One size does not fit all: Cohabitation Agreements

Those seeking a cohabitation agreement tend to fall within three groups:

• Group 1 consists of those wishing to purchase their first home. They tend to be of the younger generation; they want to protect their investment, particularly if there has been or will be an unequal contribution towards the deposit or mortgage payments, or they want to protect money advanced by family members to help them purchase.
• Group 2 consists of those who have been married before or are widowed. This group tends to be of the older generation; they are looking to protect assets they have acquired over the years, primarily to pass them down to future generations.
• What, then, of Group 3? This group tends to consist of people who are middle aged and working; they have been living together for a lengthy period of time, have children, family pets, joint bank accounts, joint life insurance policies, mingled assets and potentially an investment or holiday home. Whilst it is uncommon for this group to seek a cohabitation agreement, it does happen. Prime examples would include circumstances where one party becomes ill, receives a sizeable inheritance or begins estate planning.

We will be looking at cohabitation agreements more closely in this article, but particularly as they relate to Group 3.

The basics

A cohabitation agreement is a legal document between unmarried couples who are living together. It can record arrangements for finances, property and children while the parties are living together and in the event of separation.

Marriages are on a steady decline and cohabitation continues on the upwards trajectory. In fact, cohabiting couples make up the fastest growing type of family. In the absence of a cohabitation agreement, unmarried couples have limited legal protection in the event of separation. There are no laws in England & Wales which recognise the rights of cohabitating couples and the age-old myth of a ‘common law marriage’ or ‘common law spouse’ does not exist, regardless of how long the parties have been living together and whether or not they have children together. It is therefore sensible for cohabiting couples to enter into a cohabitation agreement to ensure that their position is safeguarded as best as possible both during the relationship and in the event of separation.

There is no set rule for when a cohabitation agreement must be entered into. It can be entered into at any time, before or after cohabitation has begun, although if a property is being purchased and the parties intend to live in it on completion, it is sensible for the agreement to be entered into on completion. What is important, however, is that neither party should feel under pressure to execute the agreement, as this could render it voidable.

What should be covered in a cohabitation agreement

A cohabitation agreement can cover a range of matters and should be tailored to the parties’ individual circumstances. Below we will look at the clauses that ought to be included, specifically when advising Group 3.

Background

It is important to include a background section at the start of the cohabitation agreement setting out clear and precise matters of fact. This should include the parties’ dates of birth, the date they began cohabitating, their employment status and marital status, whether they have any children together or from a previous relationship and where they are currently living. If the parties are living together in a purchased property, this section should also include details of when the property was purchased and by whom.

Any agreements and intentions between the parties should be recorded here. In the case of Group 3, we need to be thinking about the parties’ career, childcare responsibilities, when the primary carer might return to work (if applicable), retirement, health, relocation abroad or within the UK, undertaking a period of study, inheritance prospects and so forth.

Finally, the background section should include a clause clearly setting out the reasons why the parties have decided to enter into the agreement.

Joint Property

The parties will need to list their ‘Joint Property’ in a Schedule appended to the cohabitation agreement. Joint Property typically refers to any asset to which the parties are jointly beneficially entitled. In the case of Group 3, this usually includes property held in the parties’ joint names (other than the Family Home), joint bank accounts and investments, family cars, chattels such as art or bronze sculptures, fixtures and fittings within the Family Home and household contents.

The parties will need to record how Joint Property should be dealt with in the event of separation. Joint Property could be divided between the parties equally or in accordance with a schedule setting out each parties’ share; it could be retained by one party; or it could be divided between the parties by rotation, with each party selecting an item in turn. If Joint Property is being divided in accordance with each party’s contribution to the purchase price, the parties should be reminded to keep detailed records and receipts of their purchases. For high value items, the parties may prefer to send their items to auction to be sold.

Investment properties and holiday homes often crop up within Group 3. In addition to the usual, the parties will need to consider any notice required under a tenancy agreement, how reserved or paid future bookings should be dealt with, whether the parties will each be responsible for paying their own tax in relation to any rental income or Capital Gains Tax, the laws and procedures of any foreign jurisdiction where a holiday home might be located and so forth.

Separate Property

The parties will need to list their ‘Separate Property’ in a Schedule appended to the agreement. Separate Property means property that the parties will retain in the event of separation. In the case of Group 3, this is likely to include real property (other than the Family Home), bank accounts and investments held in a sole name, life insurance, inheritance monies, business interests, trust interests, personal items such as a personal car, income from all sources, monies owed to the party and liabilities. For the avoidance of doubt, it is sensible to set out in the agreement that if one party uses the other parties Separate Property, this will not give rise to the property becoming Joint Property.

