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Buying shares: how do I know they own it?

| Guidance | October 16, 2012

You need to see the sharer’s proof of ownership of the asset and clear evidence of genuine full title to the asset so that you know about any outstanding loans secured against the asset.

For real estate this is straightforward. You can check what mortgages or loans are currently secured against a property through the Land Registry through www.landregistry.gov.uk. The Land Registry hold records of most residential properties. There is a charge for this (£4 at August 2006) and it would be done as part of the conveyancing process by your solicitor, but you may wish to find out earlier.

For any other possessions, assessing ownership or mortgages may be more difficult. However, remember that no lender will lend on the security of an asset that is not actually “secured” to him. So if ownership does not involve documents of title, it is unlikely that the asset has been charged. An exception to this is in ownership by a company.

If a company borrows, it is usual for the lender to take a “fixed and floating” charge over all of its assets. If the company hits trouble and the bank then calls in a receiver, he will look at the company’s records to discover what assets it has. That may include the diamond necklace or earth moving machine in which you thought you had a half share!

However there are assets which do have documents of title and other records which should show whether or not they are charged: aeroplanes for example.

So, supposing the asset is not charged, how can you be sure that the asset is even owned by your potential sharer? The short answer is that you just have to make what enquiries you can. After that, your security might lie in simply knowing that your sharer has other assets. A search at the Land Registry will show whether his house is charged to a lender, but if it is, will not show the amount of the charge.

There may also be asset-specific documentation that proves ownership. Any major asset should have been bought with a receipt naming the buyer and seller. Normally major assets are insured. However there are times when these documents may be missing for honest reasons: when the asset has been owned by one family for a long time and/or when the asset is not insured.

The absence of one or all documents may indicate potential fraud. And even if the documents are available, they may be forged. If you are considering buying a part share of any asset other than real property, get specialist advice. Speak to experts, dealers and insurers specialising in that asset class. Insurers are particularly useful source of advice as you will have to insure the asset once the sharing agreement is in place. Insurers will not insure the asset unless they can satisfy themselves that the ownership is clear and the estimated value of the item is reasonable.

However it is likely that some sales of part shares will be made by owners specifically seeking to repay loans secured against the asset, using the money raised. In these cases, as long as there are no loans left secured against the property after the sale, there should be no problem. If you are discussing buying a part share of an asset, you need to discuss how it is currently financed and how it will be financed after the sharing agreement is put in place. Frank discussions about these issues will also help to confirm to you whether or not this is a suitable sharing partner for you.

If you are in any doubt, walk away from the sharing agreement.

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