# Declaration of Trust

Forumite Posts: 35
Forumite
A couple are splitting up and selling their house early in the mortgage terms thus incurring a penalty which is quite large.

There is an uneven Initial Contribution, and Mortgage Payments have been made equally over the term, meaning First Owner Share is about 30% and  Second Owner share is about 70%.

The early mortgage payment redemption fee, is along with other house sale fees like estate agents and solicitors, collectively are costs in connection with the Mortgage Payment. Let's call these sale fees (if that's right?).

The issue is how to calculate net proceeds of sale, and therefore how to split the proceeds of the sale according to the share (30/70). Are the sale fees paid before the proceeds of sale are split 30/70, or afterwards?

Sale Fees paid after net proceeds:

• Total Sale Proceeds: 500,000
• Mortgage: 250,000
• First Owner Initial Contribution: 50,000
• Second Owner Initial Contribution: 100,000
• Net Proceeds: 500,000 - (250,000 + 50,000 + 100,000) = 100,000 to be split 30/70
• First Owners Share of net proceeds: 100,000 * 0.3 = 30,000
• Second Owners Share of net proceeds: 100,000 * 0.7 = 70,000
• Sale Fees:  30,000
• First Owner Total = 50,000 + 30,000 - (30,000 / 2)  = 65,000
• Second Owner Total   = 100,000 + 70,000 - (30,000 / 2)  = 155,000

If the Sale Fees are after the net proceeds as above, they are split evenly which adheres to Clause E of the Deed. First Owner has 65,000, Second Owner has 155,000.

If the Sale Fees are before the net proceeds then the Second Owner who has the bigger share is paying a larger proportion of the Sales Fees:

Sale Fees paid before net proceeds:

• Total Sale Proceeds: 500,000
• Sale Fees: 30,000
• Mortgage: 250,000
• First Owner Initial Contribution: 50,000
• Second Owner Initial Contribution: 100,000
• Net Proceeds: 500,000 - (30,000 + 250,000 + 50,000 + 100,000) = 70,000 to be split 30/70
• First Owners Share of net proceeds = 21,000 (meaning they have paid 9,000 of the sale fees)
• Second Owners Share of net proceeds = 49,000 (meaning they have paid 21,000 of the sale fees)
• First Owners Total  : 50,000 + 21,000 = 61,000
• Second Owners Total: 100,000 + 49,000 = 149,000
Here, of the 30,000 sale fees, the First Owner pays 9,000 while the Second Owner pays 21,000. This is not even. In other words, the second owner is penalised on the mortgage payment fee (and other costs of selling) because they put in a bigger deposit.

First Owner is stipulating that Clause 2 Declaration of Trust dictates that the percentage split is based on net proceeds and that net proceeds are calculated by subtracting the sale fees from the total sale proceeds FIRST.

Second Owner argues that this would breach the Deed which specifically expresses that Mortgage Payments (including redemption fees etc.) are paid evenly. They argue that the proceeds of the sale are split first, and then the fees should be paid afterwards (which would be an even split of Mortgage Payments and therefore compliant with the Deed).

So who is right?

Here are the key clauses in The Declaration of Trust:

------

BACKGROUND
(E) The First Owner and the Second Owner intend to contribute towards the Mortgage Payments equally

1. Interpretation
1.1 Definitions:
Mortgage Payments: amounts due by way of mortgage interest or mortgage capital repayment and other amounts payable under or in connection with any mortgage secured on the Property.
Expenditure: sums paid in respect of any of: a) Mortgage Payments, b) endowment, c) any Improvements, and d) incidental costs incurred in the sale of the Property relating to estate agents fees, legal fees and disbursements.
Total Expenditure: total of a) the First Owners Initial Contribution; b) the Second Owners Initial Contribution; and c) the total of the sums specified in clause 3b and clause 4b.

2. Declaration of Trust
The First Owner and the Second Owner declare that they hold the Property, its net proceeds of sale and its net rents and profits on trust for themselves as tenants in common in the percentages shares specified in:

a) Clause 3 for the First Owner; and
b) Clause 4 for the Second Owner

3. First Owners Share

First Owners percentage share shall be calculated by dividing the total of: a) the First Owners Initial Contribution; and b) all sums paid by the First Owner in respect of the Expenditure, by the Total Expenditure and then multiplying the result by 100.

