Protecting the Bank of Mum and Dad (and other similar “banks”)

Jenifer Martindale is partner in the property & commercial litigation team at Wilsons Solicitors

As property prices have shot up, getting on the property ladder has seemed an impossible feat for most first-time buyers were it not for the Bank of Mum & Dad. It is now more and more common for parents (or grandparents/other family members) to help their children buy a property, whether that be funding for a child to buy on their own, or funding where the child is buying with a cohabiting partner or friends.

This changing landscape of property purchasing can, and does, invariably lead to the potential for dispute, particularly where there is not a clear, recorded agreement as to how it will all work. Is the contribution from Mum and Dad a loan or a gift? If a loan, what are the terms? Will Mum and Dad get a share of any increase in the property value? If there are co-owners, will they own the property 50:50 even if one has contributed more (whether from their own money or otherwise)?

There is often a reluctance to make it all “legal”. Many people it seems take a relaxed approach and don’t obtain advice as to how to protect their money, not wanting to think about it all going wrong. Indeed, research by The Family Building Society found only 8% of parents who gave money to a child for a deposit sought advice from a financial adviser, while only 14% took legal advice. Being unaware of the legal principles which govern property ownership and the risks involved, and not having written records is a recipe for future litigation.

So, how can disputes arise and what can be done?

To give some common examples:

  • A property is purchased by two people, but it is registered at Land Registry in one sole name. The registered owner will be the legal owner and, in turn, there is a legal presumption that the legal owner is also the beneficial owner. The owner would be able to sell the property without the other’s consent and could retain all of the net sale proceeds.
  • A property is purchased and registered at Land Registry in joint names as a home for an unmarried couple, with one partner contributing 100% of the deposit. There is no declaration to record this so the legal presumption is that they own it 50:50.
  • Parents help their child and co-habiting partner by providing 100% of the deposit required to purchase a property. The property is registered in the joint names of the two cohabitees but there is no declaration as to the benefthemicial ownership of the property. The cohabitees’ relationship breaks down. As above, the presumption is they own it 50:50. The parents are consequently left unprotected.

In all of these examples, if a resolution cannot be agreed amicably, the aggrieved party would need to bring a court claim for a declaration that they are a beneficial owner of the property (and to what extent) and are entitled receive a proportion of the net sale proceeds. Such claims can be very contentious and always involve needing evidence to prove the contributions made, and what everyone agreed or intended as to the split of ownership.

The court process is is time-consuming, costly and stressful to say the least and should be avoided if possible.

To do so, the best approach is to communicate with the other people involved and be open and upfront right from the start as to how it will all work. Don’t be afraid to make it “legal”!

Everyone involved should say what they intend, and should take legal advice (competent solicitors/conveyancers acting on a purchase should be asking about the source of funds, and recommending individual parties (such as Mum & Dad) take their own legal advice to protect their position).

It is likely that parties will be recommended to agree and sign a Declaration of Trust either at the point of purchase or subsequently. A Declaration of Trust can set out how the property was purchased, how the property is owned (such as % shares) and how the equity will be split when the property is sold. The Land Registry precedent Transfer Deed provides a “declaration of trust” section that can be completed so it doesn’t mean having to pay for another document. However, bear in mind the Transfer Deed will be a publicly available document so for privacy purposes a standalone Declaration of Trust may be preferred. A Declaration of Trust should also be updated, if further contributions are made which changes the % shares of ownership.

If it is too late for a Declaration of Trust (although it is never too late!), keep records and evidence of contributions to: deposits, the purchase price, mortgage payments and one-off capital mortgage repayments, renovation works, extensions, and other property outgoings. And have a conversation with the other people involved to try to reach agreement.