Buying a property with someone else certainly sounds like a good idea. By pooling your resources you may be able to purchase a home that otherwise would have been out of your reach. There are, however, things to consider. When the two parties find they have different ideas about what to do with the property, the relationship can quickly go sour. This, in turn, can land you in a lot of trouble, both financial and legal.
Andrew Theoff from Direction Law, one of Peabody's panel solicitors, looks at the legal implications of buying a property jointly with someone else.
What does joint ownership of property mean?
Joint ownership takes place when two people decide to purchase a property together. The most common situation is when married or unmarried couples buy a home together, but joint ownership may also be when friends or family members choose to jointly purchase a property.
Under UK law there are two ways you can become a joint owner of the property: you can either become joint tenants or tenants in common.
What is the difference between joint tenants and tenants in common?
If you hold the property as joint tenants, both of you will own the whole of the property. You will not each have a quantified share in the property and will not be able to leave a share of the property in your will. If you sell your home, the sale proceeds will be split 50:50.
What happens when a joint tenant dies?
On the death of one of the owners, their share automatically goes to the surviving owner, irrespective of whether there is a will or not. Buyers considering owning as joint tenants need to consider if this is what they want or need.
What happens when both joint tenants die?
In the situation when both joint tenants die at the same time - for example in a car accident - the ownership of the property passes on to the youngest person's relatives. This is because the law assumes that the older of the joint tenants is likely to die first, whereby the younger co-owner would inherit their share. If then the youngest of the joint tenants also dies, this share is then passed on to the youngest person's relatives, either under their will or, if none, under the rules of survivorship. In this instance, the existence of a will does not change the pattern of inheritance.
Obviously, this can cause a problem because the family of the oldest person could end up inheriting nothing, even though they might have put in the majority of the purchase price or are the ones looking after any children. This is why, in most cases, becoming tenants in common is a better way to co-own a property.
What happens when one of the joint tenants wants to sell?
If both parties agree, the sale of the property should be quite straight-forward. It's more complicated, however, if one person wants to sell against the wishes of the other. If only one of you wants to sell (perhaps to get their money out) then they cannot do so without applying to the court to force the sale against the wishes of the co-owner. The court may or may not agree.
Tenants in common
If you hold the property as tenants in common, each of you will own a specified share in the property. Your shares may be equal, but they do not have to be. If the property is sold, the sale proceeds can be either split equally or unequally. The presumption would be an equal split, but where monies are provided unequally a Trust Deed can be entered into between the parties which sets out the proportions owned by each party.
What happens when one tenant in common dies?
On the death of one of the owners, the share owned by that person does not automatically pass to the other owner, it passes according to the deceased person’s will or if there is no will then it passes to their nearest surviving relative under the rules of “survivorship”.
Death when tenants in common are married
If the co-owners are married, as tenants in common, when one of them dies their share would pass onto whoever is specified in their will. In the absence of a will, the other spouse will inherit the deceased's share.
Death when tenants in common are not married
When the co-owners are not married then on the death of one owner the deceased's share of the equity will not automatically pass to the surviving owners, but would pass according to the terms of the will. If there is no will, the property ownership passes according to the intestacy rules (that is: to married/civil partners or close relatives) – and the surviving partner does not automatically inherit the other’s share of the land.
Why have a will?
While the Declaration of Trust says what happens to a property when you’re selling it during your lifetime (see below), a will specifies what happens when one or both of you die. This is especially important when your co-owner is not your next of kin, i.e. your spouse. If you want your property to pass onto your joint owner in the event of your death, then you have to leave it to them in a will. Otherwise, they will find themselves owning the property with whoever your next of kin is.
What happens when one of the tenants in common wants to sell?
It is easier to sell when you own the property as tenants in common because the property is held on what is known as a "Trust of Sale" which means that when one of the parties decides to sell, then the property needs to be sold. The proceeds of the sale are split equally between the parties (unless a Trust Deed is in place).
Why have a Trust Deed?
If you’ve bought a tenancy in common, we recommend you have a Trust Deed or a Declaration of Trust. This is a legal document that does two things:
- firstly it spells out who owns what percentage share of the equity, and
- secondly, it can be used to spell out a mechanism for one party to buy the other one out. So if one wants to sell, then rather than putting the property automatically on the open market, they agree to offer it to the other party first.
Having a Trust Deed is very important because it means that people will have the ability to stay in their own home, even if their relationship falls apart.
Can I take out a joint mortgage with my partner, sibling, or parent?
Joint mortgages are usually taken out by married couples but it is possible to take one out with your (unmarried) partner, a friend, or a family member. In fact, there are lenders who will allow up to four people to take out a joint mortgage.
The benefits of taking out a joint mortgage are that by pooling your finances you will be able to purchase a more expensive property or, in the case of shared ownership, a bigger chunk of your new property.
The downsides are twofold: the lender will look not only look at the earning potential of each of the applicants but also at their outgoings and credit score. So if you're planning on buying a home with somebody with a poor credit score it can actually damage your chances of getting a good mortgage.
Another potential problem relates to the mortgage. It is likely the property will have been purchased using a joint mortgage and as such you will be “jointly and severally liable” for the debt. This means that should one of you default or disappear and fail to maintain the mortgage repayments, the lender could look to the remaining borrower for all of it.
This situation could also apply should one of the borrowers die. If the mortgage was being held in joint names, the debt is likely to be transferred in it's entirety into the surviving person’s name. One potential remedy would be to take out a life assurance policy to repay the debt in the event of untimely death.
Things to consider when buying a property with someone else
There is a number of things to discuss before deciding on joint ownership of a home. The first thing is to decide on the type of co-ownership you wish to choose. Secondly, decide on what documents you need to have in place to avoid problems in the future. Bear in mind that tenancy in common accompanied by a will and a Trust Deed will give you the highest level of protection.
Some of the things you need to think about in advance include:
- Whether you are contributing equally to the purchase price (if not, a Trust Deed should specify whether the ownership should be split equally or proportionally to initial contribution).
- Whether you have agreed to pay the mortgage and other costs equally (again, if not, Trust Deed will specify if the ownership should be split equally or proportionally to ongoing contribution).
- Whether any of you may wish to leave your share in the property to somebody other than your co-owner (if so, you will need to specify this in your will).
- What will happen if you die (again, the will will be instrumental in specifying this)
- What will happen if one of you wants to sell and the other does not (a Trust Deed may help here)
- What will happen whilst you are alive if you and your co-owner go your separate ways and / or dispute the shares you own in the property.
Deciding to co-own a property with somebody else is a huge decision that can have a life-changing impact on your quality of life down the line so it's really essential that you get specialist advice from a qualified solicitor before making any binding decision.View our panel of mortgage advisers and solicitors