Courses of Action

Co-owners seeking to sell their property & may encounter resistance or even withholding of consent from other co-owners may base their actions on what is provided by law & the courts. Aside from the legal aspect, there are practical & economic to be considered before deciding a course of action to sell the property.

a.) Sale of the common property jointly by all co-owners at the same time to a single party

This is the ideal scenario as all the co-owners agree to sell all the shares jointly & simultaneously as one transaction to a single party. For real property, this mode provides the co-owners a lot of advantages, among these are:

1.) Uniform price, terms & conditions making it easier for a buying party to negotiate and consummate the transaction. All co-owners regardless of portion or share percentage will get to enjoy the best market offer.

2.) Documentary requirements are simple as the co-owners usually appoint a co-owner as an Attorney-In-Fact (AIF) & issue a Special Power of Attorney (SPA) to transact with the prospective buyer with explicit instructions on the details of the sale. The AIF will report & consult with the other co-owners on any counter-offers, concessions & other valuable insights on the sale.

3.) Prospective buyers deal with only one or at the most two co-owners during negotiations instead of many making the transaction smooth & productive.

4.) Upon meeting of the minds of the buyer and the seller on the sale of the property, the AIF may also sign all the pertinent documents, contracts and other papers related to the sale of the property if the SPA authorizes him or her to do so. Co-owners may also designate one AIF to negotiate the sale & another co-owner to sign the sale documents and contracts if they wish to do so.

5.) Payment of closing costs, taxes and other fees are shared by everyone on a pro rata basis (ratio) based on the each co-owner’s share


b.) Subdivide the property to delineate the portion of the co-owners who are willing to sell from the share of those who are not interested in selling. Once the two plots are issued separate titles, the co-owners who are willing to sell can proceed with their transaction & sell jointly the remaining portion to a single party.

For properties with large lot areas, this option may also be the next best thing to selling the property jointly & simultaneously. However, for small plots, this may turn out to be an expensive operation in relation to the value of the property as a whole if undivided and also the chances of succeeding of selling very small portions to the open market may prove to be slim.

There are two (2) major issues to be tackled first if this option is to be considered:

1.) For small lots with many co-owners & each with varying percentages of ownership share, the issue of marketability of the lots to other buyers has to be addressed.

To illustrate:

If a 200 square meter property with dimensions of 10 meters frontage & 20 meters depth gets to be subdivided among 3 co-owners with equal shares of 33.33% of the property, the most logical & equitable way of subdividing would be to end up with 3 lots with each plot having a total area of 66.67 square meters and dimensions of 3.33 meters of frontage & depth of 20 meters since it is assumed that each plot should have a road frontage.

Problems occur should two (2) of the co-owners decide to sell their share separately, it would be quite difficult to find buyers in the open market willing to purchase a 3.33meter x 20 meter property for residential purposes if the property is located in a residential area. The property would look more of a pathway than an ideal location for any house or home. If the property is located in a commercial zone, it even gets more problematic since businesses require adequate frontages for customer visibility & access of logistical equipment such as delivery trucks and parking space.

Should two of the co-owners decide to sell jointly their shares to a single buyer for a single use, then the chances of selling the property is improved but not much since the resulting dimensions will still be at 6.67 meters by 60 meters, barely enough for a parking space or entry for a medium sized delivery truck or an SUV. Depending on the location of the property and its best use, there may still be people who may purchase these small plots with small frontages. Next door neighbors looking to expand their areas may be interested & if it’s within the vicinity of a public market, small scale entrepreneurs may also consider the property. However, we cannot expect pricing to be maximized since the advantages of a wide frontage is absent in this case.

Overall, if the resulting smaller lots would diminish the marketability & even the value of the property, then this option may prove to be counter productive in the long term.

2.) Costs & Time Spent to Subdivide the Property

Subdividing a property entails costs as well as a lag time for the final subdivision plan to be approved and titled.

The process of subdividing normally occurs this way:

*First, a surveyor or geodetic engineer is contracted take the technical descriptions and bearings of the proposed subdivision plan.

Co-owners will have to settle among themselves who gets which portion or subdivided plot of the proposed subdivision plan if they intend to sell their portions separately. A resulting plot may have inherent advantages over the other smaller plots. A particular lot maybe much nearer to an existing commercial establishment, which is good, if the dominant use is commercial or another plot maybe right next to a open drainage canal which is not a good thing. In any case, the co-owners will have to resolve this amongst themselves.

*Second, once the issue of who gets what portion is settled and the geodetic engineer is done with his survey and recording of the technical descriptions and bearings, an application for subdividing the property is then sent to Bureau of Lands for the approval. This could take several weeks. Some fees also will have to be paid out to the Bureau.

