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Equitable accounting


Introduction

"Equitable accounting" is the phrase that has been commonly used to determine whether or not there should be some re-adjustment of sums payable (after the court has determined whether or not each party has a share in the property; and if so what that share is - applying the principles in Stack v Dowden); normally to take account of the fact that one person has continued to live in the property and possibly continued to pay the expenses on his or her own. Such adjustments can make a significant difference to the outcome of co-ownership disputes. There are three different matters that are usually looked at:
  • Occupation rent: Should the party who has remained in the property pay to the other a contribution having regard to the fact that he or she has had sole occupation of the property?
  • Mortgage instalments: If one party has continued to pay a greater sum to the mortgage than the other, is he or she entitled to a contribution in respect of those payments?
  • Improvements: If the party who has remained has improved the property after the other has left should that party receive some contribution in respect of those costs?

1996 Act

Equitable principles used to be adopted to determine whether any adjustments should be made. In Stack v Dowden the House of Lords held that the situation is now governed by ss 12 to 15 of the Trusts of Land and Appointment of Trustees Act 1996 (Lady Hale at para 94 – see also Murphy v Gooch); although the result in any given case is unlikely to be different. Lord Neuberger in Stack v Dowden:
    “I think that it would be a rare case where the statutory principles would produce a different result from that which would have resulted from equitable principles”.
(The notes that follow do therefore refer to some earlier cases.)

The key points arising out of the 1996 Act are as follows:
  • Section 12(1) gives each beneficiary a right to occupy the land.
  • Under s13 the trustees have the power to exclude or restrict that right but the power must be exercised reasonably.
  • Under s13 the trustees have power to impose conditions upon the occupier, which include the paying of outgoings or expenses or paying compensation to a person whose right to occupy has been excluded or restricted.
  • An application can be made to the court under s14, by the trustees or the beneficiaries, for an order relating to the exercise of these functions.
  • Factors that must be taken into account are set out in s15 (see Lady Hale at para 93):

      1. The intentions of the person or persons who created the trust;
      2. The purposes for which the property subject to the trust is held;
      3. The welfare of any minor who occupies or might reasonably be expected to occupy the property as his home; and
      4. The interests of any secured creditor of any beneficiary.
      5. The circumstances and wishes of each of the beneficiaries who would otherwise be entitled to occupy the property.
As indicated above, these provisions give the court the power to make adjustments to the amount that should be payable one party to the other (Stack v Dowden, Lady Hale at paras 93 and 94; Lord Neuberger, paras 148 to 157, in particular para 151).

Having said that it has been held that there are circumstances where the Act does not apply, in which case the equitable principles will apply. See the cases below under the heading: Trustee in bankruptcy.


Occupation rent

At common law one joint owner is not entitled to an occupation rent from the other. However, where one party has excluded the other from the property equity requires that the excluded party receive an occupation rent (see generally Dennis McDonald [1981] 1 WLR 810); and this is now reflected in the statutory provisions quoted above which must be applied (Murphy v Gooch below).

This has been extended in recent years so that “the presentation of a petition for divorce by the party remaining in occupation of the matrimonial home should normally be taken to signify a refusal to take the other party back into the matrimonial home, and a willingness to pay an occupation rent” (Re Pavlou [1993] 1 WLR 1046, per Millet J). Separating unmarried couples are treated in the same way (Murphy v Gooch [2007] EWCA Civ 603). Generally an actual ouster has not been required and the courts have basically done what is necessary to meet the justice of the situation.

In Stack v Dowden Mr Stack had been excluded under a court order but once that had come to an end he had still not gone back. Lord Neuberger thought that Mr Stack essentially had been excluded and so was entitled to an occupation rent. However, the majority thought not, which is perhaps inconsistent with some of the earlier cases, and perhaps a bit unrealistic. At the end of the day the courts will treat each case on its own facts. In Murphy v Gooch [2007] EWCA Civ 603, the first CA case after Stack, the CA held (applying the principles in Stack) that she did not have to prove ouster before becoming entitled to claim an occupation rent. The end of the relationship and her leaving was enough (para 18).

There is no fixed method for calculating how much should be paid by way of occupation rent but in Stack Lord Neuberger stated that the power to award compensation for occupation is now to be derived from the ss 12-15 of the 1996 Act and s13(3) and (6) in particular; and that the amount payable should be calculated by reference to the rental value of the property and that the outgoings will be taken into account when assessing rental value (para 154). The cost of the alternative accommodation that Mr Stack had taken was a rational basis on which to calculate the sum (para 157).


Mortgage payments

Although the remaining occupier may be obliged to pay an occupation rent to the party that has left, it is often the situation that the person in occupation continues to pay the mortgage on his or her own. Where the mortgage involves payment of capital and interest, the remaining occupier (if he has paid the mortgage) may often be able to claim credit for half the capital part but not the interest on the basis that the interest reflects the occupation rent (Leake v Bruzzi [1974] 1 WLR 1528). This can often, but not always, be a fair and cost effective way of reaching a conclusion of who the equitable accounting should be carried out. See also now Murphy v Gooch above - her entitlement to credit for occupation rent offset the whole of his credits for mortgage interest and rent. (See also Re: Richards (A Bankrupt) [2009] EWHC 1760 (Ch)).


