Equitable Accounting

Your TOLATA (Trusts of Land and Appointment of Trustees Act 1996) proceedings have almost reached conclusion. The Judge has considered whether the Applicant has acted to his detriment, made direct financial contributions, whether a constructive or resulting trust applies or, perhaps more unusually, whether there is any basis for a claim in proprietary estoppel. As a consequence the Judge is able to make a declaratory provision regarding the beneficial interest in the disputed property and to consider whether there should be an order for sale. Finally, the Judge will turn to the exercise of equitable accounting – an account or inquiry as to what sums are due to the claimant from the defendant by way of rent or compensation for use and occupation of the premises.

The equitable accounting exercise enables the co-owner who has provided monies towards a property, over and above their interest in it, to reclaim sums that have been spent post-separation. It has to take place in most cases and will usually form part of the substantive claim in Civil Proceedings Rules Part 7 or Part 8 forms, because in most cases one of the co-owners will continue to live in the jointly held property after the date of separation and thus, will be responsible for paying the mortgage instalments, rates and other outgoings.

The process of equitable accounting has its basis in 18th Century Chancery proceedings, many of which involved married co-owners (see Leigh and Another v Dickeson (1884) 15 QBD 60). This Court of Equity case established that the proportions in which the entirety of the proceeds of sale should be divided between former co-owners must have regard to any increase in the value of the property brought about as a result of expenditure by one co-owner. In Hill v Hickin (1897) 2 CH 579, Stirling J referred to the Court of Chancery practice of directing enquiries towards both occupation rent and expenditure on improvements. Under the old authorities, the Court of Chancery was keen to establish whether the occupant of a jointly owned premises had excluded the other co-owner, for whatever purpose and by whatever means, in which case an occupation rent would be paid to the excluded party. By contrast, the co-owner who chooses not to occupy the property and is not excluded by any relevant factor or person, would not be entitled to claim an occupational rent from the owner in occupation.

More recent case law is not specific to cohabitants. Accordingly, this summary seeks to identify the common factors to be considered in the equitable accounting exercise and we hope to offer practical guidance as to how that exercise might be condensed and, if at all possible, avoided.

Repayment of mortgage instalments by one party 

Typically, the cohabitee remaining in the property after separation will be the cohabitee who continues to pay the monthly mortgage instalments. The case of Leake v Bruzzi [1974] 1 WLR 1528 deals with the question of interest-only versus re-payment mortgages. In this case the wife’s share of the proceeds of sale of the property was reduced to reflect the fact that the husband, who had remained in the joint property, had paid the monthly payments on the re-payment mortgage. Importantly, the husband was only credited for the capital repayment to the mortgage and not the interest element. This is because the court held that the interest element of the mortgage must be treated, “as something equivalent to rent or payment for use and occupation” (per Ormrod LJ).

Occupation rent

In accordance with the principles on mortgage repayments, the courts have determined that the occupying party can only be credited for their repayments of the mortgage capital and not the interest element because the latter must be off-set against the liability of the occupying party to pay an occupation rent. This is set out in the case of Re Pavlou (A Bankrupt) [1993] 1 WLR 1046. In this case the husband and wife purchased the property in joint names subject to a mortgage. Ten years later the husband left the wife in occupation and she then paid for the mortgage and general maintenance of the property. The court held that the wife was entitled to credit for one half of the increase in the value of the equity of the property resulting from the capital element of the mortgage payments made by her. The court also held that occupation rent should be off-set against the mortgage interest payments.

Occupation rent is usually off-set against the interest element of mortgage repayments as the amounts are often broadly similar. Therefore, unless there is evidence establishing that the payments in respect of mortgage interest paid by the occupant are not equal to a fair occupation rent, then the notional occupation rent is simply off-set against the payments of the mortgage interest which would have fallen to the non-occupying partner but have instead been met by the partner in occupation (Re Gorman [1990] 1 WLR 616).

Typically, occupation rent will be such proportion of the fair rent as the value of the non-resident’s share bears to the value of the whole of the net proceeds of sale. A fair rent is the rent which would be assessed by the Rent Officer for an unfurnished letting of the whole of the property to a protected tenant.

Therefore, the notion of occupation rent allows the non-occupying partner’s share to be credited with an amount to reflect the fact that the other party has benefited from enjoyment of the sole occupation and use of the joint property. Dennis v McDonald [1982] Fam 63 held that occupation rent will be charged where the party in occupation has actually or constructively excluded the other party from occupation. In Re Byford (deceased) [2003] EWHC 1267 the court agreed that, typically, occupation rent is charged where the party in occupation has removed or caused the removal of the other party from the property, although ouster or forcible exclusion is not always conclusive. Changing the locks or adding an additional lock may be construed as exclusion and this is something that client’s should be aware of.

The court will also have regard to the intentions of the persons who created the trust, the purpose for which the land is held and the circumstances of each of the beneficiaries. These issues were considered in the recent Court of Appeal case of Stack v Dowden (CA (2006)1 FLR 254). Chadwick LJ (on appeal from the Central London County Court) made it clear that Miss Dowden would not be ordered to pay compensation in respect of Mr Stack’s exclusion from their family home, following an order for sale of that property where the timing of the sale was beyond Miss Dowden’s control. And, of equal importance, was the fact that Miss Dowden was obliged to house the children of the relationship at that property until the date of sale.

Mark Pawlowski usefully summarised the rationale for occupation rent as follows, “the rationale is that the absent partner can no longer realistically occupy the property and must incur the expense of securing another home” (‘Joint spending’ in the Solicitors Journal, 14 October 2005).

Although notional occupation rent is usually off-set against the interest element of mortgage repayments, this is not appropriate where the rental value of the property is significantly greater or lesser than the interest payments on the mortgage. If this is the case then a detailed enquiry is required.

Renovations and improvements to the property

According to Re Pavlou, where there has been expenditure involving the making of improvements to the family home, then the improver should be credited with:

a) one half of the increase in the value of the property resulting from the expenditure or;

b) one half of their actual expenditure if less.

In Re Gorman it was held that the improver should simply be awarded with a proportion of the costs of the works.

Therefore, when conducting equitable accounting, some thought must be given to any repairs and improvements to the property which the partner demonstrates were entirely funded from their own resources after separation. Practitioners may find further assistance from the recent case of Clarke v Harlowe [2005] EWHC 3062 which deals with the issue of repairs post-separation.

Conclusion 

We have reached the stage where our residential conveyancers are beginning to heed the warnings of a number of High Court Judges in the Family Division by taking more careful instructions from proposed co-owners so that there is no longer any excuse for failing to recite details of beneficial ownership. Of course, the revised Land Registry TR1 requires the registering solicitor to make a declaration regarding the terms of ownership by indicating whether the co-owners are to hold the property on trust as joint tenants or as tenants in common in unequal shares or on any other basis. For many family practitioners, the drafting of a declaration of trust is a familiar task. Increasingly commonplace are requests for cohabitation agreements which cover contributions towards mortgage, outgoings and property improvement expenses during the period of cohabitation. These may also make provision for the consequences of termination with particular reference to how bank and building society accounts will operate, credit card accounts and debts and which party will have the first option to buy out the other’s share, plus what might happen during any “cooling off” period. Whilst equitable accounting is a flexible approach which enables the Court to do justice between co-owners by taking into account their post-separation contributions, responsible and aware co-owners who have access to specialist legal advice, should feel confident in quantifying their respective beneficial interests without the heartache of a protracted and expensive hearing.

For further information email Kim Beatson or email Shelley Cumbers or call 020 7940 4000.