Buying a property with friends is becoming an increasingly popular way to get onto the property ladder as affordability pressures continue to affect first-time buyers.
According to research by Lloyds Bank, almost half (46%) of first-time buyers would consider purchasing a property with a friend or sibling, while Government data shows that the number of households jointly owned by two people outside of a romantic relationship has increased by 9.2% since 2015–16, reaching 236,000 households.
Barratt Homes also found that nearly one in three Britons (32%) would be open to buying a property with a friend or sibling, with affordability cited as the primary motivation.
While buying a property with friends can be an excellent way to get onto the property ladder, share costs and purchase a home that may otherwise be unaffordable, it is important to understand what happens if circumstances change in the future.
Many friends purchase property together on the basis that everyone will contribute equally and remain on good terms. However, relationships, finances and personal circumstances can change over time.
One friend may wish to sell, another may stop contributing towards the mortgage, or there may be disagreement about how the property should be managed.
Unfortunately, many co-owners do not put a formal agreement in place at the outset. When disputes arise, determining who owns what share of the property and how the proceeds should be divided can become complicated.
Our property ownership dispute solicitors explore the legal position, practical implications, and potential outcomes when friends who own property together disagree over their shared home or investment property.
A typical scenario: What happens when friends fall out?
Take the following scenario: Two friends, Eve and Megan purchase a property together.
They do not enter into a separate declaration of trust but register the property in their joint names as joint tenants.
Initially, they each contribute equally towards the mortgage and household expenses.
However, several years later, their circumstances change.
Eve moves out of the property and stops contributing towards the mortgage, while Megan remains living there and continues to make the payments.
The parties want to know what happens with the property.
Are they able to sell it?
How is the equity split between them?
Ultimately, if the parties are unable to agree between themselves, then the Court has wide ranging powers and can make an order that the property be sold and/or how the equity should be split.
What is the first step?
Where land is owned by more than one person, a trust of land is created. This separates the legal title to the property, which is held by the trustees (the legal owners), from the beneficial or equitable interest, which is held by the beneficiaries.
Disputes commonly arise in two situations:
- The property is registered in the names of both owners; or
- The property is registered in one person's sole name, but another person claims they have a beneficial interest.
In this scenario, as the property is jointly owned as joint tenants, the presumption will be that each co-owner will have a 50% interest in the property unless there is evidence to the contrary
In many cases, the transfer document which is signed when the property was purchased includes a declaration confirming how the beneficial ownership is to be shared.
Even if the parties never signed a separate declaration of trust, this provision is usually decisive. Where no declaration of trust exists, which is now relatively uncommon, the usual assumption is that the owners hold the property in equal shares.
Once it has been decided how the legal and beneficial interest in the property is held
Once the parties' legal and beneficial interests have been established, if the property is sold or one party decides to ‘buy out’ the other party’s interest in the property, it may be necessary for one party to pay to the other party an amount out of their share of the equity through “equitable accounting”.
What is equitable accounting?
Equitable accounting is a legal process that ensures the financial contributions and liabilities of co-owners are fairly reflected when a property is sold or when one owner's interest is transferred.
The court can order adjustments to the parties' costs and benefits associated with the property before the net proceeds are divided.
This is a discretionary equitable remedy and is separate from deciding each person's ownership share.
However, it can significantly affect the final amount each party receives.
When does equitable accounting apply?
Equitable accounting commonly deals with issues such as:
- One owner continuing to pay the mortgage while the other does not;
- Money spent on significant improvements or repairs to the property; and
- Whether an occupational rent should be paid.
In simple terms, the court considers each co-owner's financial position throughout the period of ownership. It weighs up any amounts one party should receive against any amounts they owe, before calculating the final balance.
What is occupational rent?
Occupational rent is a payment that may be awarded where one co-owner has had the exclusive use of the property while the other has been unable to live there.
