What is a cohabitation agreement?
A cohabitation agreement records arrangements between two or more people who have agreed to live together, as a couple or otherwise. It records each party's rights and responsibilities in relation to the property where they live or intend to live together, financial arrangements between them, both during and following cohabitation and the arrangements to be made if they decide that they no longer want to live together.
Where property is co-owned by two or more cohabitees, a cohabitation agreement can avoid the cost of litigation about the parties' respective beneficial interests in the home that they shared when cohabitation ended.
A cohabitation agreement can also be used to record ownership of personal property (including items such as cars, furniture or art) which may be used or enjoyed by both cohabitees when they live together, but are to be retained by the owner if cohabitation ends.
Who can enter into a cohabitation agreement?
Cohabitation agreements are frequently entered into by cohabitees who want to regulate their financial and living arrangements both during cohabitation and if cohabitation comes to an end. They are usually entered into by couples who have decided not to marry or enter into a civil partnership but have decided to live together.
They are also used by people who have decided to pool their financial resources and purchase a property to live in together. The property that they occupy can be rented, owned solely by one cohabitee, owned by one or more cohabitees together or with a third party or owned jointly by cohabitees in equal or unequal shares. The cohabitation agreement can be executed before the parties begin living together or after cohabitation has begun.
Avoid the cost and uncertainty of litigation
Cohabitation agreements are a helpful way of recording a cohabiting couple's intentions about the legal and beneficial ownership of their real and personal property when they decide to live together. Former cohabitees can often spend vast sums of money on litigation to determine their respective shares in property which they either co-own or which is owned solely by one of them but which the non-owning party may have made contributions towards.
A well drafted cohabitation agreement records each party's legal and beneficial interest in the property. This reduces the possibility of a dispute about ownership if cohabitation ends. The agreement includes clauses about how the property is to be dealt with at the end of cohabitation. For example, where property is co-owned by cohabitees, they may agree to sell the property if cohabitation ends. The agreement records this and includes clauses that regulate the following:
- Occupation of the property and payment of household and living expenses pending sale.
- How and by whom the property is to be valued.
- How the costs of sale are to be paid and by whom.
- How the proceeds of sale are to be divided.
Having a cohabitation agreement in place and discussing each person's rights and obligations in relation to the property at the outset of living together can therefore avoid the acrimony, cost and uncertainty of litigation after cohabitation ends.
Entering into a cohabitation agreement gives cohabitees the flexibility and freedom to organise their financial affairs as they wish, both during and following cohabitation. Current legislation does not entitle a cohabitee to make a claim for maintenance, or to claim a share of their former partner's assets as of right, if cohabitation ends. Some cohabitees do however want to make arrangements to support their former partner financially following the breakdown of their relationship, particularly if they have children together. A cohabitation agreement can include clauses for maintenance to be paid to a former cohabitee, to allow for one party to readjust financially after cohabitation ends.
Preservation of assets
Rising housing costs have made it difficult for first-time buyers to get onto the property ladder. They are therefore having to save for longer to accumulate a suitable deposit or are choosing to pool their financial resources and purchase property jointly with others to live in together. Having struggled to save a deposit, cohabitees are less willing to risk a future dispute arising about ownership of the property. They are increasingly entering into cohabitation agreements to evidence beneficial interests in co-owned property and ultimately safeguard their investment.
Where parents have gifted, loaned or invested funds to enable a child to make their first property purchase and the child subsequently wishes to cohabit with a new partner in the property, parents sometimes insist on the execution of a cohabitation agreement to protect family money invested in the property.
Cohabitation agreements are also often entered into by cohabitees who are beginning a new relationship following divorce or dissolution of a civil partnership. These cohabitees are more aware of the financial repercussions of relationship breakdown. Many therefore enter into a cohabitation agreement to safeguard their own financial security and, in some cases, to protect a future inheritance for their children.
Uncertainty about enforceability
There is uncertainty about whether the terms of a cohabitation agreement will be upheld and enforced by the court. Cohabitation agreements were historically void on the basis of public policy as they were deemed to encourage sexual relations outside marriage. With the passage of time, social values changed and the law began to distinguish between "meretricious" agreements (where sexual relations form part of the consideration) and agreements that regulate financial and property affairs between cohabitees.
The view expressed by many commentators is that cohabitation agreements that regulate the financial and property affairs of cohabitees are enforceable. There have however been no recent cases testing this point.
The Law Commission has expressed reservations about the enforceability of cohabitation agreements and stated that "insofar" as cohabitation agreements are lawful, they are governed by ordinary rules of contract and can therefore be challenged on any of the following ordinary contractual principles:
- Undue influence.
- Illegality on other grounds.
Depending on the parties' circumstances and the complexity of the terms agreed, entering into a cohabitation agreement can be an expensive process. Many cohabitees enter into agreements on the purchase of jointly owned property, when finances are already strained. Despite the benefits that these agreements offer, many cohabitees do not want to incur the additional costs of negotiating and executing a cohabitation agreement.
Risk of relationship breakdown
Cohabitees in a couple relationship often find it difficult to raise the question of entering into a cohabitation agreement with their partner, particularly where the couple will be living together in property that is solely owned by one of them. Non-owning cohabitees may perceive the request as their partner doubting their sincerity and commitment to the relationship. Some feel contemplating what should happen at the end of cohabitation, before they have even begun living together, indicates doubts about the permanence and longevity of the relationship.
When should a cohabitation agreement be executed?
There is no set rule as to when a cohabitation agreement should be executed. If property is being purchased with the intention of it being occupied by cohabitees on completion of the purchase, it is advisable for the agreement to be executed on completion, so that the parties' intentions are clear and have been recorded at the outset. Alternatively, if the intention to cohabit is formed after a property has been purchased, a cohabitation agreement can be executed at any time, before or after cohabitation has begun.
Cohabitation agreement or declaration of trust: which should my client execute?
A declaration of trust should always be executed where legal title to the property is held as tenants in common or where the beneficial interest in jointly owned property differs from legal ownership. A declaration of trust will simply record the parties' respective beneficial interests in the property. In contrast a cohabitation agreement can include not simply a declaration of trust but go on to deal with a wider range of issues, including the following:
- How the mortgage and other household expenses are to paid, by whom and in what proportions.
- What should happen if a co-owner wants to sell the property and realise their investment and the other does not.
- The arrangements for one party to buy the other's share.
- How and when the property is to be sold.
- Ownership of joint and separate property, if cohabitation comes to an end.
- Financial support between cohabitees during and after cohabitation ends.
- The living arrangements and financial provision to be made for the parties' children, if cohabitation ends.
A cohabitation agreement can include and cater for a more extensive range of issues than a declaration of trust, which are relevant not only to parties in a couple relationship but also those parties who have entered into a joint venture. For example, business partners who are not only sharing a property but also operating joint bank accounts and sharing chattels (such as motor vehicles and household contents) should be advised to enter into a cohabitation agreement rather than simply executing a declaration of trust, setting out their respective property interests. The agreement can include a declaration of trust in relation to the parties' respective beneficial interests in the property and also clarify the ownership and treatment of any joint bank accounts and chattels.
Alternatively, depending on the complexity of arrangements agreed between the parties, it may be appropriate for them to execute both a declaration of trust and a separate cohabitation agreement.