*Finally, once the technical descriptions are approved, then the original title & other documents (tax declaration, tax receipts, etc.) will then be submitted to the Registry of Deeds along with the approved subdivision plan issued by the Bureau alone with legal documentation proving that all co-owners approve the partition. The Registry of Deed then cancels the old title & issues new titles for the new smaller lots. Again, certain fees will have to be settled for each of lots with the Registry of Deeds.

Compared to selling the property undivided, subdividing can be quite an expensive proposition given the process involved. However, if the lot is big enough and is situated in a good location, then the expenses are worth it. Real estate developers subdivide and sell smaller lots and still make profit especially since they purchase the plots at low price and introduce improvements that would enhance the quality of the entire location as well as raising surrounding values of the local community. On the other hand, for small plots, say at 200 sq.m., a lot of consideration should be given if the expenses and the potential returns are worth it given the lengthy process and other costs.

c.) The selling co-owners can always offer their share to the other co-owner unwilling to sell or subdivide their share.

This option is quite simple and doesn’t need to be mentioned but it’s worth exploring also. Prices and terms can be easily be negotiated by all the co-owners.

If a sale does occur, a Deed of Sale will be executed wherein the selling co-owners surrender and relinquish all claims, rights & interests over the property. Payment of the appropriate fees & taxes on the sale then follows. The original title is then surrendered to the Registry of Deeds who will cancel the old title and issues a new one in favor of the acquiring co-owners with their respective shares reflected.

d.) The selling co-owners may also sell their share in the common property without the consent of the other co-owners.

As mentioned in the Civil Code & other Supreme Court decisions, a co-owner has the right to sell his share anytime even without the expressed approval or consent of the other co-owners.

However, it is recommended that this option be taken as a last resort and would need to be done with the advice and supervision of a legal counsel. This is to prepare the selling co-owner of whatever legal actions that may be initiated by other co-owners who don’t give their consent. There is also the issue of relationships & sensibilities that maybe offended. Although this is an exercise of one’s right to do as one sees fit to one’s shares, nevertheless, extra caution through the help of a lawyer is highly recommended.

Another issue to be considered is marketability of a co-owner’s share in an undivided property to prospective buyers. Normally, buyers would want to purchase properties free from any future complications and would like to exercise absolute ownership (no co-owners/fee simple) rights over a property especially if it is residential. Though the law recognizes the right of the co-owner to sell his share in the common property, the buyer will end up being a co-owner of the property together with the other non-selling co-owners. It is now a question on whether a buyer, especially in the Philippines, is willing to go into a co-ownership arrangement with people he may or not get along.

e.) If the other co-owners insist on not giving their consent to the sale of their shares on common property, the selling co-owners can go to court and show that their withholding of consent if prejudicial to the common interest of the entire group.

For this option, a selling co-owner will need legal counsel as this involves going to the court and proving that the refusal of the other co-owners to consent to the selling of the entire common property is prejudicial to the interests of the co-owners holding more than a majority of the shares or portion of the property.

Summary

Co-ownership is recognized by law in order for co-owners to enjoy the fruits & benefits of its commonly owned property. As much as the courts recognizes the need to have unanimity in decision making as far as selling of a co-owner’s share or portion in a thing or property, it is also equally important that the rights of a co-owner be respected and the law has provided several avenues for this rights to be respected in numerous decisions and other articles in the Civil Code.

To sell a share or shares/portions in a common property, there are several options available which may be legally feasible but would be not be making sense from the economic and practical view point to the selling co-owner. For small properties, there are also physical limitations such as the area and resulting dimensions if subdivision of the common property is to be undertaken for the purpose of sale.
Co-ownership from the business/financial & even personal standpoint is a very good investment strategy for prospective property owners who may want to take advantage of opportunities in the market but lack immediate personal resources to make their purchase. For family members or heirs who want to preserve the family estate (and unity) for their children, co-ownership provides a common bond among kinsmen, a shared legacy which will be carried on by succeeding generations. The law is very clear on the issue on co-ownership and I advise not just my real estate buyers for subdivision properties & individual real estate in Cebu, Iloilo or Bacolod but for all owners of properties around the country to be aware and conscious of their rights as well as their obligations in a co-ownership arrangement.


[i] Spouses Si vs. CA,135 SCAD 754,342 SCRA 653
[ii] Villanueva vs. Florendo, 139 SCRA 329
[iii] Civil Law: Property, ownership and its modifications, Justice Jose C. Vitug,
[iv] Bailon-Casilao vs Court of Appeals(160 SCRA 738)
[v] Tomas Claudio Memorial College, Inc. vs. Court of Appeals (114 SCAD 58, 316 SCRA 502)
http://www.chanrobles.com/civilcodeofthephilippinesbook2.htm















1 comment:

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