Buying an ex-partner out of a house after paying different initial deposit values

mcsteely

Five years ago I bought a flat in London with my partner. This year we have separated and we need to agree what to do with the flat.

She would like to continue living there and will buy me out of my share of the property.

When we bought the flat we each put in a different amount of deposit and signed a deed of trust agreeing that if we were to break up we would each get our deposit back and the rest of the property would be split 50/50 since we were taking equal accountability for the mortgage.

In the last five years the value of the property has gone up by a considerable amount and now my ex-partner is reluctant to stick to the 50/50 agreement since she put up more of the initial deposit. She would like to split the increase of the house 60/40 since this would be the "fair" way to do it, effectively ignoring the deed of trust which stated the house would be split 50/50 in the event of a break up.

I'd like to keep this negotiation amicable for old times sake but there is quite a difference between settlement values. What should we do?

TBagpuss

If there is a declaration of trust then legally, that is what you should use, unless there was a different agreement between you at any point in the intervening period.

In the interests of settling it, it may be reasonable for you to offer her something - maybe £1,000 - £1,500. Make clear that you are offering that *only* to try to move things forward and that the offer is only on the table for (say) seven days.

It would be *fair* to adjust the split, as she had a bigger investment in the property so she will get a proportionally lower return on that investment.

(e.g. if you bought at £200K, she put in £50K and you put in £25K, and the house is now worth £300K, and supposing for the sake of argument that you have beetwen you paid £10K off the mortgage, then based on the deed


the sale would be

£300K
less mortgage £115K
less her deposit £50K
less your deposit £25K

net £110

She would end up with £105K, you would end up with £80.
So she has got a return of £50K on an investment of £50K - 100% profit
You have got a return of £50k on an investment of £25K - 200% profit

Legally, you are entitled to it because that is what you agreed.

However, it might be fairer to split it in accordance with yor contributions. So if the outstanding mortgage is (say) £10k less than when you bought, it might be fair to split so that you each get your deposit + 50% of amount the mortgage is reduced by + % of the balance in line with original investment.
e.g. if she contributed 60% then she would get original deposit +£5K as 50% of mortgage + 60%

jjlandlord

What was the point of drawing a legal document to agree what would happen in this very case?

She cannot ignore it. She is bound by it in the same way as you are.

dodger1

If the property had gone into negative equity would she have offered to take a bigger hit on her deposit? eg her deposit was 60% but would agree a hit of 80%, I doubt it. Just go with the agreement.

bowlhead99

mcsteely wrote: »

When we bought the flat we each put in a different amount of deposit and signed a deed of trust agreeing that if we were to break up we would each get our deposit back and the rest of the property would be split 50/50 since we were taking equal accountability for the mortgage.

In the last five years the value of the property has gone up by a considerable amount and now my ex-partner is reluctant to stick to the 50/50 agreement since she put up more of the initial deposit. She would like to split the increase of the house 60/40 since this would be the "fair" way to do it, effectively ignoring the deed of trust which stated the house would be split 50/50 in the event of a break up.

I looked at all this kind of stuff when buying a house with friends and we were deliberately very clear in our deed of trust about what would happen in every possible scenario from the house price going up or down to someone not being able to afford the mortgage one month etc etc . So I can give you some analysis below.

Agreed with Bagpuss that ignoring the deed of trust is a huge amount to give away for 'old times sake'. People make deeds of trusts precisely because emotion will get in the way if you try to negotiate and think what might be 'fair' after the fact when you both have vested interests and a lot of bias in whichever way works out best for each of you.

If you sell the house and tell the solicitor to distribute the proceeds according to the deed of trust, you will get your shares as agreed and if you then want to thank her for her extra help at the beginning then feel free to give her an extra slice if you wish. Depending on her mindset, she might think this figure should be £50k and she will tell all her friends that you screwed her over if you only give her £10k more than you actually have to. Like it or not, emotional blackmail may come into it.

