You are instructed by a married couple, or a couple who are in a civil partnership, to buy a house in joint names which they intend to live in, i.e. a matrimonial or marital home. One of them is introducing capital which was acquired before marriage, either inherited or a gift, or they are buying a more expensive home using part or all of the proceeds of sale of a property which was in the name of one of them. There is an unequal contribution towards the purchase.
In one such case a husband and wife married and bought a property in 2002 for £400,000, taking a mortgage of £200,000. The balance came from the sale of the husband’s flat. Title was taken in joint names. They separated in 2005. The property was then worth £600,000 with a mortgage of £200,000, leaving £400,000 of equity.
They now wish to sell the house.
The husband suggests that from the sale proceeds he receives his £200,000, plus £100,000 being one half of the remaining £200,000 equity, with his wife receiving £100,000 representing the other half. To the husband this seems fair. They both earn the same amount and have made equal contributions to maintaining the property.
The wife’s view is that is unfair. As title is in joint names, she is of the opinion that she is entitled to one half of the equity of £400,000, i.e. £200,000.
An adverse precedent
The difficulty for the husband is the decision of Lord Macfadyen in Cunningham v Cunningham 2001 Fam LR 12. In that case the wife had used £50,000 of inheritance to assist in buying the matrimonial home. On separation she sought repayment of £50,000 prior to the matrimonial property being shared, as it was not matrimonial property. Lord Macfadyen disagreed as she had invested the money in a particular type of investment, a matrimonial home. He said: “Money used to purchase the matrimonial home is, in my view, devoted in a particularly clear way to matrimonial purposes and the source of funds used is, in my view, less important than it would be in the case of other types of matrimonial property.”
There is more to a matrimonial home than investment solely, or even at all. It is the home in which lives are going to be lived. For that reason the court treats that particular investment/item of matrimonial property as different from other matrimonial property.
The effect of the Cunningham decision is that the husband in our example is not guaranteed return of his investment, and has to argue his case under the exceptional circumstances or source of funds provisions of the Family Law (Scotland) Act 1985 to attempt to recoup his investment.
In this particular example the case settled shortly prior to proof with an agreement that the husband received return of £50,000 of his original investment of £200,000.
One in two married couples separate. Cunningham was decided in November 2000. Did the husband have a claim for professional negligence against the solicitors who acted in the sale and purchase in 2002 for failing to advise him that he would not be guaranteed return of his original investment of £200,000 on separation?
I am unsure whether or not the solicitors were negligent. However the client was sufficiently concerned that he sought the opinion of counsel.
How can we advise the couple in such a situation to avoid a claim for professional negligence?
There are three options to protect an investment:
- Title could be taken in unequal shares.
- A second security could be taken over the property in favour of the husband.
- A pre-marriage contract or a cohabitation agreement could be signed, recording that the funds being introduced by the husband are not matrimonial property.
(a) Disposition – unequal shares
In our example, of the purchase price of £400,000 the husband introduced £300,000, i.e. £200,000 investment and £100,000 as one half of the mortgage, and the wife £100,000, one half of the mortgage. If title were 75% in favour of the husband and 25% in favour of the wife then on a sale of the £400,000 equity the husband would have received £300,000 and his wife £100,000. This would only apply if it were a stand alone sale and there was no requirement to consider the provisions of the Family Law (Scotland) Act 1985. The wife however could argue that as it is a matrimonial home, taking title in unequal shares should not guarantee the husband on separation return of his original investment.
(b) Second security
For there to be a security over the property for the original investment of £200,000, you would have to consider the following:
- interest on the capital sum;
- the rate of interest;
- whether the sum is repayable on demand; and
- any provisions which would entitle the husband effectively to repossess his own property.
As the Land Register will not register a security by both parties in favour of one, the security has to be over the husband or the wife’s half share.
You would also have to cover the situation of a remortgage or sale if the couple use the monies to buy another property. Will the original security be discharged? Do you then have a further security over the new property? Do you also need the consent of the prior lender?
If the couple separate, does the husband get back his original investment of £200,000, or can his wife argue that as it is a matrimonial home, according to the Cunningham case her husband is not entitled to recover his original investment? The wife could say that the security was to protect the husband’s investment against a third party creditor and does not prevent her making a claim against her husband’s share of the equity. Much depends on why the security was granted, which involves looking at the legal advice provided.
(c) Cohabitation agreement
The couple could enter into a cohabitation agreement stating that the husband’s £200,000 is not matrimonial property and that the wife cannot make a claim on this money on separation. The agreement would also have to deal with the matrimonial home being sold and another property being bought. It is important to emphasise to the husband and wife that whilst the document may be persuasive, on divorce it is not possible to have an agreement which can be free from challenge. As the agreement cannot be challenged after divorce (s 16 of the 1985 Act), the only means of obtaining redress would then be a claim against the solicitor.
