Ahead of an online Solicitor Chat on Buying Property with Friends by The Law Society on Twitter, we decided to catch up with Karen Lang from our Residential Property team to get a Scottish Perspective. Karen specialises in property matters, in particular residential conveyancing, throughout the whole of Scotland. Her work includes negotiating house purchases and sales, handling re-mortgages, and the letting of domestic properties, acting for both landlords and tenants. She also can assist with transfers of title, boundary disputes and title queries, title defects (and the rectification of same) property disputes and can provide advice on aspects of property ownership in general.
So Karen to start us off….
How many people can become owners of a single property?
In reality any number of people can own a property although practically the more owners there are logistically the more issues there may be when it comes to managing the property and ultimately selling it. In some cases, where for example a family may wish to purchase a property for the benefit of the whole family (for example a holiday home or similar) other options may be worth considering such as holding the property in a trust for the benefit of the family members with trustees then appointed to manage the administration.
What rights do they have?
Unless the title (or some other agreement says otherwise) each party will have equal rights to the property. If parties are purchasing a property together and are purchasing in unequal shares then the title can state the percentage share to be held by each party. It is important however to tell your solicitor when purchasing early on that that is the intention to enable that to be taken into account in the drafting of the title. This also may not be possible where a mortgage lender is involved as the mortgage lender may wish the title to be taken in equal shares. In that instance unequal ownership shares can be narrated in a separate Minute of Agreement which we would always recommend be put in place in any event where a property is being purchased in multiple names.
What is the difference between tenants in common and joint tenants?
In Scotland the terminology is different and we do not have "tenants in common" and "joint tenants". Title between multiple parties can either be taken equally between them "pro indiviso", in equal shares (unless the property is being purchased in unequal shares in which case title could be taken by the parties to the extent of their respective portions) or equally between parties and to the survivor. In the case of the latter, on the death of one party that party's share automatically transfers to the survivor(s). The latter is less common these days as it is inflexible and if parties subsequently decide they do not wish their share to go to the survivor it cannot be changed without the other party's consent. Furthermore any change requires amendment to the title itself and that being the case in general terms it is more advisable for title to be held equally between parties pro indiviso or in accordance with their various shares. The position on death can then be covered by the owners' Wills and we would always recommend where a property is being purchased Wills be reviewed or put in place if they are not already.
What are the main pitfalls for friends buying together?
There can be a number of pitfalls particularly if there is a change in circumstances for the parties further down the line. We would always recommend a Minute of Agreement (or contract) be put in place between co-purchasers to try and predict, and avoid, any pitfalls there may be. Such a Minute of Agreement can have as little or as much in it depending on the requirements of the individuals. It can cover how costs are to be managed, who is allowed to reside in the property, (if one party is only residing in the property are they to pay rent to the others for their shares?) if the property is to be rented out where rent is to be paid, and perhaps most importantly if the property is to be sold how that is to be managed.
Whilst at the time of purchase it is often inconceivable to the various parties that they will not be able to agree on matters such as selling the property at some point in the future unfortunately often disagreements can arise further down the line. A Minute of Agreement can cover a situation for example where one party wants to sell (or has to sell for financial reasons) but the others do not. The Minute of Agreement can make provision for the remaining proprietors to "buy-out" the party wishing to sell and it can also cover the terms and conditions for that buy out i.e. how the price is to be calculated and the timescales for completion of the buy-out. Another quirk of Scottish law is the legal provision for actions of Division and Sale. In Scotland where property is owned by multiple parties and one party wishes to sell but the others do not, the party wishing to sell can raise an action of Division and Sale in Court which could ultimately force the sale of the property. Even if the relationship between the co-owners has deteriorated it is unlikely that any party would relish the potential Court costs involved in such an action either pursuing or defending it.
A Minute of Agreement can place an obligation on the parties not to raise an action of Division and Sale without first trying to agree a buy-out. Other pitfalls and things purchasers need to bear in mind is what would happen if one party was to be sequestrated (become bankrupt) as that could force the sale of a property, if one party was to die or if owners are married to individuals not included in the title and they subsequently divorce. All these things could force an unexpected sale of the property, or put a party in a position that they have to sell their share. With regards to issues like sequestration if contributions are made towards the purchase price in unequal shares it is important that this be documented as if the title is simply in joint names each party will be legally entitled to an equal share of the value of the property and a trustee in bankruptcy would, for example, be looking to recover that share irrespective of the individuals initial contribution towards the purchase price.
Who is responsible if one of the owners stops paying their share of the mortgage?
In Scotland parties are jointly and severally liable for the repayment of the mortgage. That being the case the bank can choose to pursue either or both of the parties if the mortgage is in arrears. If parties are entering into a joint mortgage it is worth bearing in mind such a commitment will link them financially and if the mortgage is not paid that will affect both parties future credit rating. If there is a separate stand-alone Minute of Agreement between the parties that says each is to pay an equal share of the mortgage then if one owner stops paying their share leaving the other to pay the full mortgage payments then the party paying would have a contractual right under the Minute of Agreement to recover the defaulting parties share from them.
What happens if one owner decided they would like to sell?
Parties in Scotland are able to raise an action of Division and Sale in Court to force the sale of a property if they wish to sell and their co-owners do not wish to. If parties wish to avoid becoming embroiled in such an action then a Minute of Agreement put in place at the time of purchase can narrate what is to happen if one party wishes to sell and the others are less inclined. It can make provision for the remaining parties to purchase the share of the property owned by the owner wishing to realise their investment. It can narrate how the price of the share is to be calculated and set out timescales within which agreement on price and completion of the sale are to take place.
What tips would you give for someone considering buying a property with their friends?
The best advice we can give parties wishing to buy property with their friends would be to put in place a legally binding agreement covering all aspects of the property's ownership, management, and maintenance. We would also strongly recommend all parties ensure that they have Wills in place that are valid and up to date and would also recommend that any Minute of Agreement covers any unequal financial contributions towards the purchase of the property and makes provision for what is to happen if the property is to be sold or if one party wishes to realise their investment in the future.
Thanks Karen. If you have any questions regarding buying property with a friend then please get in touch with Karen or find out more online using the link below.