The Family Home

This is a well-covered area and so we will only touch upon it here.

Those in Group 3 are likely to have already purchased a Family Home together. The cohabitation agreement will need to record how they purchased the Family Home, whether in a sole name or in joint names and if the latter, whether as tenants in common or joint tenants. If the property is held as tenants in common, the agreement should detail each parties’ share in the property and the contents of any Declaration of Trust.

The cohabitation agreement should address what should happen to the Family Home in the event that one person dies during cohabitation. If the property is held in joint names as tenants in common, the deceased’s share of the property will pass under the deceased’s will (or intestacy), whereas if the property is held as joint tenants, the survivor will automatically become solely and beneficially entitled to the property. If the Family Home is held in a sole name, the owner should consider whether they would like the non-owner to inherit the Family Home on their death; if so, this should be recorded in the agreement and reflected in the owner’s Will.  Alternatively, and to give the non-owner some breathing space, the agreement could stipulate that upon the death of the owner, the non-owner and any children shall remain in occupation of the Family Home for a certain period of time before vacating; the agreement should stipulate who should pay the household expenses during this time.

The agreement should also address any other foreseeable eventualities. For example, if the parties are an international couple, have family abroad or if one party has a job that could take them abroad, the parties ought to consider what will happen to the Family Home if one or both parties temporarily relocates abroad during the cohabitation. If both parties decide to temporarily relocate, they ought to discuss and record the possibility of renting the Family Home, including the term, how the rental proceeds will be divided, who will pay for any repair or decorative works and what should happen in the event that one party wishes to return to the Family Home sooner than planned. If only one party decides to temporarily relocate, the parties ought to discuss whether this will change how the outgoings and mortgage payments are discharged.

In the event of separation, the cohabitation agreement should clearly set out what should happen to the Family Home. If the property is held in a sole name, it is likely that the owning party will wish to retain their legal and beneficial interest. If this is the case, the agreement should make it clear that the non-owning party will not acquire a beneficial interest in the Family Home by virtue of making any direct or indirect payments towards the purchase price, maintenance or improvements of the Family Home or towards payment of any mortgage. The agreement should also make it clear that the non-owning party has no right to remain in the Family Home and shall vacate the Family Home and return the keys to the owner upon receiving written notice.

If the property is held in joint names, the agreement will need to record whether the Family Home should be sold, transferred to one party following a buy-out or held on trust until a determining event. If the Family Home is to be sold, the agreement will need to set out the mechanisms by which to do this, including who will value the property, who will have conduct of sale, how the property will be marketed, who will pay the costs incidental to the sale and how the sale proceeds with be applied. If there is to be a buy-out, the cohabitation agreement will need to set out how the Family Home will be valued for the purposes of calculating the seller’s share, when payment must be made, when and how the selling party will be removed from the mortgage and what will happen in the event that payment is not made on time. For belt and braces, the agreement should deal with the scenario where both parties wish to buy-out the other’s share in the Family Home; in this situation, the parties can submit their best and final offer in a sealed envelope to an agreed valuer, who will read and select the highest bidder.

Joint bank accounts

There is often a separate section dealing with joint bank accounts in a cohabitation agreement, and those in Group 3 are certainly likely to have at least one joint bank account. The cohabitation agreement ought to set out the details of any joint bank accounts and whether, when and in what sum each party should make a deposit from their respective sole accounts into the joint account to meet expenses, including mortgage payments. The agreement should also set out whether withdrawals can be made from the joint account and if so, on what basis. Crucially, the agreement should record what should happen to the joint account in the event of separation, including how the funds should be divided and how any overdraft should be discharged.

Debts and liabilities

The parties will usually be liable for their own debts and liabilities upon separation, unless they borrow money in joint names or guarantee their partner’s debts. That said, and for the avoidance of doubt, it is sensible to include a provision in the cohabitation agreement that each party shall remain solely liable for any existing and future debts incurred in their sole name.

Gifts

Those in Group 3 are likely to have amassed a number of gifts over the years from family, friends and from one another, including anniversary gifts and jewellery to expensive crockery and home décor.  The parties can record how these gifts should be dealt with in the cohabitation agreement in the event of separation. General speaking, if one party gifts the other party an item, this item is retained by the receiving party, and if a gift is made to the parties jointly by a family member, it is retained by the party whose family member made the gift. Whereas, if a gift is made to the parties jointly by anyone else, then typically the item will be sold and the net sale proceeds divided between the parties equally or in accordance with a share schedule; or the gifts will be distributed by rotation. This said, there is nothing to stop the parties from recording an arrangement that suits them in the agreement.

