What's your share? A cautionary tale for co-owners of real estate

Author: Helena Luckhurst

If you’ve ever bought a property with someone else, chances are that your lawyer asked you a slightly strange question: “How do the co-owners want to own this property?” To which you probably felt like replying – “Jointly? (Is this a trick question?!)”.

The law gives co-owners two options. They can own the equity in the property either as ‘joint tenants’ or as ‘tenants in common’ (neither should be confused with a tenancy, which is entirely different). Each has quite different implications and, if you are not sure how you own a joint property, it is worth reminding yourself as it can have some profound implications for you, your wealth and your family.

Co-owners opting for a tenancy in common each own a distinct share of the equity in the property. This is commonly done when co-owners who are not spouses are purchasing a property together because it enables each owner to deal separately with his equity share of the property. He can transfer his equity share to someone other than the other co-owner if he wants to, in his lifetime or on death via his Will. Often this is preferred where the co-owners are not spouses and on death each may prefer his equity share to pass to his family, rather than the other co-owner.

Two co-owners owning as tenants in common can own equal shares – 50/50 – or unequal shares – 70/30 or even 99/1 – as they agree between themselves. If unequal shares are agreed upon, that might reflect the fact that the financing of the property was provided unequally by the parties or there is some other unequal contribution that has either been made or anticipated, and needs to be taken into account. Mortgage payments for example.

Sometimes co-owners wish to express the terms of their ownership, such as who will be responsible for certain outgoings in respect of the property, or situations which will give rise to an automatic sale of the property in future and how the sale proceeds will be divided up.

Equity ownership and ownership terms are often recorded in writing in a declaration of trust signed by all co-owners around the time the property is purchased. Although the declaration can be signed after the purchase, unless it is signed whilst the parties’ minds are focused on the purchase, there is a danger that it will be forgotten about if left until afterwards.

The status of such a declaration of trust has recently been confirmed by the English Court of Appeal as conclusive as to the terms expressed within it. This is an important issue to be aware of as the Court confirmed that, if circumstances change after the declaration has been signed, the parties to the declaration will still be bound by the stated terms.

In the case of Pankhania v Chandegra [2012], a nephew and aunt purchased a property together as tenants in common in equal shares. Only the aunt paid the deposit. A declaration of trust was signed by them both to this effect. Two years later, the aunt married and moved into the property with her husband but it wasn’t until 20 years later that the nephew applied to court for an order that the house be sold and the sale proceeds distributed in equal shares between him and his aunt. The aunt resisted the claim, saying that the understanding between her and her nephew, and the wider family, was that the property was to be solely hers, as her matrimonial home. The nephew disagreed and said that the property was supposed to be for the aunt’s brother but, since his death several years earlier, he and his aunt had held it as an investment together. Prior to his death, the aunt and her brother had both paid the mortgage.

In the end, the Court of Appeal placed no great weight on what the parties’ differing intentions for the property were, and whether they had changed over the years since the property was purchased. Rather, the Court remained singularly focused on the fact that the parties had voluntarily entered into a declaration of trust at the outset, which neither had argued should be ignored on the grounds of mistake, fraud or undue influence, and therefore the terms of the declaration should be honoured without any further argument.

Declarations of trust are not immutable once signed. As the Court recognised, it is always open to the parties to the declaration to agree to vary its terms, including their equity shares. However, in this case, the nephew and aunt probably couldn’t come to an agreement, so the ability to vary will be of limited assistance unless the co-owners remain on friendly terms.

This case will be of interest to anyone who jointly owns property with another – be it a cohabiting partner, family member or business colleague. Did you sign a declaration of trust when you purchased the property and if so, what did it say? Does it still reflect your wishes? If not, it needs to be changed or you are likely to be bound by it. And there is a further moral to this story. Amid the rush and desire to ‘seal the deal’ on your next joint property acquisition, it really does pay to think through all the potential situations that could arise once the dust has settled on the purchase, before you agree equity shares. If that’s too much to ask, you can always seek out your cool-headed lawyer to help you work through all the angles!

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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