Taking it all on trust

With house prices now rising, it is becoming more common for people to purchase their first property with friends, or with the help of family members.

Parents frequently contribute to the purchase of properties for their children, often by paying the deposit. Such contributions to the purchase price, maintenance of the property, mortgage payments and other outgoings may not be shared equally. Solicitors are therefore increasingly being asked how clients can protect their interests as co-owners.

Equitable estate

As all practitioners will remember, co-owners hold the property on a trust of land (section 2 (1) Trusts of Land and Appointment of Trustees Act 1996) and, although they hold the legal estate as joint tenants (section 34 Law of Property Act 1925), they can hold the equitable estate either as joint tenants, or as tenants in common.

Tenants in common hold a specific beneficial share and a declaration of trust is particularly advisable if unequal amounts are contributed.

The declaration of trust forms a legally binding contract and sets out the following:

• the extent of each co-owners’ entitlement to the beneficial interest in the property;
• contributions made by third parties;
• how the proceeds of sale are to be divided should the property be sold or a co-owner die;
• any express terms which co-owners may want to include such as indemnities, mortgage provisions and limitations on trustees’ powers.

In the above example, a parent contributing to the purchase of a property may want the investment returned, should the property be sold. A declaration of trust would safeguard their investment. Such declarations are also advisable upon severance of a joint tenancy, as after severance, the co-owners automatically hold the property as tenants in common.

Preparing the declaration of trust at the same time as purchasing the property, including as much detail as possible, helps avoid future disputes from arising. It also clarifies each person’s entitlement. Although a declaration of trust can still be created after the purchase of a property (as long as all the co-owners agree), preparing it beforehand means the parties agree from the outset and the beneficial interests of each co-owner are clear.

Declarations of trust need only be evidenced in writing, but it is advisable to create them by deed to reinforce their validity as a contract. They do not need to be registered at HMLR and their contents, therefore, remain confidential, which should encourage co-owners to set out their joint intentions from the start.

It is also important to advise clients that where there is a tenancy in common, it is crucial (particularly when they are not married) that they have wills which deal with the distribution of their property upon death.

Positive accommodation

Previously, transfer deeds did not even mention declarations of trust, nowadays they positively accommodate them by asking for the appropriate box to be ticked in Panel 10. The Land Registry has also created a voluntary Form JO, which relates solely to joint ownership of a property and acts as another, easier way, to create declarations of trust.

It also highlights if a declaration of trust already exists between the co-owners. Once completed, Form JO must then be signed and lodged alongside the corresponding application.

HMLR has also published guidance on the joint ownership of a property in a practice note entitled ‘Joint Ownership’ and Practice Guide 24 on ‘Private Trusts of Land’. The easy-to-follow guidance also highlights the importance of registering how the co-owners hold the property.

Failure to tick the relevant box on form TR1 and any other forms needed for sale or purchase will mean a Form A restriction will
be entered in default by the Land Registry.

However, creating a declaration of trust, can, in practice, be very complicated. Even though precedents do exist, it is difficult to draft a final agreement, and declarations of trusts are becoming more akin to prenuptial agreements, being tailored to each individual.

Some precedents provide for declarations of trusts of both fixed shares, where a set share is agreed between the co-owners, and floating shares, where the share amount depends on
the future contributions of the co-owners,
thus allowing for the possibility of changing circumstances.

More clients are contemplating potential changes in their circumstances, for example, where young couples are in the process of buying a property and are also contemplating marriage. Clients will often factor in the possibility of children and protect their interests in the property should they separate, or get divorced.

Highly persuasive

At what point do property solicitors need to refer clients to colleagues for advice on pre- and post- nuptial agreements? Is a declaration of trust still binding in matrimonial courts?

The declaration of trust is persuasive, but not necessarily enforceable, in matrimonial proceedings, as it would be in property proceedings. Even though an unmarried couple contemplating future marriage may have a declaration of trust, it would be advisable to reiterate the substance of the declaration in a pre-nuptial agreement. These are becoming more binding, providing certain criteria are met, and are highly persuasive should the couple split, in family law proceedings.

Such an agreement can also be turned into a binding post-nuptial agreement after marriage.

It is important to regularly review and update such documents should this become necessary, as illustrated by the case of Pankhania v Chandegra [2012] EWCA Civ 1438.

In this case, an aunt and her nephew jointly purchased a property, with the aunt and her brother paying most of the purchase money and the mortgage payments. A declaration of trust was drawn up between the aunt and her nephew upon purchase to show they held the beneficial interest equally as tenants in common.

The nephew never lived at the property, unlike the aunt. On sale, the aunt claimed that she should be entitled to all the sale proceeds. The Court of Appeal held that the declaration of trust was binding unless varied by the parties. SJ