Buying a property seems to become more difficult each year – ever rising property prices and large deposits required by mortgage providers means that buying on your own is a huge challenge. Increasingly, friends, relatives or unmarried couples need to combine their finances to afford a home.
This will probably be the biggest and most permanent investment you will ever make, and you should be sure to protect the large sums of money you will be putting into it. Unfortunately, a relationship that is very strong when a house is purchased can change a great deal over the years, or even break down altogether. It is a sad fact that when money and property is involved, relationships can become very strained and you may find yourself involved a dispute over ownership and the sale of the property at some point.
How can you protect yourself from such problems?
Reach an Agreement Before Buying
Hopefully the person you are buying with is well known to you and you have a good relationship with them. Be open about your desire to come to a solid agreement about the ownership of this huge investment you are both making.
This is often easier said than done. Perhaps one of you is making a far greater financial contribution than the other, or you are relying on them to obtain the mortgage. This may make you feel awkward about holding these discussions, but an agreement at the start will protect all parties and ensure that everyone knows where they stand. The parties should have a good idea of how you plan to fund the purchase, how long you plan to live together and what happens if one or all of you want to sell their share in the future. Some knowledge of the types of ownership will help you to have these discussions.
Types of Ownership
This means that each person owns the property. If the property is sold, each person will be entitled to an equal share of the sale price. However, if one owner dies, the whole of the title in the property will pass automatically to the survivor, and they will own it in its entirety. This is normally only advisable for very close or married couples. It is unlikely that friends buying together would want to choose this option.
Tenants in Common
This is far more appropriate for friends or relatives buying together, and means that each person has a distinct share of the property.
Once the property is sold they will receive that share of the sale monies (after the mortgage is repaid and costs of sale are deducted). This means that friends or partners who decide to go their separate ways will each receive the share previously decided upon at purchase. It also means that should one of the owners die, their share of the property can pass to whoever is named in that person’s Will (A properly drafted Will is vital, especially as a property owner).
Unless properly recorded when the property is purchased, it will be assumed that each person named as a purchaser owns an equal share, ie 50/50. If this is not what the parties want, they should create a Declaration of Trust. This will allow far more control and flexibility over legal ownership of the property, which is often required when two or more people come together to buy a property. It can also be used to determine other factors such as repayment of deposit monies upon sale. The following are examples of a Declaration of Trust in action:-
- James is buying a house with his friend Steve as Tenants in Common. James has inherited some money so contributes £15,000 of the deposit, whilst Steve only contributes £5,000. However, Steve has a better paying job, so they decide that Steve will contribute 70% of the mortgage and bills each month and will own 70% of the house. A properly drafted Declaration of Trust will ensure that upon sale of the house, they will each receive their deposit contributions back and then a 70/30 share of the remaining sale monies.
- Gina is buying her first house, but to get a reasonable mortgage rate she needs a huge deposit. Her parents contribute half the purchase price to make this possible. The mortgage and the title to the house will be in Gina’s sole name. However, her parents want their investment back, plus any profit that investment makes when the house is sold. A Declaration of Trust can ensure that even though they are not legal owners of the property, they receive 50% of the sale price.
The above examples show how useful a properly constructed agreement can be. Without such an agreement, the legal assumption is that each party owns the property equally and should receive equal shares upon sale.
If A Problem Arises
Proper discussions and each party seeking seperate legal advice on the above is the ideal, but buying a property is often an exciting, emotional or unsettling time and many buy a property without properly protecting themselves. People buy property together for many and varied reasons and sometimes they can find themselves, many years later, in a difficult situation. Perhaps a relationship has broken down, deposit contributions have been forgotten and both parties are demanding a share they feel they are entitled to but has not been legally recorded.
When there is a disagreement over shares or ownership of a property and no Declaration of Trust has been made, legal advice should be sought. It may be possible to look into the intentions and contributions of the parties and calculate who is entitled to what share, and negotiate an agreement. If no agreement can be reached, Court proceedings may be necessary to obtain a decision on the matter. Any Court action comes with cost consequences for the parties involved, and familiarising yourself with the basics, open discussion with your buying partner and perhaps some legal advice at the time of purchase can prevent these problems from arising.
Gareth specialises in Civil Litigation and Dispute Resolution, and can assist where such problems have arisen. He can be contacted at firstname.lastname@example.org or on 01702 348 384.
To ensure these problems do not arise, Frances White can offer specialised conveyancing advice and assistance at the point of purchase. She can be contacted at email@example.com or on 01702 348 384.
Nothing in this publication should be regarded by any person as advice or in the nature of advice: it should not be relied on, and the author assumes no liability whatsoever to any person.