Declarations of Trust

Napthens - November 27th 2017

Increasingly, properties are being purchased with buyers contributing different amounts towards the price.

For example, a property may be purchased in joint names, with one party paying the deposit, and the other party not making any initial financial contribution.  In this scenario, if you are the party contributing the deposit, then it is important to consider whether this initial contribution is to be protected.

Equally, if the buyers are contributing different amounts to the purchase price, then each buyer may be anxious to ensure that upon a sale, they recover their initial payments.

It is important to remember that unmarried co-habiting couples or friends buying together have no protection in relation to their initial investment.

How do I record my financial contribution?

When instructing your lawyer to act for you in relation to your purchase, you will be asked to provide further information on the breakdown of how the purchase price will be funded, including the amounts being paid by each party.

As lawyers, we can draw up a ‘Declaration of Trust’ which can outline each purchaser’s initial contribution and as a result, the shares owned by each party in the property.  This document can be drawn up during the conveyancing process.  It is preferable for this document to be agreed, prior to exchange of contracts.

Why is it important to have a declaration of trust in place?

Unless a Declaration of Trust is entered into recording each parties financial interest in the property, then the position in relation to the distribution of the sale proceeds can be complicated.

If the property is sold and the parties do not have a declaration in place, and then disagree on how the sale proceeds are to be dealt with, then there is a possibility that you will end up in dispute.  In addition, you may be involved in litigation and ultimately a court may divide the property in a way that is different from what you intended.

Lump sum or percentage of the sale proceeds?

The Declaration of Trust can state that each party will receive  their initial contribution upon the future sale of the property.  Usually the declaration will state that the net sale proceeds of the sale will be dealt with in this way.  Therefore, the repayment of the mortgage, estate agent costs and legal fees will be paid first.

The parties can agree that they will receive a certain percentage of the sale proceeds upon a sale of the property, rather than a lump sum.  Considerations as to fixed sums and/or percentages of the sale proceeds will need to be discussed between the parties.  As lawyers, we can provide the purchasers with the options available.

Public or private?

You may not want details of your interests in the property to be set out in the Land Registry forms, as this would be lodged at the Land Registry and become a public document.  If you would prefer the details to remain private, a separate Declaration of Trust can be drawn up and the Land Registry forms will simply state that a declaration has been entered into.

Please note:

This article focuses on the situation whereby the purchasers are named on the legal title.  If the person contributing towards the purchase price will not be registered as a legal owner, then other considerations may apply, such as protecting your interest by way of a private legal charge.

For any other questions surrounding these issues, please do not hesitate to contact a member of our specialist Residential Property Team.