4. Second Owners Share

As 3 but for Second Owner.

8 In the Event of a Requirement to Sell the Property
8.1. the Property shall be sold and the proceeds distributed in accordance with the terms of this Deed

-------

• Forumite Posts: 10,396
Forumite
edited 30 April 2021 at 1:49PM
Hi there.

Yes, it makes sense to treat the early repayment charge as a cost of the sale, but even more accurately it should be treated together with the outstanding mortgage balance as representing part of the mortgage lender's interest in the proceeds of the sale.

But either way it does not matter as you are looking to find the NET proceeds of the transaction, after all these costs.

But unless I have misread, both calculations you present make no sense to me.

Specifically this section in both examples:

• Total Sale Proceeds: 500,000
• Mortgage: 250,000
• First Owner Initial Contribution: 50,000
• Second Owner Initial Contribution: 100,000
• Net Proceeds: 500,000 - (250,000 + 50,000 + 100,000) = 100,000 to be split 30/70

You are taking the proceeds of the sale, deducting the mortgage which makes sense. But then you are also deducting the initial contributions, which does not appear to be something the deed specifies. And THEN you are splitting them according to this 30/70 rule, a number which should already incorporate the effect of those unequal initial contributions.

Under the deed clauses I can see, the initial contributions are ONLY relevant to establishing the 30/70 split (or whatever the right number is), as per clauses 3&4.

You appear to be either double-counting them, and/or trying to mix them in to the calculation where they are not relevant (I don't know how you actually arrived at 70/30).

(You can also tell that your maths is wonky because the sum total of both owners' total proceeds is not the same in each example; 220k in the first example and 210k in the second. That should not happen.)

The mathematics should go something like this, I think:

- First owner's contribution is 50k. First owner's expenditure is 30k (I do not know this figure, so I have to make it up).
- Second owner's contribution is 100k. Second owner's expenditure is 30k.
- Total expenditure is 50k + 30k + 100k +30k = 210k.
- First owner's share is (50k + 30k) / 210k = 38%
- Second owner's share is (100k + 30k) / 210k = 62%

THEN we move onto the sale

- Gross sale proceeds = 500k
- Mortgage = 250k
- Sale costs = 30k
- Net sale proceeds = 500k - 250k - 30k = 220k.

First owner gets 0.38 * 220k = 83.6k
Second owner gets 0.62 * 220k = 136.4k

Obviously:
a) I may have made a mistake in interpretation or calculation, so triple-check. But I am pretty sure you have made mistakes.
b) I did not have all the variables, so put in the numbers that are right, specifically for the expenditure of the two owners.

On a re-read, I also note that you talk about mortgage payments being split evenly, but that is not something that appears in the deed clauses you have quoted, so it is difficult to comment on that aspect of your situation.

However, I would strongly argue that the early redemption charge is a cost of the sale, not a mortgage payment. It is directly connected to, and in fact caused by, the sale. If the sale were not happening, the charge would not be incurred. I think it would be difficult to interpret it any other way.

• Forumite Posts: 1,534
Forumite
edited 1 May 2021 at 2:03PM
Sale value of house
less
mortgage redemption figure (the full amount that is required to redeem the mortgage which you have both paid equally)
less
solicitors fees
less
estate agents fees

From THAT balance, take off each parties initial contribution

THAT gives you the net proceeds to divide the remaining proceeds 70 : 30

• Forumite Posts: 42,189
Forumite
It ain't ready to be split until EVERYTHING has been paid out of it...
• Forumite Posts: 46,882
Forumite
That looks like a very poor DOT on quick read as it talks about total expenditure if that includes mortgage payments.

