Deciding to purchase a property with another person, be that a spouse, parent, sibling or friend, can present many complications, but entering into these arrangements blindly without fully understanding the complexities of the transaction can have far-reaching consequences.
For example, from a legal perspective, property co-ownership can be defined in two different ways. You and your co-owner can be considered as either ‘Joint Tenants’ or ‘Tenants in Common’, and whilst these two terms might seem similar, they actually mean very different things.
Understanding whether you are ‘Joint Tenants’ or ‘Tenants in Common’ is significant, as it can make all the difference as to what happens in the event of a house sale post-divorce or dictate how the ownership of a property will be determined in the event of a death. If you co-own property and don’t know which type of agreement is in place, any assumptions you have about this matter may well be incorrect and potentially cause difficulties for you or your loved ones in the future.
What is ‘Joint Tenancy’?
Put simply, joint tenancy means that each party has equal rights to the whole property. Whilst you can have up to four owners under a joint tenancy, in the eyes of the law you are still viewed as a single entity. This means there will be only one mortgage between you; all decisions about the future sale of the property must be made jointly, and the property will automatically pass to the other owners should you die. This is referred to as the ‘survivorship’ rule.
For married or co-habiting couples, a joint tenancy often makes the most sense because of ‘survivorship’, but for friends or siblings who may be contributing different deposits to a property purchase, they are far more likely to want to protect their ‘share’ in the event that the worst happens. In this case, becoming ‘Tenants in Common’ might be the better option.
What are ‘Tenants in Common’?
With a tenancy in common, each party owns a separate share of the property. These shares can differ in size and can but does not have to be dictated by the amount of deposit each individual contributes.
This is often the type of ownership that parents opt for when helping to get their children onto the property ladder, or when friends look to pool their resources to buy a property together. So, for example, one person could own 70%, whilst the other owns 30%, depending on how much they personally financed the purchase or what other agreement they may have come to.
It is possible to have separate mortgages to finance a purchase when becoming tenants in common, however, it is inadvisable and there are very few lenders who would agree to this. Although decisions about selling the property further down the line must still be mutually agreed between tenants in common, proceeds will be split according to the share each party owns.
Furthermore, each party is perfectly within their right to leave their share of the property in their Will to someone other than their co-buyers, should they wish. With a joint tenancy, you cannot pass on ownership of the property in your Will and this is one of the key differences between being joint tenants or tenants in common.
Can you change your type of ownership?
When a couple gets married, they may seek to switch their type of ownership from being tenants-in-common to a joint tenancy, especially if they want equal rights to a property. However, a declaration of trust document prepared by a qualified adviser could essentially achieve the same result for those who own property as tenants in common.
When a relationship breaks down, the parties may have held their property in a joint tenancy but upon divorce may be advised to change to becoming tenants in common. It also offers each owner autonomy with regards to what happens to their share upon their death, rather than ownership automatically transferring to their former partner.
Changing ownership to become tenants in common is known as ‘severing’ a joint tenancy. It is a relatively simple process that, once done, will ensure that the survivorship no longer applies.
After this point, the ownership of a person’s share will be decided by either the contents of their Will or the rules of intestacy upon their death.
Severing a joint tenancy can be done by giving written notice to the Land Registry without the other owner’s cooperation or agreement. It is more common for the decision to be mutual, however. In this instance, an official form (‘form SEV’), available from Gov.uk, should be completed by the owners or their legal representatives and submitted along with any supporting documents to HM Land Registry.
When changing from Tenants in Common to a Joint Tenancy, the agreement of all owners will be needed and a ‘trust deed’ (sometimes referred to as a declaration of trust) must be prepared by a qualified legal professional.
As joint owners of a property, each party will have an equal right to live in a property, which is why it can only be sold by agreement with all other co-owners or an order of the court.
As such, seeking to draw up a trust deed before the initial purchase can also set out details such as in what circumstances the property can be sold, or how much notice should be given if someone wants to sell their share. This should help to prevent a costly court battle if someone wants to sell whilst their joint owners don’t.
CASE STUDY: Non-traditional severance of beneficial joint tenancy
The case of Dunbabin v Dunbabin [2022] highlighted the issue of how the making of Wills can have a significant impact on previously held arrangements regarding the distribution of estates after a person dies.
In this particular instance, the claim centred on a property that a couple purchased in 1983 as beneficial joint tenants.
Twenty years after purchasing the property, the husband and wife made mirror Wills which included the provision that, in the event of the death of either spouse, the family home would be held in trust for the surviving spouse for life.
The wife died in 2016 and the husband subsequently made a new Will in 2019, the terms of which gave 75% of his residuary estate to one of his sons (his executor) with the remaining 25% to be distributed among his three other sons, one of whom later died in December 2019.
The husband then died in April 2020, and the two surviving sons who had inherited the 25% share of their father’s estate, along with the widow of the deceased son, brought a claim against their brother who had executed the Will and received a 75% share of the estate.
As a result, the intervention of the Court was required to settle estate administration issues arising, in particular the matter of beneficial interest in the property. The claimants argued that the 2003 mirror Wills had the effect of severing the beneficial tenancy and that the property was subsequently held in equal shares by the couple as joint tenants on trust for themselves as beneficial tenants in common.
Crucially, a beneficial joint tenancy means that the parties involved own the whole property together, and the survivor retains full ownership in the event of the death of the other party. In contrast, a tenancy in common provides that the parties own specific shares of the property which pass into their estate when they die.
Under survivorship rules, the husband inherited legal title of property on wife’s death, but still on trust for himself and wife’s estate as tenants in common. Therefore, the claimants argued that her 50% share passed under her Will, rather than automatically through survivorship to her husband, and should be divided among the four sons.
The defendant’s counter argument was that the beneficial interest had remained intact following the making of the 2003 Wills, and therefore had passed to the husband in its entirety. That scenario being the case, the defendant would stand to inherit 75% of the value of the house along with 75% of his father’s residuary estate.
In order to prove that severance of the beneficial joint tenancy had taken place, the claimants would need to establish that a written notice of severance under the Law of Property Act 1925 had been made, that the couple had mutually agreed to such a severance, and that their subsequent actions treated the beneficial joint tenancy as having been severed.
Although no documentation of severance could be found, given the evidence presented, the Court found that on the balance of probabilities, one had been signed but later lost. It was also determined that, around the time that the 2003 Wills were made, the couple had agreed to sever their beneficial joint tenancy. Further, the making of the mirror Wills was, in itself, an indication that the couple treated the beneficial joint tenancy as having been severed.
The combination of these elements pointed to the severance of beneficial joint tenancy and its replacement by an arrangement where the property was held by the husband and wife as joint tenants on trust for themselves as beneficial tenants in common.
That being the case, the legal title vested entirely in the husband by right of survivorship, but still on trust for himself and his wife’s estate as tenants in common, and with her 50% share passing under her Will. On the husband’s death, that share passed to their four sons in equal shares.
The moral of the story here is that obtaining legal advice when making any amendments to Wills or property documentation is crucial. Failure to recognise that one action can have a knock-on effect elsewhere will only lead to complications further down the line, so it’s best to enlist the support of experienced legal practitioner to advise regarding any potential pitfalls and to make sure that costly consequences are avoided when making such major life decisions.
