Wills, Property Ownership & Declarations of Trust: Part II
Article by Janine Byrne
www.Draft-Your-Will.com

Introduction

For the majority of people, the 'home' is the most valuable asset they own. If only one person own the title to a particular property there is no confusion about how the property is owned - that person owns title to the said property absolutely. However, where more than one person owns the property - namely couples (whether married or unmarried) - confusion sets it.

Tenants in Common & Declarations of Trust

To recap, of the two forms of joint ownership - beneficial joint tenants and tenants in common - the latter is the more versatile as it allows parties to leave their respective shares in the property to someone other than the partner and can be a useful tool for inheritance tax planning purposes.

However, if opting for this type of ownership, it is important that the parties involved also have what is known as a trust deed or sometimes called a 'Declaration of Trust'. In the case of civil partners, this is not the document that sets out the inventory of what each partner owns; such a document is a Cohabitation Agreement or Pre-Partnership Contract, also of vital importance. A trust deed or Declaration of Trust (as it will be referred to from hereon in) regulates how the property is jointly owned, namely the respective shares and what will happen to the sale proceeds when the property is sold. The following example should clearly illustrate why such a document is important.

Example:

Jack and Jill purchase a dilapidated property as tenants in common. Jack contributed 70% towards the purchase of the property and Jill contributed the remaining 30%. Despite the disparate contributions, it was originally agreed that they would own the property in equal shares but never had any written document stating this to be the case.

A few years down the line, things turned sour between Jack and Jill and thus they wanted to sell the property and claim their respective shares from the proceeds. Jill wanted her half share which had been originally agreed but Jack argued that he had contributed more towards the purchase and therefore should be entitled to a larger share from the proceeds.

Ultimately, the issue goes to Court and the judge examines the case. Ordinarily, the legal assumption would be to distribute the proceeds in equal shares. However, using the rules of equity, the judge sees that Jill made substantial monetary contributions towards the renovation of the property and various upkeep expenses. The renovation expenses were such that the Judge feels that Jill in the long run contributed more than Jack did and thus decides that the proceeds of sale should be distributed 80% to Jill and 20% to Jack.

The above example is entirely fictional and somewhat simplistic (a lot of other factors would be considered by the Courts) but it clearly demonstrates the importance of having a document which clearly and irrefutably sets out the way that property is owned and what would happen to the sale proceeds.

Types of Declaration of Trust

There are three common formats  for a  Declaration of Trust;

Example: Combination

Jack and Jill purchase a dilapidated property. It is understood that Jill will pay for the majority of the renovation costs. In the Declaration they agree that as reimbursement for the renovation costs, Jill should be entitled to a faxed sum of £15,000. They then agree that upon sale the proceeds should be split in percentages of 55% to Jack and 45% to Jill.

The Declaration of Trust is a legally binding contract and can be enforced in the courts if necessary.

Other Considerations

You would also need to consider whether there is a mortgage on the property. If so, the trust deed should provide for this to be paid off before any proceeds of sale are distributed. Additionally, the declaration should set out in what proportions each party is going to contribute to the mortgage repayments.

One further consideration is whether to include in the declaration a right of first refusal - pre-emption- where one party wishes to dispose of their share in the property. The idea is that if one party wishes to sell their share in the property, they would give the other party notice of this intention and effectively, right of first refusal or acceptance and would have the right to buy the share at the market value.

Property in Sole Name

Thus far, it has been assumed that a Declaration is used where there are two joint owners of property. A Declaration of Trust can also be used where only one party holds title to the property, but a third party has some kind of right or entitlement in it. This might arise where a person has contributed to the purchase or improvements of the said property or where the party is a cohabitee. This type of declaration operates where the none owning party has no intention to realise their share in the property before it is sold and consequently the third party cannot force a sale. The purpose of the declaration is to put in writing the fact that when the property is sold, the third party is entitled to the share stipulated in the agreement.

The Declaration should detail the nature of the third party's entitlement, as set out above.

Whilst the third party cannot force a sale of the property, the sole owner is always able to sell or mortgage the property without telling or seeking consent of the third party irrespective of what the declaration might say. In order to prevent this, it is advisable that the third party register their rights as set out in the declaration with the Land Registry in the form of  a Restriction using form RX1 (see Part I for more details). It is vitally important to stress in the cases of cohabitees, that a Cohabitation Agreement should be made in addition to the Declaration of Trust. (Cohabitation Agreements are available from the Legal Forms section of the site).

Conclusion

Declarations of Trust or trust deeds (whichever  the preference) are very much overlooked, but in today's changing society where more and more people are choosing to cohabit and new living situations are arising, they will prove to be invaluable in the protection of property rights.

Janine Byrne holds a Bachelor of Law degree with Honours & a post-graduate diploma in Legal Practice. Also gained qualification in Wills Writing & is the owner/author of www.Draft-Your-Will.com