James and Sophie, an unmarried couple, are purchasing a property together. They have a daughter called Penny who is four years old.
Sophie’s parents are putting in the majority of the deposit with James and Sophie raising a mortgage for the remainder. Sophie’s parents want them to have some sort of legal arrangement to protect their contribution if James and Sophie break up, but Sophie is resistant as she doesn’t think it’s romantic.
James and Sophie currently do not have Wills in place as they believe that as common law spouses, they will receive each other’s entire estate.
Our legal experts review this situation and suggest some practical advice.
Kate Jackson, Senior Associate, Residential Property, Farms and Estates team looks at the options when purchasing with a partner.
James and Sophie should consider how they wish to own the property together. There are two ways that property can be co-owned: (1) as joint tenants or (2) as tenants-in-common.
If James and Sophie choose to own the property as joint tenants, they will each own an undivided share in the property. If one of them died, the property would automatically pass to the survivor (regardless of the terms of any Will). If James and Sophie were to break up, they would each be deemed to own a 50% share and would therefore each be entitled to 50% of the net proceeds if the property was sold.
Alternatively, James and Sophie could choose to own the property as tenants-in-common. Under this arrangement, each of them would own a specific, defined share in the property. If then say, James died, his share of the property would pass in accordance with the terms of his Will (rather than automatically to Sophie). James could of course choose to leave his share to Sophie under his Will if he wanted to do so – Mollie explains further below. If James and Sophie separated, they would each be entitled to their share of the property and net proceeds of sale.
If Sophie and James buy as tenants-in-common, they can either hold the property in equal half shares or can enter into a Declaration of Trust which would record their individual contributions to the property and set out the percentage split of equity between them accordingly.
Contribution by parents
Sophie’s parents need to decide whether they are gifting the deposit monies to Sophie or whether in fact they would prefer simply to lend the deposit.
If the money is a gift to Sophie, they will likely want to encourage her to buy the property with James as tenants-in-common with a Declaration of Trust which records that Sophie contributed significantly more to the purchase price and therefore her share of the property would be larger as a consequence. The Declaration of Trust could simply record the percentage split based on initial contributions or could be more complex, setting out a method for calculating the percentage split taking into account future contributions by James and Sophie to their joint mortgage and to any capital improvements to the property. The Declaration of Trust could also set out an agreed procedure for valuing the property in the event of a breakup and a mechanism for one party to ‘buy out’ the other if they wished to do so. This document would work well in conjunction with the cohabitation agreement suggested by my colleague Natalie below.
It is important to note that gifted deposits must be revealed to a lender during the mortgage application process. It would therefore likely be necessary for Sophie’s parents to sign a written acknowledgement that they have made a gift to Sophie and have no interest in the property going forwards.
However, Sophie’s parents might decide they would rather loan the money to Sophie. If this were the case, a formal loan agreement should be put in place between Sophie and her parents. They may wish to take a charge over the property as security for the loan but this would need to be approved by the bank providing the mortgage and many commercial lenders are often reluctant to allow a secondary charge over a property.
Sophie’s parents would need to be independently advised on the arrangements to ensure that they understand the impact on their own tax position and any regulatory requirements are met.
Common law marriage misconception
Natalie Lemonides, Senior Associate, Family team looks at how to protect Sophie’s family’s investment and dispels the myth of the “common law” marriage.
From a family law perspective, the first aspect of James and Sophie’s situation which needs to be addressed is their misconception about being “common law spouses”.
The concept of a “common law marriage” is a myth. As James and Sophie are not married nor in a civil partnership, they have no immediate legal rights by default if they separate. They do not have the same rights and responsibilities as married or civil partnership couples, irrespective of the fact that they share a child together. Therefore, it is advisable that James and Sophie enter into a cohabitation agreement to avoid uncertainty and disputes at a later stage.
A cohabitation agreement is a legal contract formalising the terms of the cohabitation; it can also sometimes be known as a “living together agreement”. Such agreements can be used to specify how property and other assets (if applicable) are owned and shared between a cohabiting couple. They can also cover how income should be treated and set out financial arrangements between the parties.