Consequently there may be no way of remaining on good terms anyway, in which case the sensible thing for you to do is just enforce the terms of the trust and not give her a penny extra. Of course, you both have to work together to get the best value for the house and having a selling partner be cooperative rather than obstinate may add thousands to the overall value recovered. So there's no harm in seeing what it would take to keep the other person onside, but it is not much of a negotiation if you just say 'yes sure that seems fair' if she is taking thousands off you that you had pre agreed in writing that she wouldn't.

Examples

Let's say you put in 10k and 15k, or 20k and 30k each, or 30k and 45k, whatever, and borrowed the rest. The borrowing was on you equally. You were jointly and severally liable for the mortgage and both of you could have been chased for the entire amount if the worst happened and the property lost a lot of value and the bank needed paying. You were paying equally towards it.

I'll take a wild stab in the dark that the mortgage represented more than half the cost of the property. Might even have been 70%,80%. So, if you have both borrowed and paid off this mortgage jointly, then 70%,80% of the gain was attributable to the amount put in by the bank, which you were taking equal responsibility for. So at least 70%,80% of the gain should be split between you equally.

However, there is some scope to reconsider your positions on what benefit that original extra cash that she had, really brought to the party. Two main ways:

1) give each person their original capital back AND the market gain on that amount of capital, before splitting the balance of the proceeds that represents the market gain on the mortgaged piece, 50:50

Example: you put in 20 she put in 30. House doubles from 300k to 600k. You take out 40 she takes out 60. Remaining 500k clears the 250k mortgage and the balance of 250k goes 125k each.

2) give each person their original capital back AND then recognise that the person who put in the extra 10k at the start (her) saved you both from borrowing so much money, and give her an extra return on her capital representing saved interest, before you split the balance 50:50.

So for example she put in £10k so she definitely saved you both 5 years interest on £10k at say 4% = £2000, and then, potentially without that extra 10k you would have been paying a higher mortgage rate on the whole remaining 250k borrowing because of having a worse loan-to-value when applying for the mortgage. That could be worth a saving of say 1% x 250k x 5 years or £12.5k total. So altogether thanks to her £10k you have saved £14.5k between you on the mortgage interest you have been paying.

You have both been paying that interest off over the years equally and so you personally have saved £7.25k of interest, so arguably you can make a case that you should give, and she should receive, £7.25k of your saved interest, meaning she gets £14.5k more than you out of the initial 'return of capital' phase before you split the rest. Effectively she keeps all the interest that her extra deposit allowed the partnership to save.

In other words you get your £20k and she gets (£30k + £14.5k saved interest)£44.5k

SUMMARY
---
So comparing model 1 vs model 2:-

Model 1, market returns on extra equity: you get £40k she gets £60k and you get £125k of remaining proceeds each. Your total £165k hers £185k

Model 2, treat her extra deposit as a loan that saved lots of interest: you get £20k she gets £44.5k and you get £142.75k of remaining proceeds each. Your total proceeds £162.75k hers £187.25k

Model 2 (b): if there was no real LTV interest saving because you ended up in the same LTV band as you would have been anyway... the £10k just saved £2k of interest by not borrowing it. So she gets £2k tacked on to her initial capital but not £14.5k. So you get £20k she gets £32k, and 149k of remaining proceeds each. Your total proceeds £169k hers £181k

Now compare with deed of trust:
You get £20k she gets £30k you split the rest £150k each. Your proceeds £170k hers £180k.

So depending on which of those methods you had chosen to put in the deed of trust when writing it, you would be getting anything from £170k (what you actually agreed) down to 169k or 165k or 162.75k.

The method you signed up for was really just to protect her extra capital which is a common one. But it does not allow her to 'earn' anything on it. If you allow it to count as an extra investment, depending on whether you treat it as extra equity or extra loan or extra loan-with-LTV-savings-too, So you may want to work those numbers on your real situation and see what sort of figures you would have come to, if you had signed up for a different method. In the example, it costs you between £1k and £7.25k to change your mind about the methods between those different, wholly reasonable, techniques.

