When buying a property jointly what can we do to ensure we remain friends in future?
When buying a property with a partner, friend or family member, it’s important to iron out any legal and financial issues and set them down in writing to avoid disputes in future says Crouch End property solicitor Sam Smith.
This is an increasingly common scenario. Let me start by setting out some of the basics of property ownership. When buying a property jointly it is possible to own it one of two ways; as joint tenants or as tenants in common.
As joint tenants two or more people will own the whole property together. This means that while each owner will have an equal interest, if one owner should die, then the whole of the property will pass automatically to the surviving owner/s. This arrangement is often best suited to husbands and wives.
As tenants in common, although the property will be owned jointly, each owner will have a specific share in the property. If one owner should die their share does not pass automatically to the surviving owner/s. While the property could be owned in equal shares, it may also be owned in different shares.
It is almost always advisable for un-married couples and friends buying a property together to own as tenants in common.
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When owning a property as tenants in common the owners should enter into a property ownership agreement (also known as a declaration of trust) with each other to confirm the extent of their respective shares and set out any other terms, for example provisions to deal with a situation where one of the owners wants to sell or how to meet day-to-day expenses related to the property such as mortgage repayments, utility costs and council tax. This is particularly important where one owner is contributing more than the other/s.
The respective shares will determine the entitlement to the sale proceeds when the property is sold and the rental income if the property is rented out.
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When it comes to setting out each person’s share there are essentially two options; either a “fixed” or a “floating” arrangement.
The fixed declaration of trust fixes each person’s share from the outset, typically based on the initial contributions to the purchase. This is the more straightforward option, but means that the declaration of trust may need to be revisited if there is a change of circumstances in the future, for example, if only one owner pays the costs of significant improvements to the property.
The floating declaration of trust provides for each person’s share to be determined according to their financial contributions throughout their ownership of the property (such as mortgage repayments and the costs of making improvements to the property, in addition to the initial contributions to the purchase price) and may therefore fluctuate over time.
Deciding which is right in an individual situation will depend on each person’s circumstances and it is best to seek the advice of a solicitor.
Setting out each person’s interests and responsibilities in a declaration of trust makes clear their intentions from the outset and will help to avoid disputes in the future.
The pitfalls of not doing so can be severe.
Where no declaration of trust has been made, the parties will be presumed to be joint tenants and entitled to equal shares in the property and it is only in very exceptional cases that a court will be persuaded otherwise.
It is easy to imagine therefore the scenario where an unmarried couple buy a property, subsequently split up and decide to sell the property but cannot agree on the division of the sale proceeds. One party has contributed the entire deposit (perhaps even as a result of a ‘loan’ from the Bank of Mum and Dad) yet no declaration of trust was put in place and there is no other evidence to confirm the intended shares. A court is likely to rule in favour of an equal split. As an aside, parents making such gifts are strongly advised to ensure their children put in place a declaration of trust in order to protect that money.
One final consideration when owning a property jointly as tenants in common is that because each share does not pass automatically to the surviving owner, each party must make a Will specifying to whom they want their share to go.
In a slightly different scenario, if one half of a couple is purchasing a property in their sole name but both parties will be living there, it is advisable to consider entering into a cohabitation agreement. There are some circumstances where a non-owning party can claim an interest in a property despite it being in the name of the other person therefore a cohabitation agreement can be used to clearly set out the intentions of the parties at the time of purchase and prevent any arguments at a later stage.
Do you have a property question for Sam? Email it to firstname.lastname@example.org or tweet @hamhighproperty