Financial support

The law does not require cohabitees to support one another either during cohabitation or upon separation. However, those in Group 3 need to think carefully about this, particularly if one party has been financially supporting the family or if one party is unemployed, earning a low income, is the primary carer of the children or has health difficulties hindering their ability to work. If the parties consider that financial support after separation is appropriate, the agreement will need to stipulate what support should be given and how it should be paid. For example, financial support could be provided to one party through a one-off lump sum payment, multiple lump sum payments or  periodical payments for a specified period of time or indefinitely.

If a lump sum payment is to be made, the paying party should consider whether the sum ought to change according to the tenure of the period of cohabitation from the date the agreement is signed. For example, if the parties separate within two years of the cohabitation agreement, then the receiving party shall receive £10,000, but if the parties separate over two years and up to six years, then the receiving party will receive £30,000, and so forth. If, however, periodical payments are being made, the cohabitation agreement will need to stipulate when they must start, how much should be paid and when payments should end.

It must not be forgotten that cohabitation agreements can record how pension benefits, death in service benefits and life insurance can be dealt with during cohabitation and upon separation; these clauses are often overlooked in the drafting stage.

Children

A cohabitation agreement can include a section outlining the financial provision to be made for a child in the event of separation. This can include monthly maintenance payments, a lump sum payment or payments, payment of school or university fees and settlement of the Family Home on trust for the child. The agreement can also include a clause setting out how the child’s day-to-day outgoings are discharged, both during and after cohabitation, including payment of nannies, private tutors and medical insurance.

However, any clause outlining child maintenance arrangements or financial provision for a child can be reviewed upon separation; either party can apply to the Child Maintenance Service (CMS) for an assessment of child maintenance and either party can apply to the family court to deal with matters concerning the upbringing of a child. A cohabitation agreement cannot oust the jurisdiction of the CMS and the family court.

Pets

It would not be uncommon for those in Group 3 to own a pet. The charity PDSA estimates that the potential lifetime cost of a dog could be circa £30,800 and the potential lifetime cost of a cat could be as high as £24,000. These numbers are not inconsiderable. A cohabitation agreement can record who will be financially and physically responsible for the pet during cohabitation and in the event of separation, including who the pet is registered to, who will pay the pet’s expenses, including insurance, health checks, vaccinations, food and toys, and who will ultimately keep the pet upon separation.

Will

The parties should always make a Will or update their Will to reflect the terms of the cohabitation agreement. It is also sensible for the parties to seek advice from a Wills & Probate lawyer during the drafting process, to ensure that the agreement is as watertight as possible.

Disclosure

To reduce the risk of the cohabitation agreement being set aside on the basis of misrepresentation, both parties should provide each other with full, frank and clear financial disclosure. This could be set out in a table or excel spreadsheet appended to the agreement or by each party completing sections 1 and 2 of Form E.

The benefits of a cohabitation agreement

There are many advantages of entering into a cohabitation agreement. First, it helps to avoid disputes on separation, and the costs and stress associated with expensive Trust of Land court proceedings. Second, it provides the parties with autonomy to organise their financial affairs as they see fit; whilst the law does not require cohabitees to support one another after separation, a cohabitation agreement provides the parties with the flexibility to do so. Third, a cohabitation agreement can set out the parties’ intentions in relation to any child of the family, including what financial provision is to be made for the child on separation, where and with whom the child is to live and when the child is to spend time with the other parent. Fourth, an agreement can help preserve assets, protect family money and safeguard future inheritance; the parties can record what should happen to gifts and loans from friends or family members in the event of separation to avoid any misunderstanding. For those in Group 3 in particular, a cohabitation agreement can provide the parties with a sense of security and insurance; carefully drafted clauses can be included to deal with the family home, serious illness, death and retirement.

The primary draw-back of entering a cohabitation agreement is that there is uncertainty about whether the terms will be upheld and enforced by the court. That said, and by way of a concluding remark, an agreement is much more likely to be upheld if it complies with ordinary contractual principles, meaning that it is in writing, makes clear on its face that it is intended to be a deed and is validly executed as a deed. In addition, the agreement should not be capable of being challenged on the grounds of fraud, duress, undue influence, misrepresentation, mistake and illegality on other grounds.

Yasmin Khan-Gunns, Associate at Keystone Law (Legal Instagram handle @londonfamilysolicitor)