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On 24th June 2014, the Office for National Statistics published its analysis of 2001 and 2011 census data, finding that the proportion of households in the UK which comprised cohabiting couples rose from 14% to 17%. More of us are choosing to live together without getting married. Many choose to purchase a property together.
This article seeks to point out why it is essential to get advice on the legal implications of jointly purchasing a property before you buy.
Types of joint ownership
Joint owners can hold a property as “Joint Tenants” or as “Tenants in Common”. The type of joint ownership you choose will affect what happens to the property on the death of you or your co-owner and the division of the proceeds on a sale.
Equally, if a property is being bought in the sole name of one of you, but the other is contributing to the purchase price and/or is going to live in the property as their home, this can affect what happens to the property on the owner’s death and the division of the proceeds on a sale.
Questions which must be considered are:
- Who will own the property and in what shares?
- In whose names will the property be registered? and
- What will happen to the property if one of you dies or the relationship breaks down?
Failure to agree and properly record entitlements in the property and proceeds of sale before you complete your purchase (or before commencing cohabitation if one is moving into the property of another) could lead to costly litigation in the event of a dispute.
If you choose to hold your property as Joint Tenants, both of you will own the whole property. You will not have separate and distinct shares in the property and so will not be able to leave a share of the property in your Will. Instead, if one of you dies, the property will pass automatically to the surviving owner regardless of whether or not a Will has been made. You should not purchase as Joint Tenants, therefore, if you have children from a previous relationship whom you wish to ensure benefit on your death rather than your share passing automatically to the surviving owner.
If you sell the property or separate, provided that you have made an express declaration that you are joint tenants (by completing the appropriate Land Registry form or a separate Declaration of Trust), it will be presumed that you both own the property equally, regardless of your respective contributions to the purchase price.
It is common practice now for Joint Tenants to make an express declaration of their joint tenancy; the Land Registry has encouraged this by including a Declaration of Trust panel on its completion form (TR1) since 1998 and subsequently introducing a voluntary Joint Owners (JO) form in 2012. In the absence of an express declaration, the presumption is still that the co-owners have equal shares in the property. However, the presumption may be rebutted if you can show that this was not your common intention on purchase or that your common intention subsequently changed.
The legal arguments used in this area of the law are complex. To minimise the risk of costly litigation in the event of a future dispute, therefore, you should enter into an express declaration of joint tenancy at the point of purchase (on the appropriate Land Registry form).
Tenants in Common
If you hold a property as Tenants in Common, each of you will own a specified share in the property. You need to consider whether each person’s share will be fixed from the outset or whether the shares will vary according to the financial contributions made by each person during the ownership of the property (see “Quantifying shares” below).
If one of you dies, the property will not automatically pass to the surviving owner. Instead, the deceased’s share will either be disposed of under the deceased’s Will or, if there is no Will, it will pass to the deceased’s next of kin. If you are not married, the deceased’s next of kin will not be the surviving partner. It is essential, therefore, if you are not married that you make Wills if, on the death of the first, you wish the deceased’s share in the property to pass to the survivor.
You should ensure that your precise shares in the property are set out in a formal agreement at the outset (Declaration of Trust and possibly a Cohabitation Agreement as well – see below). Otherwise, the court will need to apply complex trust and property laws in the event of a dispute on death or separation resulting in lengthy and disproportionately expensive litigation.
If you are purchasing a property in your sole name as a home for you and a partner, or if a partner is moving into your property, it is important that you are aware of the legal implications in the event of your death or relationship breakdown.
If you are the sole owner of a property and you die, the property will pass to your beneficiaries under your Will. If you do not have a Will, the property will pass to your next of kin. If you die and someone is living in the property or has financially contributed to your property and your Will does not provide for them to have an interest (or a sufficient interest) in the property, they could contest your Will by making an application under the Inheritance (Provision for Family and Dependants) Act 1975 which would serve to deplete your estate.
You can reduce the risk of such an application being made by entering into a Declaration of Trust with the interested person setting out your respective shares in the property at this stage. If you intend to cohabit and your partner is to have no interest in the property, rather than a Declaration of Trust, you will need to enter into a Cohabitation Agreement.
Equally, in the event that you and your partner separate, they may be able to allege that they have a beneficial interest in your property. The law in this area is complex. To minimise the risk of costly litigation in the event of a future dispute, you should enter into a Declaration of Trust setting out your respective shares in the property or, if a cohabitant is to have no interest in the property, a Cohabitation Agreement.
You will need to consider whether you and your partner are to have shares in the property which are fixed at the outset or if your respective shares are to be varied according to your respective financial contributions during your ownership of the property (floating shares).
If you opt for fixed shares, your shares may be equal or, if you have made unequal contributions to the purchase price, you may wish your shares in the property to reflect this. You will need to decide the size of your shares now, though, which means you may need to revisit your decision in the future if one of you makes a significant financial contribution, for example, by paying for improvements to the property.
Alternatively, if you anticipate making unequal financial contributions throughout your ownership of the property and wish your shares in the property to reflect this, your respective shares in the property may vary from time to time depending on who pays what. The calculations will be more complex and you will need to keep accurate records of each person’s contributions.
Do I need a Declaration of Trust or a Cohabitation Agreement?
A Declaration of Trust will simply record your respective beneficial interests in the property.
A Cohabitation Agreement can deal with the following additional issues:
- How the mortgage and other household expenses are to be paid, by whom and in what proportions
- What should happen if one of you wishes to sell the property and realise their investment and the other does not
- The arrangements for one of you to buy out the other.
- How and when the property is to be sold
- Ownership of joint and separate property, if cohabitation comes to an end
- Financial support between you during and after cohabitation
- The living arrangements and financial provision to be made for any children, if cohabitation ends.
Depending on the complexity of arrangements agreed between you, it may be appropriate for you to execute both a Declaration of Trust and a separate Cohabitation Agreement. If this is being done, it is important to ensure that there is no conflict between the two documents, which could lead to a misunderstanding about your intentions at a later date.
Severing a Joint Tenancy
A Joint Tenancy can be changed to a Tenancy in Common at any time by either party in which case the remarks above as to Tenants in Common will apply.
If you intend to marry
Please note that if you are married, or subsequently marry, the court may in certain circumstances redistribute your assets (including your respective shares in property) on divorce notwithstanding the terms of any Declaration of Trust. You may be able to avoid this happening by entering into a Marital Agreement (a pre-nup or post-nup).
If you are purchasing a property with your partner, we have a team of experienced property lawyers who are able to advise and assist you through the process.
Image by Phil Hawksworth under a creative commons licence