When buying a property with another person, one of the most significant considerations for you should be how do you wish to own the property together?
There are two ways in which a couple can jointly own a property; as Joint Tenants or as Tenants in Common. Joint Tenants each own the whole property, this means that if one were to die, then the whole property passes automatically to the survivor.
Tenants in Common on the other hand, own a defined share. This can be in equal measure, so each owns 50% of the property, or it can be in unequal measure to reflect, for example, unequal contributions (and supported by a Declaration of Trust.) Unlike with Joint Tenants, when one owner dies, their share does not pass automatically to the survivor but instead is distributed according to their will (or rules of intestacy if no will is made.)
Why does it matter how you own the property and what considerations should be made?
Firstly, you may wish to consider financial contributions. Let’s say that one of you has a lump sum from a previous sale of a property in your sole name. You would be making a significantly greater financial contribution than the other party. If you simply own as Joint Tenants, then you each have as much legal interest in the property as the other. Should you later split up, you would of course expect your share to be taken into account when dividing sale proceeds.
Secondly, families are becoming more and more fragmented with second marriages increasingly common. If you have children from a previous relationship whose inheritance you wish to protect, how you own your property is crucial. If you own as Joint Tenants and are the first owner to die, then the whole property passes to the surviving owner. As time passes and they move on, how can you guarantee that they honour your wishes?
Both of these scenarios are perfect examples of when ownership as Tenants in Common would be appropriate. You can further protect your interest by way of entering into a Declaration of Trust. A Declaration of Trust is a legal document drawn up to clearly set out respective shares of co-owners. Let’s go back to our first example where one party was contributing a greater lump at the outset. For arguments sake, imagine they contributed £100,000 towards a £300,000 purchase. A Declaration of trust could be drawn up that gives the first owner, on a sale, the first £100,000, then half of the proceeds thereafter.
In our second example where you have an owner wishing to protect the interests of children from a previous relationship, but perhaps, the contributions are pretty much equal. It would be appropriate for them to own as tenants in common in equal shares.
You may think that after many years of co-ownership, everything reverts to fifty-fifty in any event. Case law has shown that trusts that might usually arise in these circumstances simply do not apply where a Declaration of Trust exists.*
One more consideration would be the advantage of holding a property as Tenants in Common where debt is concerned. If creditors are seeking to seize assets, in a property owned as Joint Tenants a creditor can seize the whole property. If the property is owned as Tenants in Common, a creditor in a bankruptcy scenario can only seize the share of the bankrupt party.
When you next purchase a property with a co-owner, think carefully before ticking “Joint Owners” and speak to your Solicitor if in doubt. At FMC we can prepare a simple Declaration of Trust for £300 plus VAT. That’s a small price to pay to protect yours and your family’s financial interest and peace of mind.
If you would like to obtain a quote for your property sale or purchase, please click on the following link: http://fmc-solicitors.com/what-we-do/property/
*Stack v Dowden 2007; Pankhania v Chandegra 2012