Will do a more in-depth later.
• Forumite Posts: 46,882
Forumite
B_Real_2 said:

Here are the key clauses in The Declaration of Trust:

------

BACKGROUND
(E) The First Owner and the Second Owner intend to contribute towards the Mortgage Payments equally

1. Interpretation
1.1 Definitions:
Mortgage Payments: amounts due by way of mortgage interest or mortgage capital repayment and other amounts payable under or in connection with any mortgage secured on the Property.
Expenditure: sums paid in respect of any of: a) Mortgage Payments, b) endowment, c) any Improvements, and d) incidental costs incurred in the sale of the Property relating to estate agents fees, legal fees and disbursements.
Total Expenditure: total of a) the First Owners Initial Contribution; b) the Second Owners Initial Contribution; and c) the total of the sums specified in clause 3b and clause 4b.

2. Declaration of Trust
The First Owner and the Second Owner declare that they hold the Property, its net proceeds of sale and its net rents and profits on trust for themselves as tenants in common in the percentages shares specified in:

a) Clause 3 for the First Owner; and
b) Clause 4 for the Second Owner

3. First Owners Share

First Owners percentage share shall be calculated by dividing the total of: a) the First Owners Initial Contribution; and b) all sums paid by the First Owner in respect of the Expenditure, by the Total Expenditure and then multiplying the result by 100.

4. Second Owners Share

As 3 but for Second Owner.

8 In the Event of a Requirement to Sell the Property
8.1. the Property shall be sold and the proceeds distributed in accordance with the terms of this Deed

-------

The problem with this sort of trust is it does not work for all the ranges of values and deposits its a very poor algorithm in most cases.

It also does not take account of the timing of any payments which can skew the payouts

Also the distributions become dependant on mortgage rate as mortgage payments are included.

• Forumite Posts: 1,071
Forumite
If it had all lasted longer and the penalty not had to be applied and hpi increased the value even more would the person putting in the higher deposit have been complaining their profit was too high and not fair ?

• Forumite Posts: 46,882
Forumite
Your example  has information missing for this clause

Expenditure: sums paid in respect of any of: a) Mortgage Payments, b) endowment, c) any Improvements, and d) incidental costs incurred in the sale of the Property relating to estate agents fees, legal fees and disbursements.

what are all these in particular the mortgage payments as they make a difference to the ownership

What is clear is that these costs of sales change the %  ownership as they need to be included in the calculations.

Clause 2 is pretty clear it is net proceeds.

costs of sale is £30k mortgage  £250k  in the absence of any clause say 50:50 for both

£500k - (£30 +£250)

NET proceeds £220k

there are no clauses you get your deposits back first.

clauses 3,4 clear on the calculation of % ownership for distribution of net proceeds

we don't have all the costs that need to be included

lets work with what we have.

1 £50k + £15k
2 £100k + £15k

total £180.

Shares are
1. 36%(£79,200)
2. 64%(£140,800)

Now an estimate of the missing bits to show the effect.

we don't have the details of the mortgage but we can guess and say 2year of payments.

£263k at 2.2% over 30years is £1kpm and would have £250k left  that's £12k in mortgage each.

1 £50k + £15k + £12k
2 £100k + £15k + £12k

total £204.

Shares are
1. 37.75%(£83,050)
2. 62.25%(£136,950)

Equitable based shares would have been

using that same mortgage £263,000
buying at £413k  with £100k and £50k down

(£50k  + £131,500/£413k = 44%
(£100k+ £131,500)/£413k = 56%

Mortgage is 50:50 after costs before taking of the mortgage debt(you could argue a good case the ERC is mortgage cost)

net is £470k  £206,800 and  £263,200  less £125k mortgage each

1. £81,800
2. £138,200

• Forumite Posts: 46,882
Forumite
Ok you need to start again.

Follow the deed of trust as you are taking the initial contribution off to calculate net proceeds the DOT does not include that.

Why don't people stress test their DOT and come to mutual understanding what the terms mean.

That one is very poor as it includes mortgage payments

• Forumite Posts: 46,882
Forumite
If it had all lasted longer and the penalty not had to be applied and hpi increased the value even more would the person putting in the higher deposit have been complaining their profit was too high and not fair ?

Because the share is including mortgage payments it trends towards flavouring the lower deposit over time.

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