Declarations of Trust: what they are and when you should use one

If a property is in joint names, and the owners aren’t married/civil partners, the presumption upon sale is that each person will get an equal share of the net sale proceeds. If each individual owner contributed equally to the deposit and the mortgage, that may be absolutely fine.

However, imagine the following:

Scenario A

• Erica receives a divorce settlement of £175,000 and uses it to buy 15 Acacia Street; she lives there with her two children.
• A couple of years later she meets Hugo; after a few months of cohabiting they decide they want a bigger house.
• They have a conversation and agree that Erica will use the proceeds from the sale of 15 Acacia Street as a deposit for the new property. They agree that if the new house has to be sold because their relationship breaks down, Erica will get her deposit back, and that they will each have an equal share of any surplus. This agreement is not recorded in writing.
• Erica sells 15 Acacia Street for £200,000 and she and Hugo buy 27 Bakewell Crescent for £400,000, taking out a £200,000 mortgage to do so.
• A few years later Hugo and Erica split up and the property is sold, for £420,000.
• The outstanding mortgage is £180,000 and so the equity is £240,000.
• Hugo denies agreeing that Erica would get back the deposit that she paid.
• The presumption means that they will each get £120,000.

Not only will Erica not get the £200,000 she put in to Bakewell Crescent, but she has lost some of her divorce settlement, that she needs to house her children.

Scenario B

• Frank and George rent a property together but decide that they want to buy a house.
• They find 64 Park Lane, on the market for £200,000. They can afford it, but only because George can afford to pay £30,000 towards the deposit; Frank can pay £10,000. The mortgage, of £160,000, will mainly be possible because of George’s salary.
• Frank is offered a new job, that pays more, but which would involve longer hours and a longer commute. Frank wants to accept the role, as he wants to feel like he is ‘paying his way’.
• George says that although he will be paying more towards the property, both in terms of deposit and mortgage payments, it is their ‘joint home’ and therefore Frank doesn’t need to worry that he can’t afford to pay the same as George. They agree that Frank will decline the job offer.
• They buy the house, and the mortgage is paid from George’s bank account; Frank buys groceries (paying less than George does for the mortgage).
• Some years later, George and Frank split up, and the property is sold, for £250,000. The mortgage is £100,000, so the equity is £150,000.
• The presumption is that each of them will get £75,000, but George says that he should get more because he paid most of the deposit and the mortgage.

Frank believes that he should get an equal share, as George always told him that it was ‘their’ home and that it didn’t matter that they contributed to it unequally, and because he could have paid more towards it if he’d accepted the job offer, which he declined because of George’s assurances.

So what is a Declaration of Trust? And how could one have helped?

Essentially, a Declaration of Trust (or DoT), is a written record of an agreement as to who is entitled to what share of a property. It can say that because a person contributes more towards the purchase of a property, they are entitled to more of the equity when it is sold. It can also record an agreement that despite unequal contributions to the purchase of a property, the equity is to be shared equally.

Usually a DoT will be signed at the time of purchase, but one can be entered into later on.

In Scenario A, the DoT would have specified that in the event of a sale, the first £200,000 of the net proceeds would go to Erica, and that any surplus would be divided equally between her and Hugo. This would have allowed Erica to receive £220,000.

The presumption of a 50/50 split can be rebutted, and a court may well believe Erica’s claim that she and Hugo agreed that her deposit would be protected. Things would have been much easier for her, however, if she and Hugo had entered into a Declaration of Trust at the time that they bought 27 Bakewell Crescent.

In Scenario B, a Declaration of Trust could have confirmed the 50/50 split. The DoT would have been express evidence in support of the presumption, making it much harder for George to claim a greater share of the net sale proceeds.

If you have any concerns about protecting your interest in property, speak to our Dispute Resolution Team today.