Deed of trust.

When buying a property with a friend or family member, or as a co-investor, it is recommended that you enter into a deed of trust to outline each party's individual financial contributions, ownership shares, and responsibilities within a legally binding framework. It also sets out what happens if one party fails to uphold their obligations.

A deed of trust is a straightforward and cost-effective way of ensuring that all parties are treated fairly.

What is a deed of trust?

A deed of trust is a legal agreement that sets out the financial arrangements between joint owners of a property. A deed of trust is normally used when the owners have different percentage shares in a property (tenants in common), or they contribute different amounts to the purchase of the property.

The agreement removes uncertainty and formalises each party’s financial investment in their house, flat or other property or assets.

What’s the difference between joint tenants and tenants in common?

In England and Wales, up to 4 people can co-own a residential property as either 'joint tenants' or 'tenants in common'.

Joint tenants

When you own a property as joint tenants, each person owns the entire property equally and there are no distinct shares. There is also a right of survivorship, meaning that if one owner dies, their share of the property automatically passes to the surviving owner(s).

Tenants in common

If you own a property as 'tenants in common', each person owns a specific share of the property. Two tenants in common could each own equal 50% shares in a property, or they could own different sizes of share, e.g. 75% : 25%.

Similarly, three tenants in common could own equal 33% shares in a property, or they could own different sizes of share, e.g. 50% : 25% : 25%

If a tenant in common dies, there is no right of survivorship, so their share does not automatically pass to the other joint tenants. Instead, their share becomes part of their estate and can be sold or transferred as specified in their will.

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When might I need a deed of trust?

As tenants in common, you will need a deed of trust to outline each party's individual financial contributions, ownership shares, and responsibilities within a legally binding framework. It also sets out what happens if one party fails to uphold their obligations.

A deed of trust is a straightforward and cost-effective way of ensuring that all parties are treated fairly.

Common circumstances in which people enter into a deed of trust:

Is a deed of trust the same as a declaration of trust?

A deed of trust and a declaration of trust are not technically the same thing. A declaration of trust is a legally binding statement that assets, such as a property, are held in trust.

Since a deed of trust always contains a declaration of trust, along with other statements, most conveyancing solicitors use the terms interchangeably.

What’s in a deed of trust?

A deed of trust will contain a declaration of trust, the names of all legal and beneficial owners, and other statements setting out how the property is held, used and paid for.

These statements could include each party’s:

• Contributions to the property purchase price, the deposit and other purchase costs
• Contributions to maintenance and repair costs
• Contributions to the mortgage repayments, utility bills and other outgoings
• Distribution of sale proceeds in the event of a sale
• Distribution of rental income
• Pre-emption rights (the right of first refusal where one party agrees not sell their share without first offering it to the other party.)

It is also common to describe what the process will be if one or more parties decide that they want to sell the property in the future.

How does a deed of trust protect me?

A deed of trust sets out in clear, legally binding terms the financial arrangements between two or more parties. These arrangements could include each person's contributions to the purchase price, mortgage payments, bills, and maintenance costs, as well as how the proceeds from the sale of the property will be divided.

A surprising number of property co-owners never have the potentially awkward conversation about ‘who gets what’ in the event of a sale or separation.

By entering into a deed of trust, you will have ensured that all parties share a common understanding of what they are agreeing to when buying a property with someone else, and what happens in the event of a sale or separation.

The deed is a written record of what was agreed, which can prevent misunderstandings and potential acrimony in the future.

A deed can provide a framework for resolving disputes. For example, the deed of trust may include provisions for what happens if one party wants to sell the property and the other does not, or if one party can no longer afford to contribute to the mortgage repayments.

By entering into a deed of trust, a dispute is far less likely as all parties have signed a legal agreement. If a dispute cannot be avoided, however, the deed could ultimately form the basis of litigation.

How do I get a deed of trust?

In theory, any legal professional should be able to draft a deed of trust for you. A layperson with property law experience could even draft one themselves, though any errors or omissions in the technical legal language could have serious legal consequences. A poorly written deed of trust could be effectively worthless, or worse, achieve the opposite of the agreement you have in mind.

To ensure your deed is watertight, you should instruct a specialist property solicitor to draft your deed of trust. An experienced property lawyer will also be able to discuss your needs and intentions with you in detail, and will be able to suggest additional issues or protections that you hadn't considered.