Are you buying a home as a cohabiting couple? Here’s what you need to know.

Contrary to popular belief, there is no such thing as ‘common law marriage’ in England and Wales. If you intend to buy a property as an unmarried couple or as friends, you won’t (by default) enjoy the same individual legal protections as you would as a married couple.

It is, however, relatively straightforward for your solicitor to structure similar legal rights for cohabitees as part of the conveyancing process. 

Fastest growing family type

According to the Office for National Statistics (ONS), cohabiting couples are the fastest-growing family type. In 2020, mortgage applications from cohabiting couples increased by 60% compared to 2019.

Why is cohabitation on the increase?

With house prices climbing ever higher, cohabiting is a great way for first time buyers to get on the property ladder by pooling their savings into a larger deposit. A larger deposit could give buyers more options, such as buying a bigger property or in a more desirable area.

If you are able to reduce the Loan to Value (LTV) by raising a bigger deposit, you will have a greater choice of lenders and mortgage products. Although most lenders are once again offering 95% mortgages, if you can find a 10% deposit, you will have access to more competitive products and interest rates.

Combining incomes can also help secure a larger mortgage. Once you’ve moved in, mortgage repayments, utility bills, insurance and the general cost of upkeep can be split between co-owners.

It’s not just unmarried couples, cohabiting friends are increasingly common and it is possible for up to 4 people to co-own a residential property.

What are the risks?

It might be argued that government legislation has failed to keep step with the social changes that make cohabiting couples much more common. It is certainly the case that unmarried couples who don’t appropriately structure the legal ownership of their homes will not have the same legal protection as they would if they were married or in a civil partnership.

“First time cohabiting homebuyers often mistakenly believe that they will inherit the entirety of their partner’s estate if their partner dies. Another commonly held misconception is that a cohabitee’s interest in a property will be legally recognised if a relationship breaks down”, said Chris Salmon, Legal Director of Quittance.

“All too often, when a couple separates or a partner dies, the law does not function in the way that cohabitees expect.”

In the absence of a ‘prenup’, married couples (and those in a civil partnership) have a well-established legal basis for deciding who owns what, how assets are divided if the relationship breaks down, and what happens to the property if a spouse dies.

Unmarried couples must take additional steps to define and structure the ownership of their property. Failure to do so could potentially leave one or other partner with nothing in the event of an acrimonious split.

Unmarried couples don’t have the same automatic ‘right of survivorship’, leaving them exposed if one partner dies. Unless the surviving partner is mentioned in the will, the deceased’s property share might default to a child from another relationship or even an ex-spouse mentioned in a forgotten will.

Choosing the right type of ownership

Early in the conveyancing process, your solicitor will ask you and the other buyers whether you want to be ‘joint tenants’ or ‘tenants in common’.

Your decision will dictate each owner's rights and financial interests in the property if your circumstances change in the future. This is an important decision that should be contemplated as early as possible in the buying process.

Joint tenancy

Joint tenancy is a type of property ownership where each partner jointly owns the property. Joint tenancy is the most common and the easiest type of ownership (legally) to set up

It is also the most common form of joint ownership between unmarried couples - perhaps because it circumvents potentially uncomfortable discussions as to who would own what if the relationship falls apart.

If a couple separates and decides to sell the property, the sale proceeds would be shared equally. If a joint owner dies, the surviving partner will retain complete ownership of the property under the legal ‘Right of Survivorship’. 

Joint tenancy is not always the right choice. A partner who, for instance, paid a larger percentage of the deposit or contributed more to the mortgage repayments, may feel that joint tenancy will not reflect their contribution.

As each partner, in effect, owns the whole property together, one partner can’t decide to leave their share in the property to anyone other than their co-owner.

Tenancy in Common

Tenancy in Common is an alternative form of ownership that allows for co-owners to hold different ownership shares in the property. If you are buying as friends, as investors, or you just want to retain your financial independence, tenancy in common might be the more sensible choice.

If one partner will be paying a larger portion of the deposit or mortgage, this differing contribution can be reflected in the individual shareholdings.

Unlike Joint Tenants, however, tenants in common do not have a ‘Right of Survivorship’. This means that If a partner dies, their interest in the property will not automatically transfer to the other partner(s). Instead, the deceased’s share might be inherited by someone who isn’t an existing owner, introducing the complications of probate and Inheritance Tax (IHT).

On the other hand, a partner or friend has the flexibility to choose whom to leave their share in the property to, in the event of their death.

Considering the advantages, one might wonder why tenancy in common is not the default choice for joint owners. One explanation might be that, in the excitement and optimism of a new relationship or joint venture between friends, joint tenancy forces partners to contemplate a future where things don’t work out.

Thankfully, whichever form of ownership you choose, the ownership structure of the property can be fine-tuned with a legal side agreement to take cohabitees' plans into account.

A ‘Declaration of Trust’ or ‘Cohabitation Agreement’ are increasingly common ways for unmarried couples to benefit from the same legal protections as married couples.

Declaration of Trust

A ‘Declaration of Trust’, also known as a ‘Deed of Trust’, is a legally binding agreement that can be used to stipulate the rights, financial interests and obligations of each of the co-owners.

The deed can be tailored to specify more or less anything related to the ownership of the property. including:

• A record of who contributed what to the initial deposit
• The percentage of the property each party will own
• What happens if one or all partners decide to sell
• How the property (or an individual share) will be valued and how the sale proceeds will be divided when the property is sold
• What happens if one party dies

It may be that your name will not be on the deeds or mortgage. You may have poor credit, or are a family member lending money for the deposit. A Declaration of Trust ensures that your contribution to the purchase and other costs will be protected.

Cohabitation Agreement

A Cohabitation Agreement can fulfil the same purpose as a Declaration of Trust, but can be much broader in scope. 

This legally binding agreement can be bespoke to the needs of the individual couple, and can be used to define who owns what and how the property, including the contents, are distributed if the relationship comes to an end.

The agreement could even include elements that might otherwise be drafted in a prenuptial agreement. For example,it might cover other assets such as a car, savings, bank accounts and debts.

Start the discussion ASAP

There may be no ideal time to discuss heavy topics like “What happens if we break up?” with your partner, but the sooner you start, the easier it will usually be. Drafting a Cohabitation Agreement or Declaration of Trust can take some time, and if you leave this task too late on in the conveyancing process, your house purchase could be delayed.

If you have already completed the purchase, or you don’t want to delay completion, you can draft an agreement later. Your solicitor will be able to guide you and your partner through the process.

If you can, however, it is usually preferable to broach the subject before you buy. Not taking the opportunity to share your expectations and understanding of how co-ownership will work, might be something you will regret if things don’t go according to plan.

For more information - please contact us