Siân McKernon, a solicitor in our Family team, and Francesca Padilla, a solicitor in our Commercial property team, explore how an investment in commercial property can be impacted by divorce or separation.
Family investment in commercial property
As a family, you’ve sat down and discussed the idea of jointly buying a pub. An opportunity has presented itself just down the road and what could be more exciting than you, your partner (Kate), and your two children (Charlie and George) taking on this new adventure together and expanding your assets. Your intention is not to run the pub per se, but to be the joint landlords and invite tenants to bring in their own businesses, while you oversee and take your own rent. George is recently married and has a baby on the way, so it excited about the prospect of generating passive income for his family. Charlie is single and happy to be part of the family investment, seeing this as a new adventure.
Naturally, you will want to make sure your own interests are protected, whilst still offering an attractive deal to potential tenants. Getting the balance right can be tricky, but with the right legal representation it doesn’t need to eat into your already busy schedule.
Does the property have good title? Are there boundary or planning issues? Is the area at risk of flooding or contamination? You’ll want to make sure you know the answers to these important questions before committing to the purchase but let us get the answers for you. We will guide you through the process, step by step, while you embark on this new adventure and we will make sure every box has been ticked, so that you can finally sit back and watch your asset thrive. And why stop at one? Once you’ve seen what you can do as a family unit, keep that momentum going and keep branching out. We will always be on hand to help.
When problems arise, is the rental property at risk?
Investments made between family members can be exciting, but may carry risk in the context of spouses or civil partners deciding their relationship has irretrievably broken down. In this situation, if a divorce or dissolution is to take place, the financial claims that arise from this also need to be dealt with.
The process for this is to begin by gathering information on all assets each person has, before then determining the overall financial landscape.
George’s story
Sometime later, the business is thriving but George is struggling and has indicated he is intending to divorce his wife, Sam. Could you, Kate and Charlie be impacted? Yes.
The investment property is a capital asset for George, and produces an income, so will need to be included on the list of his assets. A value will need to be provided, which is often produced by a valuer with expertise in your type of investment property. Ultimately, this may mean the rental property is at risk, depending on the other assets that George and Sam have and how they are intended to be divided to meet their needs, and that of their child, moving forward.
Kate’s concerns
You are concerned about the impact George’s divorce will have on the family investment, and it is causing tension between you and Kate. Kate has indicated to you that she is not happy in your relationship and wants to trial a separation. Is the family investment at risk? Potentially.
You and Kate are not married, and there is no such thing as a ‘common law spouse’; as such if you and Kate separate, the financial claims that arise for George and Sam do not arise for you and Kate. You do not need to determine your financial landscape and divide a pot, and so the risk comes if Kate no longer wants to be part of the investment. The risk will depend on whether the investment property is held individually by the family, or if a company has been set up for this purpose.
What can be done?
The impact of George’s divorce on the investment property will be determined by the other assets within their marriage. The usual starting point when dividing marital assets is a 50/50 split, unless needs dictate otherwise.
If there are sufficient assets in the overall pot, it may mean the rental property can be retained by George and this can be ‘offset’ against Sam keeping a different asset they hold. Advice on this can be provided by specialist family lawyer.
If there are not sufficient assets, then it may be that George’s share in the investment property needs to be sold, to release capital to meet the needs of George, Sam and their child. In practical terms, this could mean:
- Selling the investment property;
- Selling George’s share in the investment property to another investor; or
- You, Kate and Charlie raising funds to buy George’s share.
From a family law perspective, this will release the capital required for the cash to be divided between George and Sam. However, each of the above options will have a different commercial impact, which it will be important to explore with a specialist commercial property lawyer.
The steps taken will depend on the your particular circumstances, and the overall financial landscape. Practical advice can be given based upon the aims of George in their financial matters, and we can seek advice in relation to commercial implications, such as tax from specialists within Moore Barlow.
How can I proactively protect an investment property?
What needs to be considered?
The use of pre-nuptial agreements is increasing, particularly when there are investment properties or a family business, which could be impacted by a possible divorce in the future.
In this situation, before embarking upon the investment opportunity, a discussion with a family lawyer to consider the risks would be prudent . For this family, George was already married when the investment opportunity arose; but a post-nuptial agreement may have been appropriate. A post nuptial agreement outlines the financial assets of the spouses or civil partners, after they have married, and sets out how those assets would be divided in the event of a breakdown in the relationship. For George, advice would be given based on the assets held with Sam, and the likelihood of a post nuptial agreement being able to protect the investment property.
For you or for Charlie, if either of you were to marry in the future, a pre-nuptial agreement may be beneficial. Again, the advice for this would depend on the financial assets held between those intending to marry, and advice would be given on the likelihood of being able to protect the investment property.
While pre-nuptial and post-nuptial agreements are not binding on the court, they are likely to be given decisive weight if the relevant criteria is met.
How can Moore Barlow help?
Our Commercial Property team can help with:
- advising on Heads of Terms for commercial property, whether buying, selling, granting a lease or taking one on;
- reviewing title to the property, carrying out searches and identifying risks and solutions;
- drafting leases, agreements and other associated documents, and negotiating the finer terms to ensure well-balanced deals;
- advising on potential future steps for your property or portfolio;
- being your point of contact for future property enquiries you may have; and
- many other areas of property – we look forward to your questions.
Our Family team can help with:
- Advising on the benefits of a pre-nuptial agreement;
- Advising on the benefits of a post-nuptial agreement;
- Providing practical advice in the event a relationship breaks down; and
- Assisting with the division of assets following a divorce or dissolution of a civil partnership
Moore Barlow has a wealth of experience, spanning multiple specialist areas. We work collaboratively to assist you with any issues you may have. Our Family team and our Commercial property team can assist when investment in commercial property is impacted by divorce or a relationship breakdown. Please contact Siân or Francesca if you have any questions.