Alternatively, look at the method she would like to follow. 40:60 on everything. So after clearing the mortgage there is 350 left and it's split 140:210. Wooooaaaah there! Going from £170k on your perfectly rational method that protected her capital as you promised and that you both signed up to... to a method where she gets all the profits on the part of the property that you bought with a joint 50:50 mortgage... causes you to drop £30k from your basic £170k expecation.

You would be a mug if you allowed that to happen and nobody would put that in a deed of trust, to let her take 60% of all proceeds - unless she was paying 60% of the mortgage and bills and you had accepted you would simply be a minority owner of the house, and were investing your own money elsewhere as an alternative to contributing to the mortgage.

Generali

mcsteely wrote: »

Five years ago I bought a flat in London with my partner. This year we have separated and we need to agree what to do with the flat.

She would like to continue living there and will buy me out of my share of the property.

When we bought the flat we each put in a different amount of deposit and signed a deed of trust agreeing that if we were to break up we would each get our deposit back and the rest of the property would be split 50/50 since we were taking equal accountability for the mortgage.

In the last five years the value of the property has gone up by a considerable amount and now my ex-partner is reluctant to stick to the 50/50 agreement since she put up more of the initial deposit. She would like to split the increase of the house 60/40 since this would be the "fair" way to do it, effectively ignoring the deed of trust which stated the house would be split 50/50 in the event of a break up.

I'd like to keep this negotiation amicable for old times sake but there is quite a difference between settlement values. What should we do?

Stick to the original agreement. It's easy to decide something else is 'fair' if it's more fair for one person than another.

If your OH didn't like the initial agreement then they shouldn't have agreed to it.

mcsteely

Thank you for the responses.

There is also the matter of potential selling on fees as part of the negotiation.

My ex-partner feels we should be jointly liable for the future selling on fees (1% of house value) even though the house is not being sold now. I feel that as she is getting full ownership of the property and she can decide if and when she wants to sell it, these fees should not come into the equation at this point and she should be responsible for these fees at if and when the property is sold.

Is there a legal precedence on this?

HappyMJ

mcsteely wrote: »

Thank you for the responses.

There is also the matter of potential selling on fees as part of the negotiation.

My ex-partner feels we should be jointly liable for the future selling on fees (1% of house value) even though the house is not being sold now. I feel that as she is getting full ownership of the property and she can decide if and when she wants to sell it, these fees should not come into the equation at this point and she should be responsible for these fees at if and when the property is sold.

Is there a legal precedence on this?

You should have taken them into account now by agreeing a lower value for your share of the property.

0.5% isn't that bad so I'd go with that. She could have said 5% and that could have also seen to be reasonable.

jjlandlord

mcsteely wrote: »

my ex-partner is reluctant to stick to the 50/50 agreement since she put up more of the initial deposit. She would like to split the increase of the house 60/40 since this would be the "fair" way to do it, effectively ignoring the deed of trust which stated the house would be split 50/50 in the event of a break up.

mcsteely wrote: »

My ex-partner feels we should be jointly liable for the future selling on fees (1% of house value) even though the house is not being sold now.

I have a growing feeling that she is just trying it on.
Especially her 'feeling' about the selling fee is ludicrous.

densol_2

I agree selling fees should be taken into account -after all if you were selling to get your money from the house - you would both pay half each - so I don't think it's unreasonable to factor them in now.

Btw - she will also pay stamp duty on buying you out - half the mortgage you are released from PLUS the sum of cash money she pays you. If they add up to £125 k it's 1% and if they add to more than £250k its 3%

dodger1

If you agree with the selling fee then pay it up front based on the current value of the property. 30 years down the line it could cost you a small fortune if property prices continue to outstrip inflation.