Division of Interests in Property - Cohabiting Couples

Trusts of Land and Appointment of Trustees Act 1996

Where a relationship breaks down and the parties cannot agree how their property should be dealt with e.g. a sale or transfer of the property to one of them application can be made to the court for a variety of Orders.

Disputes also arise where the parties cannot agree on the amount of their respective interests in the property, and the court has power to decide on the legal and beneficial interests in property (which are not always the same).

Legal interests in land

The legal interest in land is shown by the land registry title. Where more than one person is registered as the owner, the co-owners can be registered as “joint tenants” or as “tenants in common”.

Joint tenants are regarded as owning the whole of the property without separate shares, so that on the death of one of them the property automatically passes to the survivor, and cannot be left to anyone else by Will (unless the joint tenancy is severed – see below).

Tenants in common have separate and distinct shares in the property, which they can leave to a third party by Will, or charge to a lender. This is the more common type of registration where couples are not married or have purchased a property in unequal shares where they wish to preserve their separate interests in the property. The specific shares can be set out in a Trust Deed or on the Transfer document (TR1). Where it is envisaged that the share will change in the future (e.g. where one party will be paying for improvements) then it is normally better for a Trust Deed to be entered into to set out a mechanism by which the shares will alter.

Beneficial interest in land

The beneficial interest in property decides the financial value owing to each partner if the property is sold.

If only one of the partners is the legal owner, the other may still be able to claim a share in the property because they may have a beneficial interest, based on contributions made to the purchase of the property or to its improvement and/or the intentions of both partners when the property was bought. A beneficial interest cannot be acquired merely by living in the property. Partners who are not married or civil partners who are not legal owners can only have a long-term right to occupy, prevent a sale or obtain a share of the proceeds of a sale if they have a beneficial interest. This is why it is important to establish the existence of a beneficial interest, and where possible protect it by entering a restriction on the land registry title.

Even if a couple are joint legal owners, this does not mean that they have equal rights to the financial value of the property, as they may not have an equal beneficial interest in the property.

How does the Court decide what share each party owns?

Where a property is registered in joint names disputes regarding the parties’ respective interests should become less common, provided that the revised TR1 transfer forms (where owners can state their agreed interests) are properly completed.

Where property is held in one name only, or where property is registered in both names but there is no declaration as to how the interests are held (either in a TR1 of a Declaration of Trust) the courts must look at the evidence to see if a trust exists.

In the leading House of Lords case of Stack v Dowden [2007] UKHL 17 it was said that the onus is on the person seeking to show that the beneficial ownership is different from the legal ownership, and that the key question is “did the parties intend their beneficial interest to be different from the legal interest?” Many factors other than financial contributions may be relevant to divining the parties’ true intentions e.g. discussions at the time of purchase, reason why the property was in joint names, whether they had children they had a responsibility to house etc.

It was also said that in deciding whether a constructive trust existed indirect contributions such as improvements which added significant value to the property, or a complete pooling of resources in both time and money so that did not matter who paid for what ought to be taken into account, as well as financial contributions made directly towards the purchase of the property. In this case, the court held that although the legal interest in the property was held in joint names, the beneficial interests were held 65/35 in favour of Mrs Dowden who had provided most of the capital used to purchase the property. The mortgage was in joint names with capital repaid equally but interest paid by Mr Stack. This unmarried couple had lived together for 18 years and had 4 children, but had strictly maintained separate finances throughout their relationship. This was found to be indicative that they did not intend that their shares to be equal, even though the property was put into joint names (the legal significance of which was not clear to them).

The Supreme Court case of Kernott v Jones [2011] UKSC 53 was another case where there was no express declaration of trust and the property held in joint names. In this case the court said that the “common intention” constructive trust is of central importance whether the property is held in joint names or in a single name, although the starting point is different in the two cases. Where the property is registered in a single name, the other party has the burden of establishing an implied trust to show that the beneficial interests are different from the legal title from the parties’ conduct. Unless there is an express declaration of trust which says otherwise, where property is held jointly with a joint mortgage the starting point will normally be that the legal and beneficial interests in the property are owned equally. The fact that purchase monies were not contributed equally would not in itself suffice to rebut this presumption.

This presumption replaces concepts of a resulting trust in the context of a family home, and will be difficult to challenge (unless the parties are also business partners). However, the presumption can be rebutted where there is evidence that the parties had a “common intention” as to the amount of their respective shares, either at the time of purchase or at a later date if this intention changed over time. The court then went on to say that if the court is unable to infer the parties actual common intention it then has to proceed to determine what is fair having regard to the whole course of dealing between them in relation to the property – a process of “imputing” an intention to the parties – what reasonable people would have intended, had they thought about it.

In this case, the parties purchased property together in 1985, and split up in 1993 at which time Mrs Jones remained in the house with their two children. The parties agreed that at that point they owned the property 50/50. After they separated Mr Kernow paid nothing towards the property or mortgage for 14 years, when he then asked for his 50% share of the property and Mrs Jones applied to the court for a declaration as to ownership. The Supreme Court held that an intention to rebut the presumption could be inputted by Mr Kernow’s not claiming an interest for 14 years and the fact that he had bought another property which he had only been able to do because he was not contributing towards the mortgage or endowment policy on the property owned with Mrs Jones. The court imputed a presumption that the “common intention” had changed and his interest was therefore calculated at 1993 values.

What should be done to avoid expensive litigation?

Ensure that each party’s beneficial share is clearly defined either in form TR1 or in a Declaration of Trust, which should be registered at HM Land Registry at the time the property is purchased.
If circumstances change or are likely to change consider entering into a variation of the Declaration of Trust to provide for the changed circumstances in the future, if the property is not going to be sold, and again register this with HM Land Registry.
If the property is held as joint tenants, consider giving notice to sever the joint tenancy to prevent the other party “inheriting” your share by survivorship in the event of death;
Consider entering into a Cohabitation Agreement

If you wish to discuss any matter arising from this article or any other employment problem please contact Janet Long by email to j.long@pj-h.co.uk