With it becoming increasingly difficult for first time buyers to get that first step up on the housing ladder, more and more people are turning to buying properties with friends. There are practical and financial considerations to be taken into account when buying. We have a look at what those key considerations are.
If you are buying a property with the aid of a mortgage, the name on the deeds will usually need to be the same as the name on the mortgage. This is usually beneficial in obtaining a mortgage in the first place as it normally means that the mortgage lender will be able to take into account two incomes when deciding whether it will lend as opposed to the usual one. We say usually – if one of the parties to the mortgage has an adverse credit rating then it can affect any application detrimentally and you should seek the advice of a good mortgage broker in these circumstances.
One point to note in relation to the mortgage is that they have joint and several liability. This basically means that, even if there is an agreement between the parties to split the mortgage payments (for example) 60/40 and even if this agreement is ratified in a cohabitation agreement or declaration of trust, the mortgage lender is perfectly at liberty to enforce the debt against any of the parties to the mortgage.
Joint tenants or Tenants in Common
There are two ways in which the equity of a property can be held. The major difference (although there can be tax implications too) is determining what happens to the property on the death of one of the owners.
If held as joint tenants the property automatically passes to the surviving owners on the death of the other. There is also a presumption that the property is held on a 50/50 basis (where it is owned jointly).
If held as tenants in common the individual owners are capable of leaving the property to whomever they wish in a will. The property does not automatically pass to the surviving owner.
Owning as tenants in common allows you to specify your shareholding in the property, so for example, if one party had put in the deposit whilst the other made no contribution, this could be reflected in the specification by drawing up a declaration of trust or cohabitation agreement.
If you are buying with friends the Tenants in Common route is the usual way to go.
Declarations of Trust
A Declaration of Trust (also known as a Deed of Trust) is a legally binding document in which the legal owners of the property declare that they hold the property on trust for the beneficial owners and sets out the shares in which the beneficial interests are held. If you are buying jointly with friends it is likely that you will have decided to hold the property as tenants in common. It is usual for the declaration of trust to set out the percentage share in which you own the property (for example 60%/40%) but can also make provision if, for example, one party put in the deposit for the property and one party did not contribute.
A declaration of trust can also set out who would be responsible for payments of the mortgager (but note our comments above in relation to
A declaration of trust can be registered at the Land Registry at a cost of £40. This essentially protects the sale proceeds from being distributed against the terms of the trust as the lawyer acting on the sale should be aware of its existence and what is says.
Cohabitation agreements (also termed Living Together Agreements)
Whilst similar to a declaration of trust as they usually set out the percentage of ownership, a cohabitation agreement would usually go a few stages further.
They can, for example, set out what would happen if one of the owners wanted to sell the property and the other didn’t. They can also provide details of who is responsible in terms of household chores, payment of bills and the like. The possibilities are endless and it usually takes a meeting with the parties and a lawyer to agree what should or shouldn’t be included.
If the parties intend to marry it is possible for the cohabitation agreement to form part of a pre-nuptial agreement before the wedding takes place.
If you own a property as tenants in common, it is sensible to make a will to determine what will happen to the property on the death of one of the owners. A will, for example, can make provision for one of the parties to buy out share of the property from the estate of the deceased. Dying intestate (without a will) can cause issues for the administrators of “friends owned” properties if the party’s wishes are not clearly established.
For further information about buying a property with friends, declarations of trusts, cohabitation in general, or wills, please contact one of Alexander JLO’s friendly lawyers who will be happy to discuss your requirements.