There are two types of ownership that can be established. These include legal ownership and beneficial ownership. This type of differentiation in the title is made in the real estate set up generally. A legal title or a legal owner is someone who is registered with the land registry authority. He exercises the right to control the various activities of the property. He is authorized to possess the property, use the property in the way he wishes or to sell or transfer the property to someone else.
The beneficial owner, on the other hand, is someone who is not registered with the Land registry authority and thus hard to identify them. They are people that have the right to be benefited out of the property. These benefits can be a share in the rent, proceeds out of a sales transaction, or even the right to reside in the property. The court made a clear distinction between the legal and beneficial owners in the case of Pecore v Pecore [2007 SCC 17]. There are also instances wherein the registered owner and the beneficial owners are the same (Csak v. Auman (1990) 69 DLR (4th) 567).
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Why is differentiation in the title important?
The legal owner does not mean that he has some special authority on the property. He is made the owner of the property and on the same note is also made responsible for all the activities that are carried out in the property. The Beneficial owner on the contrary, despite not having to take responsibility for the property, is entitled to the benefits of the property.
The differentiation in the title becomes necessary on this behalf. It also becomes necessary in cases of a particular legal owner wanting to take more benefit than the other. For example, A and B are Joint Legal owners of the property. A takes 70% while B takes 30% of the proceeds thus making A the owner with a higher share in the benefits of the property.
The differentiation can also have tax-related benefits to the owners as the rate to be paid as tax is dependent on the beneficial title of the property and not on the legal title of the property. By transferring the beneficial ownership in a property to the co-investor with a lower tax burden can help in reducing the overall tax payable, on both the owners of the property as it is the beneficial owner that is liable to pay the tax on the property.
When does a property need differentiation in the Title?
The differentiation in the title is needed when the buyer wants to differentiate his proceeds from that of his partners. Two or more people can buy property jointly. One person may want to take fewer benefits to form the property than the other to compensate him for other arrangements.
For example, one person may have contributed to the deposit on the property more than the other thus he might need more interest. Another example is when one of the owners covers the other cost such as the cost of being the manager of the property, etc. in such cases the differentiation in the title is necessary.
The second scenario in which the differentiation becomes necessary is in cases of financing the property through a loan or mortgage. In such situations, the lender does not favor the borrower in putting another on “charge” of the property. Charging is a legal terminology used to show that the property is kept as security for a loan. This is to ensure that the repayment of the loan availed is obtained. Thus in such a scenario, differentiation in the title becomes important.
When the property is held by a trust, the trustee becomes the legal owner of the property as the property is registered in the name of the trust. The beneficiaries, i.e. for whom the property is held, becomes the beneficial owner of the property. In such cases, the trust deed or a private document can be used to state the names of the beneficiaries, and the differentiation in the title is made.
However, there are various kinds of trust arrangements. If it is a Discretionary Trust then the rights given to the beneficiary may be at the discretion of the trustee. For example, when a house is in the name of a minor, a trustee is appointed to take care of the property. The trustee in these circumstances becomes the legal owner of the property while the child will remain as the beneficiary of the property until he attains the age of majority.
The division also becomes necessary for availing of the tax benefits. The tax paid by the joint investors could be reduced by using a method by which re-apportioning the rent between owners is done in a way that does not reflect legal ownership proportions. The trustee in some cases becomes responsible to file the tax returns and pay the tax, which will be, ultimately, paid out to the beneficiary. The trustee pays the ‘upfront’ for the beneficiary who is later benefited as he gets the credit against his tax bill for the tax amount that has already been paid.
How are the legal and beneficial titles differentiated?
The legal right and the beneficial rights need to be differentiated and this could be made through an agreement. This agreement is also called the ‘declaration of trust’ and as ‘tenant in common agreement’ in the case of the tenancy. These documents generally consist of the details of the beneficiary along with his interest in the property.
Summing up it is to be stated that the interest that two parties have in a property can vary from legal interest wherein he gets the ownership registered with the Land Registry to beneficial interest wherein the person’s right to be benefited out of the property is established. The beneficial right and legal rights can be established by agreeing. The agreement can be made by naming the person as beneficiary and the interest he has in the property.
Sometimes it becomes important when there are two joint owners and one decides to give the other more return to compensate him or repay him of debt. A lender always prefers to be the beneficiary of the property kept as security with him to ensure that the loan is repaid. This arrangement of ownership also has tax benefits.