As Sophie’s parents are concerned about protecting their contribution to the property in the event of a relationship breakdown, they would be wise to encourage Sophie to enter into a cohabitation agreement. It would allow James and Sophie to clarify upfront each of their respective individual shares in the property but also consider financial arrangements more widely both between themselves and also in the context of their daughter Penny. From a matrimonial perspective, it is advisable for couples to simultaneously enter into a cohabitation agreement with a declaration of trust (as outlined by Kate above) in support, for maximum protection.
If Sophie and James choose to enter into such an agreement, both parties need to receive independent legal advice before signing the agreement. They will also need to provide full and frank disclosure of their assets and liabilities. They should also be aware that the agreement may need to be reviewed and varied if circumstances change, for example if they move to a new house. In the event of separation, an agreement that is judged to be out of date may be found to be no longer enforceable by a court. Therefore, James and Sophie should review the agreement every few years.
Whilst Sophie may believe it is not romantic to enter into a cohabitation agreement and/or declaration of trust, it is highly advisable for her to do so. If she doesn’t but later seeks to argue that she should have a greater share in the property due to her parents’ contribution, she may need to make an application to the Court which could be lengthy and expensive.
Lord Mark’s (Private Members’) Cohabitation Rights Bill had its first reading in February 2020 to provide certain basic financial protections for cohabitants who live together as a couple or have lived together as a couple. However, as yet, it has not been passed into law. It could potentially allow the court to make limited financial provision for couples who separate, however, it is still in its early stages and so cannot be relied upon to protect the parties.
The importance of having Wills
Mollie Sturgess-Webb, Solicitor, Private Client team looks at the importance of having Wills in place to protect Sophie, James and Penny.
Sophie and James are not alone in believing that, as “common law spouses”, should one of them die the other will inherit the entirety of the estate. However, this is simply not the case.
Where an individual dies without leaving a Will, the succession of the estate is governed by the intestacy rules. These rules set out that, in circumstances where an unmarried person dies leaving a child or children, the individual’s estate will pass to those children. As matters stand, this means that Sophie and James’ assets will pass to their daughter Penny, rather than to each other should either one of them die.
Whilst she is under eighteen, Penny will not be entitled to receive the value of the estate outright. Assets would instead be held on trust and managed for Penny’s benefit until she is able to receive them absolutely. At that point, Penny would be entitled to deal with her inheritance as she sees fit.
The caveat to this is that any property which Sophie and James own as joint tenants will pass automatically to the surviving co-owner (rather than in accordance with the intestacy rules). However, if Sophie’s parents successfully persuade her and James to purchase the property as tenants in common and put in place a co-habitation agreement as suggested by Natalie (supported by a Declaration of Trust as explained by Kate) then their respective interests in the property would also pass according to the intestacy rules.
The situation would be greatly simplified by Sophie and James putting in place Wills. These could be very straightforward, leaving everything to each other and then to Penny on the second death. Alternatively, given that Sophie and James are relatively young, they may like to consider a more protective arrangement which would ring-fence value for Penny’s benefit in the event that the survivor of them should enter into a new relationship or change their Will following the first death.
Putting Wills in place would also provide an opportunity for Sophie and James to defer Penny’s entitlement to her inheritance should they see fit to do so. Sophie and James would certainly not be alone if they have concerns about an eighteen year old Penny having free reign to deal with potentially significant value in whatever manner she wishes. It would be open to the couple to provide for Penny to receive her inheritance at some later age when she might be better able to decide how to deal with the value, perhaps 21 or 25.
Their Wills could also deal with the very important question of who should act as guardian for Penny if they both die whilst she is under eighteen.
If Sophie or James should die without having made a Will, there would be scope for the surviving partner to bring a claim against the estate of the first to die for reasonable financial provision. Of course, claims of this nature are best avoided if at all possible and the last thing anyone wants after losing a loved one is to get tied up in expensive litigation, particularly when something as simple as putting a Will in place could avoid it.
It is probably fair to say that most people prefer not to dwell on the possibility of a relationship breakdown or death. However, if Sophie and James take the time to consider how best to purchase the property and to put in place a suitable Declaration of Trust, Cohabitation Agreement and Wills, they will give themselves (and Sophie’s parents!) peace of mind that appropriate arrangements and protections are in place both for the good times and if there are more trying times in future. A joined up approach from a team of experts can be invaluable.
This is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or speak to your usual Royds Withy King contact.