Cohabitation: Are you betting everything on the farmhouse?

Whether choosing to cohabit or marry, an increasing number of farming families are finding themselves in an unfortunate financial predicament when their relationship turns sour. Family lawyer Isobel Robson considers what you can do to protect your property and asset values.

In order to illustrate a number of scenarios which are typical within farming families, I have called our farmer ‘John’, who, together with his girlfriend ‘Mary’, decide to move into his house together, which is a small house on his parents' farm. In what follows, if Mary and John's roles were reversed the legal position would be just the same.

Keen to make the home less of a bachelor pad, Mary decides to decorate and furnish the property with money provided by her parents. She pays £30,000 off the mortgage on the property and then pays for a new kitchen, installing a new Aga in the process, and puts in a new bathroom – spending maybe another £30,000. John and his parents tell her that the home is not just his home now, it's "a property for both of them for the future".

All fine? Well, it is until John and Mary go their separate ways. Then the trouble starts – but it could easily be avoided.

In our scenario, Mary may well have three claims against the equity in a property without a deed being signed or sometimes without a word being said. Firstly, she may be able to argue she has acquired a trust interest in the property – which can arise where a person provides all or part of the purchase price for a property of which they may or may not be the legal owner. Secondly, a different type of trust can arise if property is acquired by a couple with the common intention that it is to be shared although legally owned by only one of them - and the non-owner relies to their detriment upon that common intention; in our case, by paying towards a mortgage, spending money on repairs and improvements or, in some cases, making indirect contributions. Thirdly, Mary could prove she has a further type of trust interest in the property on the basis of John’s promise that the house was now for them both, for the future. A promise made by a party can be enforced if the other party has acted to their detriment upon the promise.

In addition, Mary could argue she was entitled to part of the equity in the property under an act of parliament called the Trusts of Land and Appointment of Trustees Act 1996 (often referred to as TOLATA). On top of this, if the couple were engaged, she could also make a claim to part of the equity in the property under the Matrimonial Proceedings and Property Act 1970, in certain circumstances.

The law in this area is hugely complex and the cases are not inexpensive – sometimes costing many thousands of pounds. But the key point is that all this could have easily been avoided at the outset by the preparation of a Deed of Trust (which would record how John and Mary hold the land and its sale proceeds) and/or a Cohabitation Agreement being entered into by the couple. These cost about as much as a household insurance policy for just one year. A cohabitation agreement could, for example, confirm that Mary would not acquire any interest in the property, whatever monies were spent – or promises made. Alternatively, the couple might agree how much interest she would acquire.

And if John, our farming son, dies, what then? Well, if he had lived with Mary for more than two years then she has an automatic right to make a claim against his estate if "reasonable provision" has not been made for her under his will. She may also have a claim within that two-year period if she can prove she was financially dependent upon him during his lifetime. Mary’s claims are wide and could be equivalent to her claims had the two of them been married. The claims arise under the Inheritance (Provision for Family and Dependents) Act 1975. In this case, John would be best to take advice upon her potential claims against his estate and either make some sort of reasonable provision for her in the event of his death or take out an insurance policy to provide for her.

And what if John and Mary had children and then separated? Either parent would have a claim against the other on behalf of the children for maintenance, a lump sum of money, a claim on property and interests in trust. In some circumstances Mary might be allowed to live in the farmhouse with the children (and it might be held in trust for the children) until the children reached 18 – or even 21 - with John being out of his home all this time. So, the impact of children arriving is huge in terms of the possible claims against the farm. Similarly, in the event of death, the children would have a significant claim against the estate.

In this fictitious – but very realistic – scenario, I hope I have illustrated the importance of not simply thinking about wills, deeds of trust, cohabitation agreements, and life assurance policies. You should act on them, as they could save tens – or hundreds – of thousands of pounds.

Darlington & Stockton Times [2009-04-24]