Playing house

The decision in Kernott v Jones has attracted much critical coverage and the unfavourable result for Ms Jones may well deter speculative beneficial interest claims in the future.

Lord Justice Wall's judgment sends a very strong message to practitioners and litigants alike: without a trust document there needs to be powerful evidence of the parties' common intention that beneficial interests were intended to be different to legal interests.

'The purchase of residential accommodation is perhaps the single most important financial transaction which any individual transacts in a lifetime,' said Wall LJ, 'it is therefore of the utmost importance'¦ that those who engage in these transactions, and those who advise them, should take the greatest care over such transactions, and must '“ particularly if they are unmarried or if their clients are unmarried '“ address their minds to the size and fate of the respective beneficial interests on acquisition, separation and thereafter.

'Cohabiting partners must, it seems to me, contemplate and address the unthinkable, namely that their relationship will break down and that they will fall out over what they do and do not own.'

With these words, Wall LJ warned lawyers and the general public that cohabitees '“ which in this article connotes people living together at a property who are neither married nor in a civil partnership '“ should not expect the court to fix any inequity caused by their failure to express in writing any 'fairer' division of property ownership than that set out in the legal title.

The aftermath of Stack

In Stack v Dowden [2007] UKHL 17 and [2007] 1FLR 1858 the law lords attempted to give cohabitees much greater certainty about how the courts would interpret their beneficial interests; doubtless hoping that this would help to reduce the number of future cohabitee disputes. Mr Stack and Ms Dowden bought a property (in which they subsequently lived together with their four children) in joint names but did not make an express declaration of beneficial interest. Ms Dowden contributed the whole of the purchase price of the property and most of the mortgage repayments (though Mr Stack paid the mortgage interest) such that the Court of Appeal thought it reasonable to award Ms Dowden 65 per cent of the beneficial interest in the property.

While the law lords agreed on the same percentage split as the Court of Appeal, they indicated that such an unequal division was going to be the exception rather than the norm in the future.

Recent social and economic trends over the last 20 years or so have, though, made such cohabitee disputes more likely as there are now many more home owners, property prices are much higher in relative terms '“ meaning that for some they are only affordable when bought jointly '“ and people increasingly live together without being married or in a civil partnership. It is perhaps not that surprising that there have been many reported cases since Stack testing the courts' view of cohabitee disputes.

The seeds for such litigation may have been sown in Baroness Hale's opinion in Stack, when she said: 'At the end of the day, having taken all this into account, cases in which the joint legal owners are to be taken to have intended that their beneficial interests should be different from their legal interests will be very unusual.'

However, the factors she then took into account in deciding that this was a 'very unusual' case were not the most unusual of circumstances. The principal factor appears to have been that the parties kept their finances separate; other than the house, there were no pooled resources or joint account.

If the 'exceptionality' threshold was to be relatively low then this may have encouraged litigants to wonder whether other factors could also persuade the court that the parties' circumstances were sufficiently unusual to justify a departure from the legal interests when determining the extent of the beneficial interests.

Here we stand

The first occasion when solicitors are likely to need to advise cohabitees is when a conveyancer is approached to act on the purchase of property. At this stage, the solicitor should provide very clear information about the different kinds of property ownership; the difficulty (at a later date) of claiming that a beneficial interest in the property is different to the legal interest; the need to record any agreement in writing; and the necessity of formalising any change in the parties' beneficial interest at the time such change is agreed.

While cohabitees tend to purchase a property together precisely because they are optimistic about the permanence of their relationship and/or the reasonableness of their partner, cohabitee relationships often begin in romantic generosity only to end in intractable selfishness. Without a written agreement in place, in most cases beneficial interests are likely to match legal interests no matter how 'unfair' that may appear. For this reason, cohabitees should consider a declaration of trust and/or a 'living together' agreement which sets out the parties' agreed terms. Advice from both property and family solicitors should be taken when such documents are drafted and solicitors will need to consider whether there is a need for separate independent legal advice to be taken by each of the parties to avoid any conflict issues.

While the additional legal costs incurred will, undoubtedly, be unwelcome to many clients, such financial investment may be a tiny fraction of the expense involved in trying to remedy problems at a later date if the relationship turns sour and there is no declaration or agreement in place.

When cohabitees separate, solicitors should ensure that they provide advice about the implications for ownership of the property. Such legal input may initially come from family lawyers acting in relation to the break up.

One of the issues to be considered will be whether the parties intend to vary the beneficial interests should one party move out of the property. If there is such a common intention to vary then it needs to be recorded in writing and any existing declaration of trust or 'living together' agreement should be varied. Other alternatives might be for one party to buy out the other at the time of separation at an agreed price or for the property to be sold on the open market.

It will not only be cohabitees who suffer the consequences if inadequate advice is provided to them. Although there is no suggestion that the solicitors who acted for Mr Kernott and Ms Jones in the purchase of the property were negligent, it must be expected that a professional negligence claim will follow if a cohabitee has suffered a loss caused by incompetent legal advice on the purchase and then sale of a property.

The decision in Kernott highlights the risks involved for practitioners in this difficult area of law. Solicitors must give and record clear and accurate advice so that cohabitees fully understand the consequences at the time they intend to buy a property together '“ when they sell and when they separate.