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A Deed of Trust – what it is and why it’s important to have one

A Deed of Trust

If you and another person are planning on buying property together as an investment, then it is extremely important that you obtain a Deed of Trust as protection for the investment. When you approach an agent to help you with the purchase of the property, they will ask you if you want to be tenants in common or joint tenants. These options are entirely different from each other, and it will be up to you and the other person entirely, which option you go for, according to your individual financial circumstances. 

How do tenants in common and joint tenants differ?

These two options differ in the following ways:

  • Tenants in Common – is the option you would go for if you and the other person prefer it that your share of the property goes to your family, or if you are investing different amounts of money. This type of Deed of Trust is created as protection for your individual investments.
  • Joint Tenants – usually, when you buy a property with another person, you are recorded as joint tenants, meaning that, if either of you passes away at some point, the other person automatically inherits your share of the property.

What exactly is a Deed of Trust?

Also referred to as a Declaration of Trust, a Deed of Trust is a legal paper used by tenants in common to show what amount of money each person has invested in the property. Since these different amounts are recorded in black and white, if the property is sold at a later stage, each of the persons involved will receive the same amount of money that they invested in the first place.

For whom should a Deed of Trust be created?

Although couples normally take out a Deed of Trust, it is also available for use by friends or family members who are investing together in a property.

 

A Deed of Trust will more-than-likely not be necessary if both persons are spending the same amount of money on the investment. The reason for this is, that when the property is sold at any time in the future, the final amount that the property is sold for, will simply be split evenly between the two parties after legal costs have been deducted.

However, in the event that both parties have invested different amounts in the purchase of a property, then a Deed of Sale will make sure that each person gets back the amount of money that is rightfully theirs. A Deed of Sale in these cases can be extremely useful, should there be a dispute or messy break up when the property is sold.

 

For instance:

Peter and Tim decided to invest in a house together, which costs £300.00, with Peter contributing 60% of the cost and Tim only putting in the remaining 40%. Having a Deed of Trust, in this case, will protect their investments when they sell the property at a later stage, with Peter getting back the 60% he invested, and Tim, his 40%.

If the pair didn’t have a Deed of Trust, there would have been a dispute as to who owns how much of the investment, and there would be no legal way to stop Tim demanding 50%, instead of the 40% he contributed, because of the two of them owning the property jointly.

Also, should Peter have paid more towards their monthly mortgage costs than Tim, and spent money on having the house decorated as well, then this would also be recorded in the Deed of Trust, with the amount being divided properly, to indicate these additional payments.

This type of deed is referred to as a Commensurate Share and is just one of the numerous choices available.

When should a Deed of Trust be used?

The main reason why a Deed of Trust is used is to have legal records in place, of different financial contributions that are made when two people invest in property. However, there are several other reasons when it would be used, including the recording of the following:

  • The amount of money contributed by each person towards the property
  • Each of their shares in the property
  • When one of the two persons has contributed more money at some time in the future, like renovations, for instance
  • The amount that each of the two investors is responsible for, regarding bills, maintenance, and mortgage payments
  • In cases where a third party has invested money, such as a friend or family member, and does not appear on the title deed and wants to protect the amount of money that he/she has invested
  • When one of the two investors is not able to, or does not want to buy the other partner out, and wants to give up his/her interest in the property, officially

How do the Deeds of Trust work?

Deeds of Trust are flexible, so make an appointment with your conveyancing lawyer to talk about exactly what you need to be covered in your agreement. He/she will then draw up a contract which both you and your investment partner will sign. Should you want these changes to be included in your title deed, speak to your property lawyer about arranging this afterward with the Land Registry. By doing this, you will be making sure that no one can sell the property without both you and your partner’s consent.

Do I really need a solicitor to create a Deed of Trust?

Although you could create your own Deed of Trust to save money, you might end up having more problems than you bargained for. For instance, if you create your Deed of Trust yourself and get someone to sign it as a witness, it could include mistakes that you’ve made or even, might not be recognized by a court of law.

The cost of having a Deed of Trust created by a lawyer is a small price to pay compared to the large amount of money that you have invested in the property.

Obtaining a Deed of Trust properly will ensure that the property you and your partner have invested in will be well protected and perfectly secure in the future.

Why is a Deed of Trust necessary?

Similar to a prenuptial agreement, a Deed of Trust also protects the assets of each partner if they split up or there is a dispute. Despite many being under the impression that a prenuptial agreement is only for celebrities and the incredibly wealthy, the Deed of Trust can be extremely helpful to people from all walks of life.

Enormous amounts of money are at stake when properties are purchased, and since everyone buying a property is doing so under different circumstances, it is well worth it to create a Deed of Trust to protect each person’s financial contribution, as well as reduce the risk of a dispute if the relationship ends.

Besides being able to enjoy the protection provided by a Deed of Trust, your lawyer can also give you advice regarding tax and planning implications involved with purchasing a property with a partner. Your lawyer might also advise you to draw up a will, to make sure that your investment is safe, and will be inherited automatically, by anyone of your choice.

Who should you approach for a Deed of Trust?

You can do it yourself, but this is not recommended. It is highly recommended that you use a qualified solicitor you will perform this for you. You should expect to pay between £350 to £750 depending on how complex your requirements are.

Always ask the solicitor for a fixed fee quote before you instruct them.