Up until fairly recently, joint ownership of a property almost always meant two spouses buying together. Today, a lot of jointly-owned properties are still owned by spouses (or civil partners). There is, however, a growing percentage of property owned by non-spousal owners. This brings a different set of considerations.
To explain further, Lovedays Solicitors, specialist conveyancing solicitors, share their expertise on the joint ownership of a property.
The legalities of owning property
There are two main ways people can share ownership of a property. The first is as joint tenants. The second is as tenants in common. Joint tenancy has traditionally been the default approach since it is best suited to spousal purchases.
With joint tenancy, the tenants are effectively considered to be a single unit. This has two key implications. Firstly, if a property is sold, both parties are entitled to an equal share of the proceeds. Secondly, if one of the joint owners dies, the other joint owner automatically inherits their share of the property.
With tenancy in common, the joint owners each have their own share in the property. If there is no explicit statement to the contrary, it’s assumed that the joint owners have equal shares in the property. Each tenant can do as they wish with their share in the property. For example, they can sell it or will it to their chosen heir.
This means that tenancy in common tends to be the more suitable option for non-spousal joint ownership of property. It can, however, also be useful for some married couples. For example, it can allow spouses to will their share of a property directly to children. This could be useful for estate-planning purposes.
Potential pitfalls of tenancy in common
The price of greater flexibility is greater complexity and hence greater responsibility. Tenancy in common brings a number of potential complications that need to be resolved if the arrangement is to work successfully. Prospective joint owners should have a clear, written agreement on these issues before they commit to a purchase.
Dividing the purchase costs
In the UK, there are generally four financial parts to any property purchase. These are the mortgage, the deposit, the Stamp Duty, and the transaction fees (e.g., surveying and conveyancing).
In principle, tenants in common have the option to arrange their own mortgages. Alternatively, one of the tenants might arrange their own mortgage, and the other pay cash.
Realistically, however, there are likely to be very few lenders who would touch this market. Any lenders which did would almost be guaranteed to charge very high rates. This is because foreclosing on a share of a property is vastly more complicated and risky than foreclosing on a part of a property.
If, on the other hand, both tenants in common, are on the same mortgage, then they become jointly and severally liable for the payments. In other words, if one tenant fails to keep up their share of the payments, the other tenant has to make good the shortfall. The tenants then have to resolve the matter between themselves.
If the joint purchasers do decide to go on a mortgage together, it can be highly advisable for them to take out suitable insurance cover. This could include payment protection insurance (if employed), income protection insurance, critical illness cover, and/or life insurance.
Deposits, Stamp Duty, and fees
Ideally, both parties should contribute the same amount to the deposit and fees. Both parties should also, ideally, contribute what they personally owe for Stamp Duty. In some cases, the Stamp Duty liability will be unequal.
This is because Stamp Duty is based partly on the price of the property and partly on the borrower’s status. First-time buyers get a discount. Second- (and subsequent-) homebuyers pay a surcharge.
If it’s not possible for both purchasers to contribute equal portions to the purchase costs, this should be reflected in some way. Buying as tenants in common means that it is possible for parties to have unequal shares in a property. If, however, you’re going to go down this route, it’s important that the sums are completely accurate.
Another possibility is for one purchase to give the other purchaser a loan. This would then be paid off separately and both parties would have an equal share in the home.
Ongoing benefits and responsibilities of ownership
If you’ve ever rented as part of a group, then you’ll probably already have a good idea of what you need to cover. Essentially, you need to agree on who gets to reside in the property and on what basis (e.g., full time or only at weekends).
You also need to agree on a process for the financial management of the home itself. Firstly, you need to decide what bills are essential to the running of the home. These will typically include Council Tax, utilities, and some level of insurance. It’s also advisable to put together a fund to deal with maintenance and repairs.
You then need to agree on who will be responsible for managing these and how they will be paid. It’s important to be clear about who manages these contracts since they will need to be updated periodically.
Changes, disputes, and termination of the agreement
It’s better to prepare for the worst and hope for the best than to do the opposite. No matter how good your relationship with your co-purchaser is, you need to agree on a process for managing changes and resolving disputes. What’s more, it’s best to do this upfront, when you are both calm and on good terms – and can walk away if necessary.
On a similar note, there needs to be a clear path for both parties to exit the agreement. This includes considering what will happen if one of the purchasers dies. Last but definitely not least, there needs to be clarity on what will happen if one of the purchasers becomes incapacitated while still alive.
Generally, the most pragmatic approach is for each purchaser to give the other power of attorney on matters to do with the house. If either or both of the purchasers would prefer to appoint another power of attorney, it’s crucial that they choose someone with the time and resources to handle the responsibility.