Establishing a beneficial interest in property: why property rights do not end with the legal title
We take a look at the ways in which a beneficial interest can be created.
So what exactly is a beneficial interest?
A beneficial interest is an interest in land that gives a person a financial share in a property and/or the right to occupy a property.
In this article, we take a look at the ways in which a beneficial interest can be created as well as touch upon some of the key legal concepts that relate to property ownership.
How is a beneficial interest created?
If we start with the example of a non-married couple who choose to invest in property together and decide to register the legal ownership in their joint names, what does this mean in terms of their beneficial interests?
Registering the ownership of a property in joint names, absent a declaration of your beneficial interests, will result in the joint owners becoming joint tenants. This means that they will have equal rights to the whole property and, if one of them dies, their interest would pass automatically to the surviving joint tenant. In other words, they are both entitled to 100% of the beneficial interest in the property and if they choose to sell the property then they would each receive an equal share of the net proceeds of sale.
However, it is common for couples buying a property together to contribute towards the purchase cost in unequal shares. So, how does a party contributing more to the purchase avoid unintentionally surrendering their right to benefit from their greater financial contribution? What if one or both parties do not want their share of the property to pass to the other automatically on death? In these situations, it is common for the parties to enter into a declaration of trust at the time of purchase which will record the parties’ respective beneficial interests in the property (resulting in the parties becoming tenants in common). However. there are alternative ways to establish a beneficial interest.
How to establish a beneficial interest
There are three ways in which a beneficial interest can arise:
- by express declaration of interests
- by resulting trust
- by constructive trust
Express declaration of interests
Continuing with the example of a couple who contribute differing amounts to the purchase price; if they choose to record their unequal contributions in a declaration of trust, this is known as an express declaration of interests. As above, they would become tenants in common with separate and defined beneficial interests in the property. Unlike joint tenants, if one of them were to die their beneficial interest in the property would not pass automatically to the surviving joint tenant and would instead pass with their estate on death.
Entering into a declaration of interest in this way is the safest and most effective way to establish a beneficial interest in property, as long as there is no evidence of fraud or mistake.
A declaration of trust can also be a useful tool to protect one partner’s financial contribution to the purchase of the property if, for whatever reason, they are not registered as a joint legal owner.
What if a person makes a financial contribution to a property that they do not legally own and without entering into a deed of trust?
Say our couple choose to separate and one of them has made a financial contribution to the property but they were not registered as a joint owner and did not enter into a declaration of trust. What happens if they cannot agree on how the non-owning partner’s financial contribution should be treated?
It is possible to establish a beneficial interest in a property without realising it. This can happen through the creation of an implied trust. An implied trust will arise when the law presumes that a person intends to create a trust over property they hold. In other words, it is presumed that a beneficial interest exists.
The intention to create an implied trust can arise from a financial contribution, such as a contribution to the purchase costs, contributions towards maintenance of the property, repayment of a mortgage or even value added to a property in other ways, such as work undertaken to the property that has increased its value. It is also possible to create an implied trust through the common intention of the parties where no financial contribution has been made.
There are two types of implied trust.
The most common way to create a resulting trust is through a financial contribution to the purchase price of a property. For example, where a person contributes towards the deposit on the property, this would entitle that person to a percentage beneficial interest in the property. To avoid a resulting trust from arising unintentionally, it is common for contributions from a third party, such as a family member, to be recorded as a gift to one or both purchasers and not a direct contribution towards the purchase.
A less common example of a resulting trust is where the legal owner has given away their interest but the legal formalities have not been followed properly and, as a result, the ownership of the property reverts back to them.
Also referred to as common intention trusts, constructive trusts arise by operation of law where the parties agree that the beneficial ownership of the property should be held in a particular way, but do not enter into a formal declaration of trust.
For a constructive trust to be established, the onus is on the claimant to show the existence of a common intention to share ownership and be able to demonstrate that they have suffered detriment in reliance on the agreement.
In a straightforward case, there would be an express written or oral agreement between the parties. Absent express agreement, a common intention to share the property can be inferred from the parties’ conduct.
Whether or not a beneficial interest can be established from indirect contributions made towards family life, such as food and entertainment, will depend on the facts of the case.
A person’s contributions to family outgoings may be explained by the fact that the parties were making their lives together, rather than by the belief that a greater interest in land was being acquired.
However, evidence of indirect contributions could be viewed as conduct which gives rise to the inference of common intention provided that the claimant can show that they have acted to their detriment in reliance on that common intention and have suffered financial detriment (for example by contributing to the family’s outgoings instead of investing that money elsewhere).
Quantifying a beneficial interest
In the case of a resulting trust, it is usually straightforward to establish the extent of a person’s beneficial interest arising from a financial contribution to the property. Beneficial interests are expressed as a percentage of the overall value of the property and are usually calculated at the date that a contribution is made.
In the case of a constructive trust, the extent of each party’s beneficial interest will follow what the court finds to be their common intention. If it is not possible to establish a specific intention as to the shares in which the beneficial interest is to be held, the parties’ common intention as to shares has to be deduced objectively from their conduct or, if that is not possible, the court may impute an intention to the parties and each will receive a share which the court considers fair having regard to the whole course of dealing between them in relation to the property.
What is proprietary estoppel?
Proprietary estoppel can be relied upon where a party has acted to their detriment upon a belief encouraged by the legal owner of the property that they have (or will have) an interest in that property.
The sole legal owner will need to have made some sort of representation, given an assurance, or otherwise encouraged the other party to act to their detriment in reliance on that belief.
Unlike with a constructive trust, there does not have to be a common intention and so propriety estoppel is more often found in cases where one party had intended to mislead the other into believing that they would acquire a beneficial interest in the property.
An example of this might be if a person who does not own the property acts to their detriment to live with the owner of the property, for example by giving up a job, or if they were encouraged to make regular payments towards the household economy, believing that they would acquire an interest in the property.
If a party can establish that they have rights by proprietary estoppel the court will decide on the appropriate remedy, for example by granting them a licence, a tenancy or a beneficial interest in the property.
I think I may have a beneficial interest, what next?
In many cases, it will not be possible to establish beyond doubt that a beneficial interest exists, and there may be competing versions of events that will make it more difficult to determine what the parties’ intentions actually were. In this situation, it may be necessary to apply to the court for a declaration of a party’s beneficial interest in property.
It is important to take expert legal advice before asserting the existence of a beneficial interest in property or commencing legal proceedings.
For further guidance on establishing a beneficial interest in property, contact our family lawyers.