Between 2019 and 2020, mortgage lenders saw a remarkable 60% rise in the number of mortgage applications from cohabiting couples.
Buying a property with your partner is an exciting prospect, and there’s an understandable temptation to gloss over legal technicalities and focus instead on paint colours and room concepts. However, choosing the wrong legal structure when buying a home can lead to problems down the line. A change in one owner’s financial circumstances could make remortgaging the property more difficult. If the relationship ends, confusion over who owns what share of the property could lead to acrimony and even legal action.
Fortunately, cohabiting couples, friends or family buying together have several options to properly structure the home ownership, and to protect the interests of everyone involved in the purchase.
Here are a few things to consider before buying a property as a couple:
What are the risks when buying property with family, friends or partner?
Cohabiting couples do not enjoy the same legal protections that civil partnerships and married couples do. The law of England and Wales does not recognise any form of “common law” marriage.
Unmarried couples must take legal steps to ensure inheritance and related matters follow their wishes. The same is true for friends and family who own a property together. Without specific documentation in place, if one owner dies, the surviving owner (or owners) may not automatically inherit their partner’s share.
If one party has contributed more to the deposit or towards mortgage repayments, they will not automatically own a greater share of the property. If the intention is that a property is owned by two or more people with unequal shares, this must be arranged when the property is purchased.
With the agreement of all parties, you can always change the ownership split of a property in the future.
Should you choose Joint Tenancy or Tenancy in Common?
The legal structure of how your property is jointly owned will depend on whether you choose to own as “joint tenants” or “tenants in common”.
What is Joint Tenancy?
Joint tenancy describes a situation where all the owners (up to a maximum of four) own the whole property together. This arrangement is akin to that of a married couple owning a property together and is the simpler of the two options.
In the event that one owner dies, or is removed from the deeds, the remaining owners continue to own the property. A deceased owner cannot leave their “ownership” of the property in their will to anyone other than the remaining joint tenants. This is referred to as the “right of survivorship”.
Chris Salmon, Director of Quittance said, “If joint tenants make unequal contributions to the mortgage, or to the deposit used to buy the property, this cannot be reflected in joint tenancy ownership itself. Tenancy in common may be the better route in these circumstances, but a Declaration of Trust or Cohabitation Agreement can also be used to protect all parties’ interests where unequal contributions are made. Your solicitor can advise you further on this point.”
What is Tenancy in Common?
Tenants in common each own a share in the property. The share split can be equal (e.g. 50% each for two owners) or unequal (e.g. 50%, 30% and 20% for three friends making different financial contributions).
Tenancy in common is more complex than joint tenancy, and may require a more serious conversation at the outset for the buyers to agree on an unequal share split. The share split is legally binding, helping to avoid any confusion or anger in the future when the property is sold. Each party clearly understands what their percentage ownership split is, and therefore what percentage of the proceeds they will receive on a sale.
Tenancy in common also makes it possible for one party to sell their share in the property to someone else, or leave their share in their will to someone who isn’t currently an owner, such as another family member.
To ensure this greater flexibility doesn’t create problems or anxiety for the other owners, tenants in common can make a legally-binding agreement regarding what to do when one tenant wishes to sell (or dies), in the form of a Declaration of Trust or Cohabitation Agreement.
Protecting your interests (and your partner’s)
Choosing the best tenancy structure is a critical step, but there are other factors to consider when buying property with someone else that may not be reflected in the ownership itself.
Questions that could arise during the ownership, or when one party wishes to move out, include:
● How will the property be valued if one owner wants to sell their share?
● Will the current owners get “first refusal”?
● Can an owner leave their share to someone else?
● How will sale proceeds be split if joint tenants make unequal contributions to the mortgage?
A Declaration of Trust or Cohabitation Agreement can be used to address these points and others, removing stress and confusion from the process if someone wishes to sell their share.
Declaration of Trust
A Declaration of Trust can be used to formalise a difference in two or more joint tenants’ ownership of a property. Without such a document, the proceeds from a sale would be split equally among all the joint tenants.
If one party has put up the whole deposit, for example, a Declaration of Trust could be used to ensure they receive this deposit back, perhaps with interest or reflecting any rise in the property’s value, before the remainder is split equally.
A Declaration of Trust can also be used to protect the interests of a party that is not an owner of the property, such as a parent who is making a contribution towards the deposit.
If you have any questions regarding your options, you should discuss these with your solicitor as early as possible in the conveyancing process.
Cohabitation Agreements can fulfil a similar purpose to Declarations of Trust, and are legally binding in the UK. These agreements can cover a wide range of matters, including how sale proceeds of a jointly-owned property would be split in the event of a separation and sale.
Responsibilities for paying the mortgage, household bills and living costs can also be reflected in a Cohabitation Agreement, along with what happens if one owner dies, and is particularly useful to protect the rights of a partner who is not named on property deeds. A Cohabitation Agreement can be used to recognise non-financial contributions towards a household, such as full-time childcare.
Other options for cohabiting couples
In some cases, one partner may be unwilling or unable to be named on the mortgage application and property deeds (e.g. poor credit).
In this situation, one person can be named as the registered owner of the property, and their partner’s interests can still be reflected using a Declaration of Trust or Cohabitation Agreement as set out above. This will ensure that, if the non-owner makes contributions to the deposit or mortgage, their contributions will be recognised in the event of a sale.
Planning to fail?
You may be reluctant to discuss these “what happens if..?” legal issues with your partner. This is understandable, as it forces you to imagine the worst outcome of a relationship - an acrimonious split leading to further disagreements about who owns what and the value of non-financial contributions.
That’s one way of looking at it. It may help to reframe the whole issue as a more mundane legal exercise; one which you have to go through because your conveyancer recommends it.
Better still, you could consider the exercise of discussing ownership splits and drawing up a cohabitation agreement as a matter of mutual respect, formally recognising the financial and non-financial contributions each party makes.
However you approach the exercise, it is far better to have formal agreements in place from the outset, to ensure all parties understand their ownership split, rights and obligations. Taking the time to do this now can save considerable stress, heartache and expense in the future, whatever happens.
Looking for the perfect home, either as an individual or a cohabiting couple? Find your local Guild Member to get started with your property search today.