Safeguarding your finances as a cohabitee: is a cohabitation agreement necessary?

Our Private Client team considers the law surrounding the protection of cohabitees when a relationship breaks down.

It can come as a surprise to many unmarried couples who are living together in a long-term relationship that they are treated in law as separate individuals and have no automatic rights against each other if they split up - there is no such thing as a ‘common law marriage’.  Such unmarried couples who live together are often referred to as cohabitees and this term is used throughout this article.

Buying your own home is undoubtedly a momentous milestone, and one which many will undertake with the supporting arm of a partner or family. In fact, the Mortgage Advice Bureau in 2020 reported a 60% year-on-year increase in joint mortgage applications from cohabiting couples, whilst the Office for National Statistics found the cohabiting family to be the fastest growing family structure, with a 23% increase in the last decade. For most, a property will represent the most expensive purchase of their lifetime, and yet few couples give significant up-front thought to the preservation of their own financial interests. It is little surprise, however, as few wish to dwell in significant measure on the possibility of a future breakdown of the relationship. It remains crucial, however, that couples consider the issue as early as possible to abate the risk of costly and acrimonious litigation further down the line.

Cohabitants’ interests in property without a cohabitation agreement or express declaration of trust

Co-ownership of property is a complex area of law, the application of which is highly dependent on the individual circumstances of each case. With this in mind, however, it is possible to outline some of the general principles applied by the courts in the absence of any formal record of the interests and intentions of a couple. 

The legal owner of a property is the person who owns the legal title of the land, whereas the beneficial owner is the person who is entitled to the benefits of the property. As a starting point, the law presumes that the beneficial ownership of a property mirrors its legal ownership. In other words, if a couple jointly purchase a property and are both recorded as legal owners on the title deeds, then they are assumed to be joint beneficial owners entitled each to 50% of the proceeds of any later sale. Though this may be perfectly acceptable for some couples, those who contribute unequally may wish to ensure their greater interest is protected. With the present direction of the housing market, family members are increasingly likely to contribute financially through gifts and loans to allow younger relations to enter the property ladder. This arguably makes the protection of an interest in a property, in the event that the relationship breaks down, of even greater importance.

This starting point applies equally to properties owned in law by only one partner: it is presumed that they are entitled to 100% of the proceeds of any future sale. This may come as a shock to those who move in with their partner after the initial purchase of the property, especially where they make financial contributions to the property or general day-to-day expenses. 

In both instances, this presumption may be challenged by either partner seeking to demonstrate that the beneficial interest that they own in the property should not follow the legal position, on the basis that a ‘common intention constructive trust’ has arisen. The creation of such a trust does not have to be in writing and can be established by finding an express common intention. The partner challenging the presumption will have the heavy burden of demonstrating to the court that the parties did intend their beneficial interests to be different from their legal interests, and in what way. In quantifying the precise shares owned by each partner, the court will undertake a complex and highly fact-dependent assessment of the whole course of conduct of the parties, including a consideration of any intentions recorded in documents or discussed expressly, the parties respective contributions to the property and other expenses, the organisation of their finances, and the purpose for which the property was acquired.

An express declaration of trust

As can be seen in this brief account, protecting your financial interests as a cohabitee can be an unpredictable, costly and intrusive process. This is why proactivity is so important: creating a formal record of the couples’ respective ownership positions is the first step to providing financial clarity and peace of mind against unanticipated changes in personal circumstances. A ‘declaration of trust’ is a legal document that records the ownership of an asset. If the legal title to the property is held in only one partner’s name, the owning partner can declare that they hold the property on trust for the benefit of both of the parties, and in what shares. If the legal title is held in both names but the couple wish to own the property in unequal shares, a declaration of trust can clearly record the share that each party owns.

Cohabitation agreements: a more comprehensive record

Cohabitation agreements can go further in protecting the financial interests of a couple during the time that they live together and in the event of:

• the breakdown of a relationship;
• the illness of a partner; and/or
• the death of a partner.

As well as recording the beneficial ownership of a property, cohabitation agreements are capable of capturing ancillary arrangements associated with the sale of a property and/or the end of the relationship, to facilitate more comprehensive financial planning. For example, it is possible to set out how savings and jointly owned assets will be distributed should the relationship come to an end. Cohabitation agreements can also record the obligations of each  partner to contribute towards household expenses including tax, repairs, food, and insurance during the relationship. More general aspects of personal finance may also be agreed, such as the extent to which the couple’s finances will be amalgamated through joint bank accounts. Some also wish to make financial provision for their partner notwithstanding the end of the relationship, or for children of the couple.

Cohabitation agreements are not just for romantic relationships and can be equally useful for other types of cohabitees, such as friends or siblings. 

Other considerations when cohabiting

To ensure that assets pass as you intend on death and that loved ones are sufficiently provided for, a valid Will should be put in place to sit alongside the cohabitation agreement. For more information on the provision for cohabitees on death, see our article on the importance of Wills and the myth of ‘common law marriage’.

The best way to safeguard your financial interests with peace of mind is to act early, rather than at a time when the relationship may be more strained, and take appropriate advice tailored to your personal circumstances.