Repairs and improvements

Where one party has spent money on repairs or improvements that have increased (or perhaps even retained) the value of the house the other party will frequently be required to give credit for a fair share (one half in the case of joint ownership) of the cost of those works (Pavlou [1993] 1 WLR 1046). Where justice requires it other payments may also be required (Bernard v Josephs [1982] EWCA Civ 2).


Trustee in bankruptcy

Entitlement to rent from spouse remaining in occupation

Where a co-owner remains in occupation of a property after the bankruptcy of the other joint owner, the trustee in bankruptcy is entitled, on the sale of the property, to set off a sum in respect that occupation against the co-owner's half share. The trustee would not have been entitled under the 1996 Act because he was not a beneficiary. However, the equitable principles continue to apply where the Act does not (French v Barcham [2008] EWHC 1505 (Ch)).

Wife given additional credit for one half of all the payments made under the mortgage

Davis v Jackson
[2017] EWHC 698 (Ch)

Summary

In this High Court case the judge held that ss12 to 15 of Trusts of Land and Appointment of Trustees Act 1996 have not replaced the doctrine of equitable accounting. On the facts the correct apportionment of the proceeds of sale of the property would be to split the net proceeds equally between the trustee and the wife, and then to give the wife additional credit for one half of all the payments she had made under the mortgage(s).

Facts

A husband and wife (H and W) became estranged and then lived apart. W re-mortgaged a property which she then owned and in which she lived with her four children. This released a capital sum which she put towards the purchase of a second property in her sole name (the "Property"). The remainder of the purchase price was borrowed by W on and interest-only mortgage. She then moved to live in the Property with her children.

W executed a trust deed concerning the Property. In this W declared, inter alia, that she held the Property on trust for herself and H in equal shares. The Trust Deed then contained a clause stating:
    "Consequently I the said [W] agree to pay half of the mortgage payments in favour of [the mortgagee] or any subsequent mortgagee of the Property in consideration of my being entitled to half of the equity of the Property."
The purposes for which the trust deed was executed were unclear but H did not live at the Property and never paid the mortgage or the outgoings.

Some years later, H became bankrupt and T was appointed as trustee in bankruptcy. The Court made an order declaring that T was entitled to one half of the equity in the Property and granting an order for sale, and made a direction that the net proceeds of sale be divided equally between the Trustee and W. Subsequently, the order for sale was varied to provide that it should be subject to an equitable account to be taken between T and W in relation to the divi-sion of the anticipated proceeds of sale of the Property.

Issues
  • What was the position concerning the equitable accounting between the parties on the sale of the Property?

  • Whether the wife should be charged an occupation rent.

Decision

W was entitled to claim an additional credit of one-half of the payments of interest which she had made under the mortgage(s) in relation to the Property.

T accepted that, as it was never anticipated that H should live at the property, no compensation should be paid by W for her sole occupation up to the date of H's bankruptcy. However, as it would be unreasonable for T to exercise an occupation right once he had become the owner of H's share in the property, T submitted that W should not be entitled to claim credit for the mortgage interest payments after that date, without taking into account an 'occupation rent'.

The Court held that the Trusts of Land and Appointment of Trustees Act 1996 did not provide an exhaustive regime to determine whether a payment in respect of occupation of property by a co-owner was to be made in any case (see French v Barcham [2008] EWHC 1505 (Ch) - above). Under general equitable principles, the default position was that where a trustee in bankruptcy was not in occupation and the co-owner was in occupation, occupation rent was not payable (Jones v Jones [1977] 1 W.L.R. 438 and Dennis v McDonald [1982] Fam. 63). The effect of French v Barcham (above) was to reverse that default position but Snowden J said that he did not find the analysis of the position in that case 'entirely convincing'. In any event it was not necessary to reach a conclusion as to whether the approach in French was correct as the court had a broad equitable jurisdiction to do justice between the owners.

Here, the facts of the case were unusual. The Property was acquired to provide a home for one co-owner alone, and the bankrupt never had, nor was intended to have, any right of occupation of the Property at all. That being so, it could not be in accordance with equity or justice for T, who had simply had the husband's interest in the Property vested in him, automatically to become entitled to claim an occupation rent from the wife. Snowden J:
    “The Trustee has in no sense been excluded from the Property; and it is not merely that it is unreasonable for the Trustee to start occupying the Property with [W] and her children; the true position is that [H] never had such a right at all. I therefore do not see how the Trustee can in effect claim to stand in a better position and charge [W] rent in place of seeking to occupy the property.”
Here, W had paid all of the mortgage instalments and all of the other outgoings in respect of the Property. It would not be equitable to charge W a rent for continuing to occupy the Property that she alone had always been intended to occupy without charge.

Accordingly the wife was entitled to claim an additional credit of one-half of the payments of interest which she had made under the mortgage(s) of the Property. There was no reason in principle why the credits should not include all money that W had continued to pay until any sale of the Property or agreement between the parties. All such payments had been made on behalf of both parties in order to ensure that the mortgagee did not take possession.

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