Private Client Newsletter April 2010
JOINT BUYERS BEWARE
When two people purchase a property together it is essential that they establish from the outset the extent of their respective beneficial interests. This is the case whether or not they are married to each other or have a civil partnership.
It is often erroneously assumed that the property should be held as beneficial joint tenants. In this event if one joint owner dies the whole property will automatically vest in the other surviving joint owner. This is not always desirable. Even if the parties decide that they would prefer to hold the property as tenants in common it cannot be assumed that they hold the property as tenants in common in equal shares. This would depend upon many factors including direct and indirect contributions towards the purchase price and capital improvements that may be carried out to the property during the period of joint ownership.
The ownership of the family home is usually not disputed until either the relationship between the cohabitants breaks down or there is a competing claim over the property by a third party. In such circumstances determining ownership rights become imperative. The Matrimonial Causes Act 1973 gives the courts very wide powers to deal with disputes between spouses and now civil partners on the breakdown of marriage or civil partnership. However these powers are not applicable to cohabitants and in the absence of legal co-ownership in the family home cohabitants and spouses who cannot rely on the 1973 Act have to establish an equitable interest in the property. This can only be achieved with the use of imputed trusts and proprietary estoppel.
A resulting trust will arise where for example title to the property is vested in one party’s name but the consideration was provided by another. Unless a contrary intention is proved the property will be held by the legal owner on resulting trust for the beneficial owner to the extent of his contribution. This causal connection between the financial contributions and acquisition of an equitable interest has been described as the “solid tug of money”.
Resulting trusts of the family home can only be established from contributions to the purchase price paid from the outset. Therefore if one party pays the purchase price and the other contributes the mortgage repayments but this is not agreed from the outset then no resulting trust can arise. Just paying the solicitors fees in connection with the property purchase does not amount to a direct contribution. Resulting trusts are inflexible and therefore courts prefer to rely on constructive trust principles with a view to providing claimants with a fair share of the assets “in order to satisfy the demands of justice and good conscience.” (Carl Zeiss Stiftung –v- Herbert Smith (2) [1969]).
In Lloyds Bank plc –v– Rosset [1991], Lord Bridge outlined a “first category” express constructive trust requiring an agreement, arrangement or understanding between the parties that the property is to be shared, and a “second category” inferred constructive trust based entirely on the parties’ conduct. Both require a common intention and a detrimental change of the claimant’s position in reliance on shared intent.
“However imperfectly remembered and however imprecise their terms may have been” there must be mutual understanding that the property was to be shared beneficially to give rise to common intention. Thus in earlier cases, the courts were prepared to regard excuses for not putting a party on the title documents as evidence of a common intention to share, since otherwise there would be no need for such explanation. This was confirmed in the case of Eves –v- Eves [1975], where the husband’s excuse was that his wife was underage, and in Grant –v- Edwards [1986], where Edwards did not want Grant’s name on the lease because it could have been detrimental to her on-going divorce. The House of Lords in Stack –v- Dowden shared the view that the requirement for direct contributions prescribed by the Law Lords in Lloyds Bank Plc –v- Rosset is restrictive and they preferred to rely upon Oxley –v- Hiscock which was a Court of Appeal case. In that case the courts suggested that it was appropriate to look beyond direct contributions to the course of dealings throughout the relationship. Thus the court inferred common intention to share a property from the wife’s substantial indirect contributions to living expenses that enabled her husband to meet the mortgage repayments.
Why is this case law relevant to joint purchasers today?
The answer is that if you are a joint purchaser but your name is not on the title you risk either losing your beneficial interest or failing to establish a beneficial interest that truly represents your equitable share of the property. It is important to understand that fairness is not used by the courts as a basis for establishing a beneficial interest. Neither a common intention to pursue improvements as a joint venture, nor to occupy as a family home will be sufficient in itself to establish a beneficial interest and there is no inference from the purchase of property by a couple for their joint occupation that it is a family asset in which each is entitled to an equal beneficial interest. Furthermore, indirect contributions will only establish a beneficial interest if based on an agreement, arrangement or understanding to that effect.
Even once the existence of the parties’ beneficial interests is agreed or proven then in the absence of evidence of a common intention as to the shares it is necessary to consider all the case law to determine a fair division in the light of the whole course of dealing in relation to the property. Whilst the courts may be prepared to apply a “broad brush approach” having to establish a beneficial interest by going to court is a costly business.
The clear message is that if you are going to buy a property with another party and your name is for whatever reason not going to be on the title, ensure that a formal declaration of trust is completed recording the agreement reached between you. A professionally drafted document recording your agreement will go a long way to avoiding future disputes. A restriction reflecting the trust should also be placed on the Proprietorship Register of the Title. Whilst the Cohabitation Bill may offer greater financial security to cohabitants in the future, to qualify for relief cohabitants must have lived together for a minimum of two years and must be able to prove economic disadvantage.
If you would like advice and guidance on the preparation of a declaration of trust then please contact Chris Clifton-Moore.
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