"While mortgages with friends offer advantages, they are not without risk. As a result, it’s crucial to have clear agreements - and the right legal documents - in place"
- John Roberts - Austin Lafferty Solicitors
Property prices and rents in many areas have risen significantly, making it difficult for first-time buyers to afford a home on a single income. Indeed, according to the latest figures from HM Land Registry, the average price of a property in Scotland was over £191,000. Earlier in the year, Lloyds Bank reported that first-time buyers are required to put down an average deposit of £39,691.
Buying a house with friends is one way of combatting the price rises - and offers an affordable method for getting on the property ladder, especially for first-time buyers. By pooling resources, friends can combine their deposits, potentially secure better mortgage terms and often buy a larger property.
Lenders are often open to lending to friends, as it allows them to cater for a broader range of customers who might otherwise be unable to enter the property market.
However, while mortgages with friends offer advantages, they are not without risk. As a result, it’s crucial to have clear agreements - and the right legal documents - in place.
Although it is technically possible to purchase a property jointly without additional legal documents, having them can help protect both parties while clarifying important aspects of ownership and responsibilities. The documentation to have in place includes:
Ownership and title deeds
While other territories refer to “tenants in common”, and “joint tenants”, in Scotland the terminology used is completely different; instead, the title between multiple parties can either be taken “pro indiviso” (in equal shares) or equally between parties and to the survivor (known as “survivorship”).
Survivorship is the least common of the two, as upon the death of one party, their share gets transferred to the survivor automatically. This option doesn’t offer much flexibility, as if one party decides they no longer wish their share to go to the survivor, the arrangement cannot be revised without the other’s consent - unless stipulated it can be revoked by either party individually. However, all that being said, survivorship clauses are still used, often for tax purposes.
Alternatively, a pro-indiviso title ensures all parties own a share of the whole property, provided the others have the right to share possession. Should one party then pass away, their position will be stated in their last will and testament.
When considering whether to opt for either pro-indiviso or survivorship, it is best to consult a solicitor for advice.
Minute of Agreement
For situations when the title is in unequal shares (such as when one person has paid a greater proportion of the purchase price), a Minute of Agreement (or similar legally binding contract) can be signed. This outlines what would happen if the home were to be sold and how the proceeds would be divided, thereby protecting all parties’ interests in the property.
The Minute of Agreement enables one party to buy the other out should they decide to sell the property. This is particularly useful should relations between the two parties become strained or breakdown, as without this agreement in place, the house could automatically be placed on the open market under an Action of Division and Sale in court.
Furthermore, any terms and conditions for the buyout would be outlined in advance, including payment terms, transfer of ownership, release from liabilities and dispute resolution.
Co-ownership contracts
Given the complexity and long-term implications of co-owning a property, it is wise to employ a solicitor to draft or review a co-ownership contract which covers both parties during the ownership of the property.
This document details how much each party is contributing to the purchase price while making clear the percentage of the property each person will own. It should also specify how any ongoing or recurring costs (such as monthly mortgage payments and taxes) will be divided, as well as the processes to follow if somebody decides to sell their share or wishes to exit the contract.
When buying a property with a friend, it is important to agree on this document, as it ensures everyone is prepared for any eventualities in future, so they can remain mates as well as housemates. Having everything recorded in writing prevents any information from being misremembered or misinterpreted, which is particularly useful from a legal perspective should any issues arise in future.
It’s important to note that although one lawyer can handle the actual house purchase for two friends, they can’t represent both parties in formal negotiations or contract completions. Therefore, each party will need to have their own solicitor to agree on both of the above documents.
Make sure wills are up to date
With any property purchase, each party involved should review their will - or have one drawn up if required. That way, should one of the homeowners pass away, they will leave clear instructions detailing how their share of the property should be distributed. Without an updated will, shares of the property may be distributed according to the laws of intestate succession, going against the deceased’s wishes.
Power of attorney
As well as writing will, friends buying a house together should consider setting up a power of attorney (PoA). This is particularly beneficial should one party be unable to manage their financial affairs due to illness or absence. PoA (a Continuing Power of Attorney) grants legal authority to another person to act on their behalf regarding property matters, such as house transactions and mortgages.
This may be given to commence straight away, or only take effect if an individual loses the capacity to make decisions and handle such matters later in life.
Any friends looking to buy a house in Scotland should make sure they have the correct legal documents in place to ensure whatever deal they make is watertight. Purchasing a property is usually the biggest financial decision anybody has to make, so all parties involved should utilise the knowledge and experience of a solicitor for added security and peace of mind.
