Tenants in Common, unequal deposits, no deed of trust, going wrong!

Wishment

I am trying to help a friend who cannot afford a costly solicitor at the moment.  7 years ago she (A) bought a house with a friend (B), for A to live in (no intention by B to ever live in it but she wanted a property investment) using unequal deposits of 2/3 (£24k) from A and 1/3 (£12k) from B.  They were tenants in common but the intention was that B never lived in the house, nor was she to pay any mortgage payments, or costs of insurance, refurbishment costs etc.  It was agreed that A was to pay all the mortgage costs etc.  B had to be jointly on the mortgage as that was the requirement of the bank but B hasn't had to pay a single penny in 7 years.  B had a mate who was a solicitor who was instructed by B to prepare a deed of trust as well as do the conveyancing.  Draft deed of trust showed A and B sharing the property equally despite unequal deposits, but it was never agreed or signed as A was concerned that it didn't represent her interest and although she raised issues, they were not dealt with.  At no time did the solicitor ever check with A that she understood the implications of agreeing to 50% ownership despite unequal deposits and B not intending to pay any mortgage costs.  Solicitor should have told A to get independent legal advice but did not.  Solicitor just dealt with B and copied in A in emails.  B was adamant all along that she wanted a 50% interest in the property (she had made other property investments and knew what she was doing).  Solicitor entered the shares of the tenants in common on land registry docs as 50:50 at completion, A and B signed them, and the deed of trust was forgotten about.  A did not understand the implications of this at the time and how it would affect her interest in the property.  B clearly understood exactly how things worked.

B now wants her profit out on "her half of the house".  The house is worth about £50k more than original purchase price, with about £20k capital paid off, so after deduction of £30k of mortgage interest plus a few thousand of improvement costs, there is about £25k notional profit each at 50:50.  A doesn't want to sell the house, but wants to buy out B.  B will not agree a valuation of the house with A.  She will not accept the average of x5 local estate agent valuations as the value. She has suggested using a local chartered surveyor to do a formal valuation, which we are advised by the estate agents costs about £600 and will inevitably be lower than the market values arrived at by the estate agents.  

A has therefore made B a reasonable offer of £25k based on a value derived from the average of estate agent values and a 50% share in notional uplift in value after deducting all mortgage costs, costs of buildings insurance and improvements and repaying her initial deposit.  A will have to borrow all of this amount from the bank to repay B, so it is in fact dependent on the bank being ok to lend A the extra money.  B has rejected the offer and is claiming £70,000 based on a made up inflated value that is not backed by any evidence, plus has refused to have any of the mortgage costs allocated to her in the calculation as she says she should have been paid rent on her half of the house for the last 7 years, on top of all the mortgage payments A was making. A and B never discussed the absent party being paid rent so this is a completely new argument put forward by B to try to get more money out of A.  

We have tried mediation and it failed.  B was not listening to any argument, was not logical and just ranted and talked over the mediator.  I am thinking that we should get agreement to pay half of a chartered surveyors costs and when they have valued the house, make a revised offer, which is likely to be less than £25k which we offered before.  Unless B accepts a revised offer, she would have apply to court for an order for sale at which point A would attempt to prove that the beneficial shares in the property are in fact unequal and the solicitor did not do her job properly.  A would absolutely want to avoid a costly court case.

Sorry for the essay, but has anyone met this sort of thing before and resolved it without going to court?  Is it inevitable if B did take A to court for an order to sell, that a court would uphold a 50:50 split, given this is what was on the land registry form and they have never been a co-habiting couple?  Any other ideas to help resolve this would be gratefully received as I have just about run out of them......  

anselld

The TR1 form on which te 50:50 ownership split is recorded is actually a deed of trust and A has signed it.  Unfortunately it is a simple one that only records ownership rather than allocation of costs, deposits, etc.  So in the event of a forced sale the default position would simply be 50:50 split of sale proceeds after immediate sale costs.  There is no recognition of uneual deposits or mortgage contributions etc.

Even if it had been properly recorded it is optimistic for A to deduct deposit, mortgage, insurance and all renovation costs prior to the split of profits since A has had the benefit of being the sole occupant of the property.  This is probably what B is getting at with the demand of rent.  Perhaps rent is not the right way to treat it but neither is deducting every running cost and effectively living in the asset "rent-free" for 7 years.

Suggest A makes a more realistic offer which recognises the benefit she has derived from living in the property for 7 years.

unforeseen

Does B realise that they will be liable for CGT? Although it may fall within their allowance

Annisele

I agree with anselld that A's current offer is unrealistic. But before she makes a new one, I think it'd be worth her having a chat with a mortgage broker. If A can't afford to borrow enough to buy B out, the unfortunately the whole "what is a fair offer" thing might be moot, and the house is ultimately going to have to be sold.

Caz3121

Wishment said:

The house is worth about £50k more than original purchase price, with about £20k capital paid off, so after deduction of £30k of mortgage interest plus a few thousand of improvement costs, there is about £25k notional profit each at 50:50.  A doesn't want to sell the house, but wants to buy out B.  B will not agree a valuation of the house with A.  She will not accept the average of x5 local estate agent valuations as the value. She has suggested using a local chartered surveyor to do a formal valuation, which we are advised by the estate agents costs about £600 and will inevitably be lower than the market values arrived at by the estate agents.  

