Property Passing on Death – What happens to the debt?

A fundamental principle of estate planning is property ownership. How you own your property can affect how it passes when you die.

For example, a property held as joint tenants generally bypasses a Will and the last survivor inherits 100%; whereas where two people own property held as tenants in common they each own a distinct interest that passes under their Will.

What happens to the debt on a property when one person dies?

When borrowings are taken out for the acquisition of the property, who becomes liable when one person dies, and does it matter where the property ends up?

A recent Western Australian case, Young v Martin [2020] WASC 442, has brought attention to the importance of careful estate planning when:

  • the purchasers contribute unequally;
  • partially fund their purchase from borrowed funds; and
  • come from blended families (or even just a second relationship).

What happened in this case?

Mr Jones and Ms Young lived together in a de facto relationship.  They each had children from previous relationships; Mr Jones’ children were still minors.  Mr Jones and Ms Young purchased a property together as joint tenants – Ms Young funding her half of the purchase with proceeds from the divorce and financial settlement with her previous spouse and Mr Jones funding his half with funds from a bank loan. 

In applying for the loan, the two of them applied jointly, and the bank secured its loan with a mortgage over their property.  Other than this property, the couple kept their finances separate, and split the utility expenses between them, rather than pooling their income or assets.

They had been together for five years before Mr Jones’ death, at which time the property passed to Ms Young by survivorship – but in this case, so did the liability for the loan. 

Ms Young claimed that the agreement between them was that Mr Jones would make loan repayments from his personal funds, despite the loan being in their joint names, such that she claimed the repayment of the loan should be made from his estate.  Ms Young claimed that this was a contract between them.  While the matter was being disputed, Ms Young made the mortgage repayments for which she claimed reimbursement from the estate.

The Supreme Court dismissed the claim on the basis that it wasn’t satisfied there was a contract (whether express or implied) regarding the payment of the mortgage debt, given there was no intention to create legal relations – one of the four basic requirements of a legally binding contract. 

The Court considered the repayments after Mr Jones’ death based on the manner of ownership of the property.  The Court said “equitable principles would not require the estate to discharge the obligation of Mr Jones to pay the mortgage where it relates to property which is not part of the estate“, noting that it may have been different if Ms Young were making repayments on the property owned as tenants in common, where the estate should have also had an obligation to contribute.   

What are the key take away points?

Where the debt is owed to a bank, most of the time the liability is ‘joint and several’ which means that both parties are responsible for the debt together, and also independently of each other.  Importantly, this doesn’t deal with how the loan will work as between the borrowers.  This raises the question of who is liable to make payments, and whether one party can require any contribution from the other. 

Where liability for debt is unclear, it may lead to disputes and Court cases.  In the Young v Martin case, the responsibility for the debt flowed to the surviving joint tenant, just as the ownership of the property did – but it may not always work like that. 

Another issue to consider is what would happen if two parties borrow from a bank, but the debt is secured against a property owned by only one of the borrowers.  What would happen if the owner of the security property dies, and leaves the property to a third party in their Will?  This is a key reason why both Wills and debt arrangements between parties need to be very clear.

How we can help

Whether you’re putting an estate plan in place, or making decisions about the structure of ownership or borrowing, these intentions need to be clear, and even documented appropriately, to ensure that they continue to play out the way you intend. For expert advice or guidance regarding Estate Planning, please do not hesitate to contact us.