Joint tenants or tenants in common?

Introduction

When property is bought by more than one individual, the parties can own the property as either tenants in common or as joint tenants.  It will depend on the parties’ circumstances as to which type of ownership will best suit them.  The two different types of joint ownership are described in more detail below. 

Tenants in common

A tenancy in common is where two or more people purchase a property together and have defined shares in the property.  For example, if A paid 25% of the purchase price for a property and B paid the remaining 75%, the parties could choose to own the property as tenants in common to reflect their individual shares.  A would own a quarter share in the property and B would own a three-quarter share of the property.  The individual shares would be reflected on the certificate of title to the property.

Furthermore, when either party passes away, their share in the property will not pass to the other party.   The shares are dealt with according to the parties’ Wills.  For example, if B passed away before A, his three-quarter share would not pass to A, as it would if A and B were joint tenants.  Instead, his three-quarter share would pass to whoever he has chosen to leave it to in his Will.

Joint tenants

A joint tenancy is where two or more people purchase a property together and do not have or want defined shares in the property.  This type of ownership is common between a husband and wife.  When one person passes away, their share will automatically pass to the other party through "survivorship".  For example, if the husband passes away, his share will automatically pass to his wife who will then have full ownership of the property.  

A joint tenancy can be severed and in some circumstances it may be beneficial to do so.  In the case of Harvey v Gateshead Investments Ltd the High Court looked at how a joint tenancy can be severed and how caution should be applied in some circumstances.

Background facts

Mr and Mrs Harvey owned a property in Auckland (“Auckland Property”) as joint tenants.  Mrs Harvey ended up with a number of personal debts, and with that in mind, the couple decided to enter into a contracting out agreement under the Property (Relationships) Act 1976 (“PRA”) in December 2009.  Essentially this was so that not all of their assets and liabilities would be shared equally. 

Under the agreement Mrs Harvey agreed to transfer her share of the Auckland Property to Mr Harvey, however, the transfer never took place as certain documents that needed to be signed to give effect to the transfer were not signed.

Summary judgment was entered against Mrs Harvey in respect of one of the debts she owed and a charging order was registered over the Auckland Property on 9 February 2010.  On 15 February 2010, Mr Harvey changed his Will to leave his estate to a trust for the benefit of his children and a life interest in the Auckland property to his wife.  However,  Mr Harvey was unable to transfer the Auckland Property to the trust due to the registered charging order.                       

Mr Harvey died in February 2011 and shortly after his death, the couple’s son, who was the executor named under Mr Harvey’s Will, registered a notice of claim on the title to the Auckland property, which reflected his father’s interest.  Mrs Harvey was subsequently bankrupted in December 2012.  A dispute arose between the couple’s son and Mrs Harvey’s creditors over the Auckland Property. 

Summary judgment application

A further summary judgment application was brought by Mrs Harvey’s creditors, in which they argued that:

• In accordance with section 47(2) of the PRA, the contracting out agreement was void.  Section 47(2) of the PRA states that any relationship property agreement that has the effect of defeating creditors will be void against those creditors during the period of two years after it is made;
• The notice of claim entered on the title to the Auckland Property by Mr Harvey’s executor should be removed; and
• Upon Mr Harvey’s death, the Auckland Property should fall to Mrs Harvey through survivorship.

The High Court granted the orders set out in the first two bullet points above however, the Court held that there were arguable defences to the claim that Mr Harvey’s joint interest in the Auckland Property had passed to Mrs Harvey by virtue of survivorship. 

Severing a joint tenancy

A separate High Court proceeding took place to determine whether the joint tenancy between Mr and Mrs Harvey had been severed.  The High Court noted that where the right of survivorship (under a joint tenancy) potentially gives rise to an injustice, the Courts will often attempt to avoid this by severing the joint tenancy.

In this case the High Court found that severance had not occurred at law as the required documents, to transfer Mrs Harvey’s share in the Auckland Property to Mr Harvey, had not been signed.  Therefore, the issue was whether there was a justifiable or ‘equitable’ severance of the joint tenancy prior to Mr Harvey’s death, based on the facts of the case. 

The High Court looked at two methods of severance of a joint tenancy that relate to this case:

• Severance by mutual agreement; or
• Severance by any course of dealing sufficient to show that the interests of all were mutually treated as creating a tenancy in common.

It was found that there was a common intention between the parties to sever the joint tenancy, even though Mrs Harvey was facing insolvency.  The High Court found that the changes made by Mr Harvey to his Will were inconsistent with any belief or intention that the Auckland Property was held jointly.  The Court also accepted Mrs Harvey’s evidence that she held no beneficial interest in the other half share of the Auckland Property and that she had agreed to terminate the joint tenancy as shown in the contracting out agreement.

In referring back to the summary judgment decision and in considering Felton v Johnson [2006] 3 NZLR 475 (SC), which also discussed section 47(2) of the PRA, the High Court stated that there must be a reduction in the amount available to a creditor before any defeating of a creditor’s interest can arise. 

In this case, the transfer from Mrs Harvey to Mr Harvey was void against creditors as it reduced the amount of Mrs Harvey’s assets that were available to satisfy her debts as at the date of the agreement.  However, the severance of the joint tenancy did not prejudice creditors as at the date of the agreement or prior to Mr Harvey’s death as the creditors had no recourse to Mr Harvey’s interest prior to his death.  The joint tenancy would have severed upon the bankruptcy of Mrs Harvey or upon any sale order made in respect of the Auckland Property.     

The High Court ordered that Mrs Harvey’s creditors were entitled to her share in the Auckland Property. However, the Court decided that the reversal or voiding of the agreement to sever the joint tenancy was not required to give effect to the order.

Conclusion

It is important to consider the different types of joint ownership when  purchasing property with another party and what type of arrangement is best suited to your current situation, taking into account any future plans you may have.  This is highlighted in the Harvey v Gateshead Investments Ltd case.  For example, if Mr and Mrs Harvey had originally bought the Auckland property as tenants in common, this would have allowed them to deal with the property in defined shares.

There are a number of factors to consider before deciding on whether to own property as tenants in common or as joint tenants.  We recommend seeking legal advice when purchasing property to ensure you are fully informed of your options.    

If you would like further information please contact Dale Thomas on 07 958 7428.