We have tried mediation and it failed.  B was not listening to any argument, was not logical and just ranted and talked over the mediator.  I am thinking that we should get agreement to pay half of a chartered surveyors costs and when they have valued the house, make a revised offer, which is likely to be less than £25k which we offered before. 

based on your post
£36k deposit and £20k capital reduction....to have 50% of the equity being less than £25k would imply the property has reduced in value over the past 7 years rather than increased
If the £50k increase is correct then equity should be around the £106k mark, offering £25k would translate are giving deposit back and only 25% of the increase in value so not surprised was rejected

[Deleted User]

As far as I know the courts can overturn the ownership split if there has been a marked changed in how the property was intended to be used.   For instance if A&B lived together and B moved out and didnt pay anything then this would be taken into account by the courts.  

However,  in this instance there has been no alteration of how the property was intended to be used.  A was intending to live there and B wasn't. A was to pay the costs and B wasn't.   So the situation that is in real life mirrors what the initial intention was.   So after that there is only a signed document saying it is 50:50 ownership.   So I cant see why a court would go against B being entitled to 50% of whatever equity there is.  Unequal deposits is more common than not in my experience

The question of independent legal advice appears a red herring as A was intending to hold greater rights over the property than B. So if anyone should have had independent advice documented then it should have been B.   

A lack of understanding isnt a defence can evidence that concerns were raised and ignored by the solicitor.   The solicitor emailing B and copying in A appears fairly standard practice when dealing with multiple people.   I assume at some point the solicitor obtained confirmation from A that she wanted to proceed with the transaction and was happy to exchange and complete?  

p00hsticks

Wishment said:

B will not agree a valuation of the house with A.  She will not accept the average of x5 local estate agent valuations as the value. She has suggested using a local chartered surveyor to do a formal valuation, which we are advised by the estate agents costs about £600 and will inevitably be lower than the market values arrived at by the estate agents.  

Surely if the surveyor will value the house lower it is in A's interest to agree to this way of fixing the price ?

I agree with the others that if A wants to deduct all mortgage interest, insurance, renovation costs and deposit it should be balanced on the other hand by some nominal rental value to reflect the fact that A has had the entire house to live in. And as Annisele says, A needs to confirm that they are able to get a mortgage by themselves to buy B out, otherwise all this is moot.

getmore4less

Deleted_User said:

As far as I know the courts can overturn the ownership split if there has been a marked changed in how the property was intended to be used.   For instance if A&B lived together and B moved out and didnt pay anything then this would be taken into account by the courts.  

However,  in this instance there has been no alteration of how the property was intended to be used.  A was intending to live there and B wasn't. A was to pay the costs and B wasn't.   So the situation that is in real life mirrors what the initial intention was.   So after that there is only a signed document saying it is 50:50 ownership.   So I cant see why a court would go against B being entitled to 50% of whatever equity there is.  Unequal deposits is more common than not in my experience

The question of independent legal advice appears a red herring as A was intending to hold greater rights over the property than B. So if anyone should have had independent advice documented then it should have been B.   

A lack of understanding isnt a defence can evidence that concerns were raised and ignored by the solicitor.   The solicitor emailing B and copying in A appears fairly standard practice when dealing with multiple people.   I assume at some point the solicitor obtained confirmation from A that she wanted to proceed with the transaction and was happy to exchange and complete?  

A is the one that  needed independent advice as they got done over with the deal.

The capital input by B bought a small proportion of the property but a much higher proportion of the uplift.

Without the mortgage size not possible to determine a fair distribution.

Wishment

Thanks everyone, very helpful comments that confirm that the position is probably worse than we thought.  I completely get the point that if A cannot borrow the money she will have to sell, presumably only if B forced the point by obtaining a court order?  Does anyone know how much it would cost to obtain a court order?  

The deed of trust that wasn't signed did in fact contemplate that on sale or buying the other party out (i) the mortgage would be redeemed / an amount representing the amount of mortgage remaining would be deducted; (ii) the deposits would be paid back in the amounts put in; (iii) the total mortgage payments (capital and interest) would be deducted from the remaining equity; and (iv) the remaining equity would be divided equally.  No mention of rent at all - it was not in the contemplation of the parties.  There are lots of emails between the parties showing that this was their agreement that they wanted to document, plus additional comments from A asking about unequal deposits as she was concerned.  I think I will run the numbers again based on what would have been the case if the deed of trust had been signed. If we can then agree the valuation using a chartered surveyor that should give the right answer.  Who knows if B will accept it though.

Wishment

Caz3121 I haven't explained the numbers correctly, sorry.  There is an increase in the value of the property and on my spreadsheet they do work out to give an equity of about £75k after deducting the deposits, from which I have then deducted mortgage payments and improvement costs, divided in half then added the deposit back in to reach an amount approx £25k to be returned to B.

Wishment

unforeseen said:

Does B realise that they will be liable for CGT? Although it may fall within their allowance

Unforeseen, we are aware she will be liable for CGT subject to her allowance but I don't think B has thought about it yet.