Whether the cohabitation agreement will stand up to challenge depends on the length of the marriage, the other assets, and contributions which the husband and wife have made during the marriage. The wife would have to have the agreement set aside as it records that the husband’s original investment is not matrimonial property. A cohabitation agreement, being an agreement between the parties, does not affect any claim by third parties such as heritable creditors.
It appears to me that the only way that the husband can guarantee recoupment of his original investment is either:
- for the title to be taken in unequal shares together with a cohabitation agreement; or
- a security in the husband’s favour together with a cohabitation agreement.
Dealing with conflict
All of these options pose difficulties for conveyancers. If you are asked to act for a couple who wish title in unequal shares, or a security, what advice – if any – can you give them? Is there a conflict of interest?
In the particular example there is a conflict of interest. You cannot advise the husband to protect his original investment, as that prejudices the wife’s position, and you cannot advise the wife as that prejudices the husband’s position. They both require separate legal advice about title in unequal shares, a security and a cohabitation agreement.
If you are asked about title being taken in unequal shares, a security or a cohabitation agreement then you can advise only one client. The other party has to have independent legal advice.
How do you deal with all of this in practice? My advice would be as follows:
- You explain to the clients buying a property in joint names that they should consider the shares they would wish title to be taken in.
- Explain that title can be taken in unequal shares. You require to advise them that this cannot guarantee recoupment.
- Explain that a security could be taken over the property to be granted in favour of the one who is contributing more to the price. You require to advise them that this cannot guarantee recoupment.
- Explain that they should enter into a cohabitation agreement; and
- Terms of business should be sent to each client individually and these should be signed and returned.
If the client, having received that advice, elects to do nothing then you can proceed to take title in joint names.
The 1986 Practice Rules, rule 3 indicate that a solicitor should not act for two or more parties whose interests conflict. Rule 5(1)(f) indicates that in the case of a loan to be secured over heritable property, you can only act for both parties if the terms of the loan have been agreed between the parties and the granting of the security is only to give effect to such an agreement. This confirms that you cannot discuss the terms of the security with the clients.
If the couple wish a security then you will become involved in discussing the terms of the security. You cannot advise them both independently. You cannot force anyone to take independent legal advice, but any correspondence sent to the other party should indicate that they are entitled to take independent legal advice. Once the terms of the security or the disposition in unequal shares and the cohabitation agreement have been agreed, you can continue with the purchase. At that point the conflict no longer exists.
Any advice you provide about title in unequal shares or the preparation of the security should be the subject of a separate fee charging agreement.
With a cohabitation agreement there is a conflict of interest. There is an argument for sending both parties to other firms. That may represent your best prospect of retaining both clients.
Provided you advise the clients of the position, they will be able to balance this advice with other non-financial issues. The purchase of a matrimonial home is more than a financial investment. Speaking with your partner about unequal sharing, a security or pre-marriage contract is difficult. Most people are not good at having difficult conversations and may acknowledge the advice you provide and then do nothing further. To do otherwise may signal the end of the relationship.
However you will have advised your clients of the potential difficulty and suggested a resolution. If the clients choose not to take the advice further, it is more difficult for you to be criticised later.
If you do not raise this and the relationship ends, one of your clients may look to you for redress if they are unable to obtain satisfaction in a separation negotiation.
Rights of cohabitants
As from 1 May 2006 the Family Law (Scotland) Act 2006 provides rights to cohabiting couples.
As the provisions of the 2006 Act mirror some of the provisions of the Family Law (Scotland) Act 1985, case law for married couples will be relevant in dealing with cohabitants’ rights, including the Cunningham case.
When acting for a couple who live together or propose to live together, your advice should be no different from that given to a married or civil partnership couple.
Tom Quail is a partner in Andersons LLP, Glasgow and an accredited family law specialist
PROOTECTING FUNDS: THE OPTIONSThere are three options to protect a party’ investment: title could be taken in unequal shares;
a second security could be taken over the property in favour of the husband; or a pre-marriage contract or a cohabitation agreement could be signed, recording that the funds being introduced by the husband are not matrimonial property.
Each has its drawbacks.
In this issue
- CGT: Don't lose out on 6 April 2008
- Bank charges and the Unfair Terms Regulations
- One Scotland, many cultures?
- Promoting our ideals
- Out of the wrong pocket
- Market movers
- In and out of court
- Towards an efficient system
- Keeper's rejection of registration applications
- Financial health check
- Before the axe falls
- Summary trials: deciding the facts
- The cost of guardianship
- CSR takes centre stage
- Beyond the principles
- Question of technique
- Time's up
- Persons liable
- Fair competition or own goal?
- Always the Land Court?
- Rewriting the DDA?
- Away win for Webster
- Points of entry
- Website reviews
- Book reviews
- Banding together
- Name, rank and number
- Family law for conveyancers