Problems with family contributions towards the purchase of a family home on divorce/separation
There are many situations when family relatives contribute towards the purchase of a property. An example is parents helping a child who is a first time buyer. Another example which is becoming more common is for elderly parents to sell a home and make a contribution towards a larger family home. These contributions can come into question if the relationship between the adult child and his/her husband/wife breaks down and there is a permanent separation/divorce. In this situation there is frequently a dispute about who owns what.
To avoid this it is very important for there to be a Deed of Trust or other formal document recording the acquired legal interest of the donating party. Unfortunately, it is frequently the case that a formal document is not drawn up and the family members have worked on verbal agreements. This can result in substantially increased costs and delay if there is an issue about whether the legal title of matrimonial property accurately reflects the beneficial ownership. It can also mean the generous parent is at risk of losing what they contributed.
If there is a dispute, other family members can be joined to the financial proceedings on divorce/separation, so that the Court can decide who owns what in advance of dividing the assets between the divorcing couple. This can be expensive but may be necessary. Failure to join to the proceedings between the divorcing couple a third party who has an interest in the matrimonial property can result in serious costs consequences and delay.
In the case of Fisher Meredith v JH and PH there was a dispute as to who owned shares in a company. In the Judgment on appeal of Mostyn J, he identified two types of case where joining a third party would be an issue:
Where the legal title to property in dispute is held in the name of a third party and the claimant asserts that the other spouse is in reality the beneficial owner. In this type of case, the onus is on the claimant to join a third party in the early stages of the case.
Where the spouse asserts that he/she holds the legal title on behalf of others, the duty is not so clear cut. In this type of case, the duty to apply for joinder lies primarily and equally on the non-legal owner, third party and the spouse who makes the assertion.
In either category, the onus is on the person asserting that the beneficial ownership is different to the legal ownership to take action and failure to join third parties where necessary will lead to wasted costs orders.
It is essential where a dispute arises about ownership of property in financial proceedings between a spouse and a third party that:
- the third party should be joined to the proceedings at the earliest opportunity
- directions should be given for the issue to be fully pleaded by Points of Claim and Points of Defence
- separate witness statements should be directed in relation to the dispute; and
- the dispute should be directed to be heard separately or as a preliminary issue, before the Financial Dispute Resolution hearing (without prejudice settlement meeting in the divorce proceedings with a Judge)
Such proceedings can be avoided if a Trust Deed or other formal document was executed at the time of the original contribution.
There can also be problems if monies are loaned by one family member to another who subsequently gets divorced. The general public may not be aware that if a parent loans monies towards the purchase of a property for an adult child, the Family Court has the power to decide that the loan was a ‘soft debt’ and that it should therefore be ignored by the Family Court when deciding what should happen to the property. The Court may decide a debt is a ‘soft debt’ if it forms the view the lender would not ask for repayment if it were not for the divorce. Therefore if making a loan to a family member, it is extremely important to have a formal loan agreement or a charge registered against the property securing the loan.
To avoid the costs and stress of litigation it is very important to consult your solicitor to ensure you have the necessary trust deed or agreement drawn up at the time the parent contributes towards the adult child’s property.
If you would like any further information or advice with regard to the above, please contact:
Partner and Head of Family
T. 020 727 7448
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.