If you are buying a property with someone else, a deed of trust is an effective way of proving legal ownership of all parties who have a share of the property,
Shared ownership of property is becoming more and more common, whether between unmarried couples, friends, siblings, or children with their parents.
What is a deed of trust?
A deed of trust is a legally binding agreement that sets out how a property is held between two or more people, and any other person who has a financial interest in the property.
It is not uncommon for there to be unequal contributions to the purchase price of a jointly owned property, or for a contribution from a third party such as a parent, whose financial interests need to be secured.
So while the third party may not be named on the title deeds, and as such will not have a legal interest in the property, they will by virtue of their financial contribution have a ‘beneficial interest’ in the property.
The purpose of a deed of trust is to set out the individual interests and intentions of joint owners of a property. It can also be used to protect the investment of any third party who is not on the title deeds, but has contributed to the purchase price.
In practical terms, a deed of trust records how much each person has contributed financially for ownership of the property, and how much each person should receive when there is a change in ownership, such as a sale of the property or when one owner is bought out.
The deed of trust should be made at the time of property purchase. By setting out all parties’ interests at the beginning, the deed of trust removes any uncertainty as to the financial entitlement of those involved, providing you with the necessary clarity in the event that your circumstances change, minimising the potential for any future disputes.
Joint tenants or tenants in common?
In law, there are two different ways in which you can own a property jointly with other parties, either as “joint tenants” or as “tenants in common”.
There are important legal distinctions between the two which should be clarified and formalised at the time of purchasing a property to avoid any future issues or disputes over ownership shares.
A joint tenancy refers to property held equally by two or more people, with no identifiable or divisible share. If one of you should pass away, that share will automatically pass to any co-owner(s) by the right of survivorship. As a joint tenant you cannot pass on ownership or any ‘share’ of the property in your will.
As tenants in common each co-owner owns a distinct and transferable share of the property. In the event that one of you dies, that individual share will not automatically pass to any co-owner(s), rather it will form part of the deceased’s estate and pass in accordance with their will or the rules on intestacy if no valid will exists.
In practice, married couples will typically own property as joint tenants, whereas a tenancy in common is used where jointly buying a property with a friend or relative, or where buying with a partner but different size shares are required to reflect different levels of contribution.
It is possible for the deed of trust to specify equal shares, although your share will still fall to your estate after you die. This means a tenancy in common can also be a solution where you are buying a property jointly with your partner but you have children from a previous relationship, and you would like your half of the property to pass to them on your death instead of your partner.
If you intend to own a property as tenants in common, i.e. in unequal and/or divisible shares, you will first need to sever the joint tenancy. You will then be free to draw up a deed of trust setting out the shares in which the property is held.
Deeds of trust for cohabitees
When you buy a property jointly with, for example, your partner, a family member or friend, it may be the case that you won’t be dividing the purchase costs and purchase price equally. One person may have a greater sum to put towards the deposit, whilst the other may be making greater contributions towards any mortgage repayments.
In the event that you decide to sell the property, the deed of trust can again make provision for the proceeds of sale to reflect your different financial contributions as tenants in common. The trust deed can also set out any equal ownership, for example, 50/50, without resurrecting any joint tenancy.
Deeds of trust & parents or other investors
Alternatively, you may be receiving financial help to buy a property from another party. Indeed, rising house prices are seeing parents make substantial financial contributions to enable their adult children to purchase property, whilst requiring their financial interest to be protected.
This can be protected using the deed of trust, which would specify how much they are entitled to in what circumstances, such as the sale of the property or any subsequent transfer of ownership.
By way of example, if you are purchasing your first home with a mortgage, and your parents are providing the deposit, the deed of trust can provide for your parents to share in any net proceeds of sale to reflect their percentage contribution.
What should a deed of trust include?
Deeds of trust can be as simple or as complex as you require, tailored to your particular set of circumstances. The detail of the deed of trust can vary considerably, and will often depend on the relationship between the co-owners of the property and their respective contributions.
As well as confirming the shares of property owned by joint or multiple parties, a deed of trust will also often include detail of other financial arrangements between the parties.
Common clauses found within a deed of trust will:
- Record the contribution of each co-owner towards the deposit or purchase price. This should include purchase costs, including legal fees and stamp duty.
- Specify the respective shares of each co-owner, usually in percentage terms.
- Formalise the ongoing contributions of each co-owner to any mortgage repayments and maintenance of the property. The deed of trust will not, however, affect any obligations under the terms of a joint mortgage. Here you will remain jointly and severally liable.
- Confirm the proportions to be repaid to each co-owner when the property is sold.
- Make specific provisions for buying out a co-owner, including an agreed mechanism for valuing the property.
- Make provision for any dependant children to remain in the property until they reach the age of majority.
Common problems when setting up a deed of trust
If you already jointly own property but are unsure about the type of ownership under which the property is held, your legal title and ownership status should be recorded on the register of title to the property with HM Land Registry, as either joint tenants or tenants in common.
Unless a restriction is registered with HM Land Registry, any property that you jointly own will be held as joint tenants. As you can only execute a deed of trust if you hold the property as tenants in common, you will need to first sever the joint tenancy by serving on each co-owner a notice of severance. You would also need to register any changes with HM Land Registry.
However, you should always seek legal advice if you are contemplating changing the status upon which you jointly hold property, not least because this can significantly affect who is entitled to inherit your share of a property. If you become a tenant in common, provision may need to be made within a written will to ensure any property is left to those who you intend.
Seeking legal advice on using a deed of trust
Without a deed of trust, joint owners are forced to rely on the complexities of trust law to seek enforcement of their beneficial rights to property. This approach can be costly, time-consuming and, above all, uncertain.
By seeking legal advice in relation to a deed of trust, you can help to protect your financial contribution, tailored to your individual circumstances. Your legal adviser can help you to decide what to include in a deed of trust, ensuring that your financial contribution is properly reflected.
Your adviser can also draw up the deed of trust to ensure that the document is properly drafted and executed.