Statistics reveal that 33% of first time buyers (those placing deposits) would not secure their financial contribution with a legal agreement, should a breakdown of the relationship subsequently occur.
A further 18% who have put down uneven deposits would not use one for fear of “damaging trust”.
My personal view is that, if a client feels that the relationship is not strong enough to survive that point being raised, then it is probably doomed to failure anyway and clients should discuss the issue.
One problem is that clients think that there is such a thing as a Common Law wife/husband and there is not, so they must not assume everything is 50/50 or that they inherit on death if they are not married or in a civil partnership.
From the point of view of the conveyancer, we have to advise clients to consider a tenancy in common and a declaration of trust. The principle case is Stack v Dowden [2007] UKHL 17
The Law Society Guidance note issued after this and subsequent cases is clear conveyancers must advise clients to consider the position.
Mr Stack and Ms Dowden had cohabited for almost 18 years and had four children from 1986 to 1991. They then bought a house in 1993. It was registered in both their names, but they had not said what their respective shares were on the Land Registry Form. Usually this meant a presumption that they would share equally in the home.
However, the purchase was funded by selling a house that was in Ms Dowden’s sole name, her savings and a joint loan, so she had given 65% of the purchase price. Mr Stack had kept his finances separate, but was living in the previous house since 1983 and had done many improvements. They always, or most of the time, had had separate bank accounts, savings and investments. In 2002 their relationship broke down and they agreed a court order that excluded Mr Stack from the house and required Ms Dowden to pay Mr Stack for the cost of his alternative accommodation. Mr Stack then sought a declaration that the house was held upon trust by the couple as tenants in common in equal shares and an order for its sale.
The House of Lords decided that Ms Dowden was entitled to 65% as that was what they thought the parties would have agreed.
Obviously as one party lost the case this was not what they inferred!
Baroness Hale identified that the onus is upon the person seeking to show that the beneficial ownership is different from the legal ownership and that the key question in cases such as this is “did the parties intend their beneficial interests to be different from their legal interests?”, although she acknowledged that cases of this type would be unusual.
Baroness Hale stated that, contrary to Lloyds Bank plc v Rosset, many factors other than financial contributions may be relevant to divining the parties’ true intentions, such as any discussions at the time of the transfer which cast light upon their intentions; the reasons why the home was acquired in their joint names; the nature of their relationship; whether they had children for whom they both had responsibility to provide a home; how the purchase was financed, both the initial purchase price and the subsequent mortgage payments; how the parties arranged their finances, whether separately or together or a bit of both; how they discharged their household expenses. Baroness Hale stated that these and other factors should be taken into account when deciding whether the parties’ beneficial interests should be different from their legal interests and whether a constructive trust existed.
Because the parties had kept their finances rigidly separate, Baroness Hale was of the opinion that, taking their entire course of conduct into account, the appeal by Mr Stack should be dismissed and the Court of Appeal’s order of a 65/35 split in favour of Ms Dowden should stand.
There are of course other cases with similar facts and outcomes.
It seems that best practice is to explain the difference between a tenancy in common and a joint tenancy and to further explain that contributions to price and subsequent payments can be unequal or equal and that it is best to record the intention of the clients in a trust deed, as otherwise the Courts can and will infer what the parties intended, even if that was not what they intended!
Even if the interests in the property are equal, it is better to document this in a declaration of trust.
If the interests in the property are unequal, then it should be essential to document this in a declaration of trust. Whilst it is possible to mention ownership of the equity in the property in a TR1 (the transfer) there is not enough detail to adequately deal with the issues that can arise.
A declaration of trust should recite the background to the transaction, the property, the contributions made, the mortgage if any and what the net proceeds of sale are to be. Who is to pay for what outgoings, the purpose of the purchase – is it a home or investment property and if there are to be pre-emption rights. In other words, can one party buy the others share and if so on what terms.
I think it is also sensible to include a clause to the effect that all parties have had the opportunity to take separate independent legal advice.
The conveyancer drafting the deed can explain what the effect of the deed is but may not be able, due to a potential conflict of interest, to advise if it is fair and reasonable to all parties.
Declarations of trust allow you to be very flexible with the equitable interest.
For example, one party may invest more and should have that money back plus a larger share of any increase in value perhaps 60/40.
If however the party putting in the most money earns less and does not pay the outgoings equally, you can adjust the situation so that the party gets their initial investment and starts at 60/40, but that ratio changes each year provided the other party has paid the extra share of the outgoings by an agreed percentage until parity is reached.
There is, I think, an unintended consequence of the SDLT changes that can have a significant effect on declarations of trust.
Take the following scenario:
Miss A and her boyfriend Mr B buy a flat. Miss A’s father who owns his own house is happy to give his daughter money to buy the property but does not trust Mr B. Without appearing sexist that is the normal scenario. In the past we would have done a nominee declaration of trust so that the father had a share and could then reclaim it if things went wrong. If things went well, he could gift the whole on sale or part by amending the deed. This may lead to CGT liability, but does protect the family money.
However now there will be an extra 3% SDLT payable if you do that and that often wipes out the gift.
It is therefore the case that parents are losing the ability to protect family money, as Ms A can the day after completion, amend the declaration as she wishes giving Mr B 50% whilst there may be issues of undue influence that is a possibility that does exist.
It is of course not only unmarried couples that need to consider the question as to ownership of the equity in the property. It is for the conveyancer to check in every situation if a tenancy in common is needed. If that involves some initial awkwardness so be it you have a duty to the client to give proper advice and must ask the questions. This can be done indirectly by the use of fact sheets, but a direct approach may be required.
For example, if Mr and Mrs B have children from previous relationships, it is imperative to have a tenancy in common in equal or unequal shares. As if one dies and they have a joint tenancy the survivor inherits the deceased’s share. If the survivor, then remarries and later dies the new spouse will inherit and not the deceased’s child.
It is sensible for them to consider making wills so that the children inherit but the survivor has a life interest in the property (and can transfer that to another property if they wish)
Any declaration of trust should be supported by an appropriate will of course.
The cynic may think that suggesting declarations of trust and wills is a way for lawyers to increase their fees. However, consider the potential costs of litigation let alone stress and heartache that can be caused by a failure to consider if a declaration of trust is needed and the terms of the same it is money well spent.
