The Brief

22.04.2009

Property values, negative equity and relationship break-ups

Falling values in the property market and high mortgage loans in recent times mean that for couples whose relationship has come to an end, the break-up may now be even more difficult.
A lot of younger co-habiting couples will have bought a house or apartment together when property values were higher and perhaps with a 100% mortgage and so many will now be in a negative equity situation – in a break-up what happens and who gets to take on the mortgage?   
Whereas previously many married couples looking at a separation may have been in a position to consider a sale of the family home with the proceeds being divided up to provide each spouse with funds towards the purchase separate smaller properties.  Now, the poor housing market means that a sale of the family home may simply not be an option and so what are the other options?
 
1.         Co-habiting couples and negative equity
 
What does negative equity mean?
 
Simply that the value or likely sale price of the house/apartment is less than the loan or borrowing secured on the property. If the property is sold, there will remain an amount owing to the lending institution.
 
What are the parties legal rights vis-à-vis each other?
 
The parties should have put in place a co-ownership agreement at the time of purchase which will then govern the rights and obligations of the parties. It may provide for one party being allowed to buy out the other and how the property would be valued for this purpose.
 
In many cases, no formal agreement will have been put in place and the parties then have to look to their strict property rights (there is no provision in law allowing adjustment of property rights based on a relationship other than a marriage). If there is an equity value in the property, there may be an issue over who gets the benefit of this, for example, if, despite both parties being equal owners on the title, one party had exclusively paid the deposit, mortgage repayments and maintenance costs of the property, he/she may feel entitled to the benefit of the equity.  There may also be an issue if one party wishes to sell and the other does not.
 
What can the parties agree to do if they split up?
 
In the short term, some couples may have to consider continuing to co-habit to avoid paying rent in addition to the mortgage, or taking on a second mortgage elsewhere. 
 
The parties can of course agree to sell their property but they will continue to be liable for the remaining loan monies if there is a shortfall. 
 
One party can agree to ‘buy out’ the other – in effect this will mean one party taking over the mortgage and perhaps it may even involve a payment being made by the party being released from their obligation to the lending institution. This will only be an option if a lending institution agrees and would usually require a parent to guarantee the loan or some additional security. 
 
A third party might agree to ‘buy out’ one of the couple’s shares. This might work where a friend or sibling is substituted for one of the couple. Again, it may be appropriate for a payment to be made and security for the lending institution would be an issue.
 
What happens if one of the parties decides to walk away?
 
If both parties are on the mortgage deed, then they will be jointly and severally liable for the debt. This means the lending institution may look to either one for repayment. It is important to understand that the loan is not only the responsibility of the person who might remain in occupation.   If the loan repayments are not being paid, then both parties credit ratings may be damaged in the first instance. The lending institution may ultimately take steps to obtain a Court Order for possession and sale of the property and such other steps as might be necessary to secure payment from the parties.
 
2.         Marital break-up and falling property values.
 
What difference has falling property values made to marital breakup?
 
Whereas previously the sale of the family home and/or other assets may have allowed a settlement to be made between the spouses whereby each spouse would have sufficient provision to go their separate ways, this is now much more difficult. A forced sale of the family home or other assets such as investment properties, bank shares, etc in present circumstances may involve a dramatic drop in the expected sale proceeds.  
 
Who decides if the family home has to be sold and when?
 
In a marital break-up, the parties themselves can negotiate an agreement on how and when this should be done, but if such an agreement is not possible, the decision on how financial separation is achieved and whether and when the house is sold will likely be made in Court. 
 
Are there any options other than sale?
 
In some cases, ownership of the house may be vested in one spouse absolutely as part of a settlement. In other cases, one spouse might buy out the other’s share, perhaps at an agreed amount less than the property value. Obviously the options will depend on the circumstances involved. 
 
The Courts now have to consider more inventive options because of falling sale prices and also the increased difficulty of obtaining a mortgage which may prevent a ‘lump-sum’ type settlement. It is now more likely that the spouses will not have a ‘clean break’ from a financial perspective at least in the short term. A Court may order that one spouse be given possession of the house for a number of years perhaps until children reach a certain age and then direct a sale of the house at that time and division of the proceeds. This leaves the parties in limbo to some extent and their respective financial futures uncertain.
 
Can the settlement provisions be re-visited?
 
A provision relating to maintenance whether contained in a separation agreement or a Court Order granted on separation or divorce proceedings may be re-visited. A spouse or former spouse can apply to Court for a maintenance order or to vary an existing maintenance order and this will be considered by the Court in particular where the circumstances of the parties have changed, e.g. a spouse has lost his/her job (Note - a former spouse who has re-married following a divorce is not entitled to do this). 
 
By contrast an order providing for a lump-sum type settlement may be much more difficult to re-visit. There are difficulties being experienced in cases where Court Orders have been based on the agreed value of property before the dramatic changes in the last year or so. There may now be a situation where one spouse is in breach of a Court Order due to being unable to obtain a mortgage, unable to sell assets, or the sale price will not be sufficient to meet the obligations of the Court Order. Recent cases and those now pending will be much less likely to be 'clean break' type settlements and are more likely to be temporary arrangements which will  postpone the  final solution until a future date.
 
For further information contact Cormac Mullen on 053 91 22555 or cmullen@mjoc.ie

 

© 2006 MJ O'Connor Solicitors | Disclaimer | Site managed and developed by ReganLowey