It is intended to compensate the non-occupying party for their inability to use and enjoy the property and is commonly assessed at 50% of the property's market rental value.
A claim for occupational rent generally arises where one party has been effectively excluded from occupying the property.
The Court will often recognise that, following the breakdown of a relationship, it may be necessary for one party to leave the home and will consider the circumstances in which that occurred.
Using the example above, Eve could contend that she was effectively excluded from the property as a result of the relationship breakdown and that Megan should therefore account to her for 50% of the property's rental value.
However, where Eve ceased contributing towards the mortgage after leaving the property, any claim for occupational rent may be offset against Megan's claim in respect of those mortgage payments.
How are property improvements treated?
A general principle is that where one party incurs expenditure on a property without the knowledge or agreement of the other co-owner, they will not usually receive credit for that expenditure.
This principle tends to apply to more substantial capital expenditure rather than ordinary repair and maintenance costs, which are generally treated differently.
In appropriate circumstances, the party who incurred the expenditure may seek a credit in the account, typically limited to the lower of:
- 50% of the increase in the property's value attributable to the expenditure; or
- 50% of the amount actually spent on the works.
What about rental income and other expenses?
Any rental income received by the occupying owner, such as payments from a lodger or tenant, it would usually be taken into account when calculating each party's entitlement.
The court may also consider certain ongoing property expenses, including buildings insurance and, in some cases, contents insurance where the contents remain jointly owned.
As with all aspects of equitable accounting, the court's objective is to achieve a fair outcome based on the parties' respective financial contributions and the circumstances of the case.
The Legal Framework
The Trust of Land and Appointment of Trustees Act 1996 (ToLATA) gives the court certain powers to resolve disputes about ownership of land.
Two main types of applications can be made under ToLATA to resolve disputes about co-owned property. These are:
- An Order for sale of the property; and
- A declaration of the beneficial interest in the property.
These applications permit a court to decide who are the legal and beneficial owners of a property and in what proportions.
What if Friends Purchase a Property as an Investment?
The position can be different where friends purchase a property as an investment rather than as a home to live in.
In those circumstances, the parties' intentions are often clearer from the outset.
Friends may contribute different amounts towards the deposit, agree to receive rental income in specific proportions or have a clear understanding as to how profits should be shared.
For that reason, it is particularly important to record the arrangement in a Declaration of Trust or a formal co-ownership agreement at the time of purchase.
Whilst the legal framework under ToLATA remains the same where friends purchase a property as an investment, disputes are often more straightforward because the parties' intentions and financial arrangements are commonly recorded in a Declaration of Trust or co-ownership agreement from the outset.
As a result, the Court will frequently focus on the agreed ownership shares, the distribution of rental income and responsibility for expenses. Unlike disputes involving a former shared home, issues such as occupational rent are less likely to arise because neither party is ordinarily occupying the property.
Nevertheless, disputes can still occur where one party has contributed more towards mortgage payments, repairs, and improvements than the other.
In those circumstances, the Court may still consider equitable accounting principles when determining how the net proceeds of sale should ultimately be divided.
Equitable accounting may still be relevant with investment properties.
The Court can take account of rental income received, mortgage payments made on behalf of the co-owners, substantial repairs and improvements when determining what adjustment, if any, should be made between the parties.
In some cases, these adjustments can significantly affect the amount ultimately received by each co-owner following a sale.
Contact Our Property Litigation Team
If you are involved in a dispute over a property you own with friends or family, our specialist property dispute solicitors can advise you on your rights and help you reach the best possible outcome.
Contact our team today for expert advice on co-ownership disputes, ToLATA claims and property ownership issues.
0161 941 4000
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Kerry Horsfield
Trainee Solicitor
Kerry joined Myerson as a Trainee Solicitor in September 2024. Kerry graduated from Manchester Metropolitan University in 2021 with First Class Honours degree in Law, and went on to complete the Legal Practice Course in 2022, having achieved a Distinction.
About Kerry Horsfield