Joint ownership, how to divide rent?

[tenantincommon]

Dear All,

I would really appreciate some advice regarding the situation with the joint ownership of my flat. My flatmate has moved out of the flat we own to live with her boyfriend, and wishes to rent out her room. However, I own a larger share of the flat as a whole and my deposit has subsidised her mortgage for over two years. Now that she will receive an income on the flat, I feel that I should be entitled to a proportionate share. The situation is as follows:

The Deed of Trust details the fact that we contributed different amounts to the deposit on the flat, and that my flatmate contributed a sum of 10000 pounds, whilst I contributed a sum of 35 000 pounds. We also took out a mortgage of 190 000 which we agreed to split equally and take responsibility for paying. We agreed that our respective shares in the property would be 45% to her, and 55% to myself.

However, the Deed of Trust section 1 says:

Now this deed witnesseth as follows:

1 a) The Parties hereto shall hold the property and the joint extras upon trust to sell the same with power to postpone the sale thereof and shall hold the net proceeds of any sale and any other monies applicable as capital and the net rents and profits thereof until sale upon trust for themselves as joint tenants in law and tenants in equity in the following shares:

i) in respect of the first 45 000 of any net proceeds of sale to pay to the First Party 10 000 and to the Second Party 35 000 PROVIDED THAT if the net proceeds of sale total less than 45 000 then to pay to the first party 22% and to the Second Party 78%.

ii) in respect of any remaining net proceeds of sale over and above the first 45 000 to pay to the First Party 45 % and to the Second Party 55%.

The Deed of Trust states that the first party, owns a 45% share in the flat as a whole, whilst I own a 55% share in the flat. She is proposing to let the room she is vacating at the rate of 500 per month. Having taken advice from three estate agents, if we were to commercially let the property, the property would be marketed for a similar amount and net income would probably be lower after taking into account estate agents fees, certification etc.

Using this model, and given the sum she proposes to charge, she expects to receive 50% of what we could receive from the flat as a whole. This will enable her to pay mortgage costs and other incidental costs on the flat, and make a profit.

However, my extra investment in the property has allowed us both to benefit from a better mortgage deal, and our mortgage payments are considerably lower. At our current mortgage rate of 5.24%, without my extra capital, each of our annual mortgage payments would increase by 655 per annum, or 54.5 per month. Although she has benefited from this arrangement since we purchased the flat in 2006, I feel that as the flat will now be considered as generating income, it is fair that I should receive a share of the overall income (considered as a function of the flat’s total rental value) proportionate to my ownership stake.

Moreover, I have taken on a much larger financial risk and now that the property market has taken a downturn and we would be unlikely to sell the flat for the same price we paid, I stand to lose a much larger sum of money.

I have proposed that rather than the tenant simply paying rent, that I also contribute rent to the flat, and that both she and I become joint landlords of the flat. The tenant and I would pay an agreed rental price into the joint account, which would be divided up according to our shares in the flat 45%-55%. From this income, my former flatmate and I would be able to pay our shares of the mortgage. This arrangement would reflect how we had agreed to divide the proceeds from the sale of the flat, and provide her with a regular income that would enable her to pay her share of the mortgage and any other expenses incurred in running the flat. This will enable us to earn a much higher proportion than if we were to rent out the flat commercially, which would incur high costs in estate agents fees etc.

If you could possibly have a look at what I’m proposing in conjunction with the deed of trust, I’d be really grateful as I just need to check that what I am proposing is reasonably, and doesn’t create any sort of problem concerning ownership and our rights. I’m going to take this to a practising solicitor, but would really appreciate any thoughts you have on it.

Thanks so much

[Preston]

Hi

If I understand what you are proposing, I think it might be a bit unnecessarily complicated. In law (regardless of whether you are tenants in common or joint tenants) you both own the whole flat. Your flatmate doesnt own one part and you the other; you both own the whole. The deed of trust describes how the proceeds of sale should be distributed, but doesnt change this fundamental fact.

What this means is that she can't grant a tenancy of part (or all) of the flat to anyone without your consent - in fact she cant grant a tenancy at all, it would have to be both of you doing so. My apologies if you knew this already.

With this in mind, would it not be possible simply to negotiate how you should split the rent?

I assume you have been splitting the mortgage payments equally between you? If so, for what its worth, my suggestion would be to agree that any rent over and above your flatmates mortagage payments should be split between you down the middle.

Sorry if I've missed the point and good luck.

Preston

[plym77]

Hi

I believe that you are Tenants in Common - this is more likely because a) you hold different shares and you are not a couple - whilst this is an assumption, this is more likely that joint tenants (I have also just seen your tag!! this may be a clue!)

A couple of things to consider.....

A Declaration of Trust states beneficial interest in a property. This is capital based and whilst you could consider the position for profit on this basis, this is not a legal implementation of a profit split.

As you are not married, by mutual consent you can split income however you like irrespective of capital ownership, 10:90 etc, as long as this is documented - but what you receive is what you declare.

As you remain in the property you have two choices - a) delare as rent a room (and therefore first £4250 of income is tax free) or declare your income and deduct an appropriate proportion of expenses (a share of mortgage interest, insurance, light/heat etc)

The other owner will have to declare her income less her expenses (which I assume would then only be her share of mortgage interest and insurance)

Your comptutations will be entirely different as your circumstances are different.

I have to agree with Preston that unless you are talking a mansion with very expensive rent for a room, then I would keep it simple, agree 50:50. The way that the market is at the moment you probably do not want to fall out with your friend and have to remortgage her share.

Hope this helps

Sherena

[paulslinn]

I appreciate that this posting is probably far too late but a completely different slant may be of interest to others ....

No matter what the purchasing percentages, if I were you, it would be my home we are talking about and I would not be happy if someone I jointly bought a property with simply decided they wanted to rent their share to what would effectively be a stranger to me. How do you know you can get on with this new person. What happens if they never wash a dish or clean the floor ? After all, unlike the co-purchaser, a tenant has no financial interest in the property and has no incentive to keep it up as 20 years letting experience tells me is the case with 99% of tenants, so you may be taking on much more cleaning or accepting a dirtier environment as well as running repairs. Who is responsible for "managing" them and if it comes to a situation where you cannot stand them of fall out and they leave, will the co-purchaser expect you to pay the rent for "losing" her tenant or pay her mortgage in compensation ?? It seems fraught with potential problems.

It all sounds a bit much to me and I would simply refuse unless I could choose, manage and have full control over the tenant as a resident landlord so they can be kicked out immediately if they cause a problem and from their rent I would pay the co-purchasers share of mortgage, rates, insurance and all other shared costs first, then expect to keep any balance for my trouble. I would equally expect the co-purchaser to make good any shortfall if the tenant should be late paying, cause any damage etc., and pay for all costs associated with finding a replacement. If she wouldn't agree to this I would simply refuse and a sale would be the only option. Any letting of a room is going to change the status quo and the big question is "Why should you have to accept this if it is likely to be to your detriment ?". Forget the money and who gets what, your sanity and quality of life are the most important issues to my mind.

Sorry if this is not particularly helpful, but that is my view.

R0