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Legal and beneficial ownership

This page deals with three issues:
  • Application of the Jones v Kernott test.
  • Application of the principles in Stack v Dowden to investment property.
  • Illegality.

Application of the Jones v Kernott test

Lack of child support

Barnes v Phillips
[2015] EWCA Civ 1056

Summary

In a claim following dissolution of relationship of the parties, the issue was whether, following a remortgage, the proceeds of which were used by the appellant for his business purposes, there was an agreement to vary the beneficial ownership in the property. The Court of Appeal considered the correct application of the Jones v Kernott test.

Facts

The parties lived together from 1989 until 2005. They had two children. The property that was the subject of the dispute was purchased and registered in both their names as joint tenants. They used their savings and obtained a mortgage. Both parties worked, although the respondent worked part time when the children were small. They both contributed to major works to the property.

During the course of the relationship the appellant (M) purchased three further properties which he said were a business investment for himself. They were registered in his sole name. In early 2005, M was in financial difficulty and told the respondent (W) that she and the children would be out on the street unless she agreed to remortgage the property. She agreed and the property was remortgaged. The funds went to discharge the first mortgage and pay back M’s debts, although he stated at trial that he had not in fact paid of two of the debts. There was almost nothing of the mortgage funds remaining.

M moved out of the property in 2005 shortly after the remortgage. He continued to contribute to mortgage repayments for about eight months. Between 2005 and 2008 M paid approximately £22,000 and W approximately £12,500 in repayments. M paid £250 per month for the children but not on a regular basis. From 2008 W had financial responsibility for the children and paid all the mortgage instalments. She also paid for all the upkeep of the property from 2005 which amounted to about £22,600.

At trial the property was valued at about £500,000 and the outstanding balance on the mortgage was about £113,000.

First instance

HHJ Madge found for W and preferred her evidence to that of M. He found that at the outset, both parties owned the property as joint tenants equally. The fact that there was unequal contribution did not matter. They had intended to set up a joint home. The judge said:
    “…both were contributing equally to what was in effect a marriage without a wedding ceremony. They had both intended to set up a joint home. He may have made a greater financial contribution because he earned more but she no doubt made a greater contribution towards the care of their daughters.”
The judge then went on to consider whether that situation had been varied. He tried to put the test into lay person’s language because M was in person. He said that there was no evidence that the parties later formed an actual common intention that their shares would change. There was no specific agreement as to a variation of the shares on the split. The evidence was that the parties had discussed a variation but had not reached an agreement about it. The judge continued:
    “…this is a case where it is not possible to ascertain by direct evidence or by inference what the parties’ actual intention was as to the shares they would own in the property after the split. That means that the Claimant and Defendant are each entitled to that share which the court considers fair, having regard to the whole course of dealing between them in relation to the property. I have to impute the parties’ intention by considering what is fair”.
The judge concluded that W was entitled to an 85% share and M a 15% share of the beneficial interest. M appealed to the Court of Appeal.

Issue

The main issue on appeal was whether the judge had correctly applied the test in Jones v Kernott [2011] UKSC 53.

Decision on appeal

The Court of Appeal dismissed the appeal. M argued that the judge had failed to conduct a crucial stage in the reasoning process when he applied the Jones v Kernott test in that he had not expressed a finding that there was evidence of an intention to change the beneficial interest. M said that there had to be evidence from which an intention to vary the beneficial interests could be inferred before it was possible to decide by a process of imputation what reasonable people would in fact have agreed.

M also argued that the judge was wrong to take into account W’s maintenance for the children. Sums were due and unpaid to the CSA and an award in this respect would amount to double recovery.

The Court of Appeal considered the way that the judge had applied the Jones v Kernott test. He had properly directed himself on the law, however he had missed out a stage in his reasoning. There was some lack of clarity in the way he expressed the first stage of the test, possibly because he was trying to make the decision intelligible to a litigant in person. However, it was possible to deduce from the judge’s reasoning that he had made a finding of fact that there was an intention to vary the beneficial interests, even though he had not expressly stated this. Having correctly directed himself as to the law, he would not have moved to the last stage of the test if he had not considered that there was such an intention as a matter of fact. There was evidence of discussions between the parties about a change in the beneficial shares in the property. The weight of the evidence supported an inference that the parties intended to alter their shares in the property.

Considering the issue about the lack of child support payments by the Appellant, the Court of Appeal restated the words of Baroness Hale in Stack v Dowden [2007] UKHL 17 that a very wide range of circumstances will be relevant when considering the imputation of intention in domestic contexts. The whole course of dealing between the parties would be relevant. A similar range of factors may be considered as when ascertaining the parties’ actual intentions. The court cited with approval the obiter dicta of Strauss J at first instance in Jones v Kernott that failure to contribute to the maintenance of children was a factor that could legitimately be taken into account. Despite the fact that the Court of Appeal had left this issue to one side in that case, Wall LJ observed that the defendant’s failure to maintain the children might well be relevant were he to seek to charge the claimant for her occupation of the property and were the process of equitable accounting to be applied between them.


Investment property

Application of Stack

Marr v Collie (Bahamas)
[2017] UKPC 17

Summary

The Privy Council has clarified that the principle that beneficial ownership follows legal ownership unless the contrary is proven as held in Stack v Dowden [2007] AC 432, is not limited to a domestic context and can apply where the parties' personal relationship has a commercial aspect. The context was key, informed by the parties' common intention, or the lack of it.

Facts

The appellant (M), and the respondent (C) were in a personal relationship with each other for about 17 years. During that time, they acquired a number of properties, including investment properties and other items. The appeal related to the ownership of the properties and the other items and how they should be disposed of on the breakdown of the personal relationship between them. Each party was relying on common intention but they could not agree on what it was. M had purchased various properties over a 10-year period, making all the financial contributions, but at the same time placing them in joint names with C as he alleged that C had promised to make financial contributions but failed to do so. He therefore claimed he was entitled to full beneficial ownership of the properties. C maintained that the parties had agreed that he was responsible for renovation, maintenance and furnishing the properties, much of which he had funded himself, and that he held a beneficial interest in the properties.

Main issue

What is the correct the approach that should be taken where cohabitees jointly own property purchased as an investment, rather than for a domestic purpose?

First instance

The trial judge, decided that the burden was on C to rebut the presumption of a resulting trust in favour of M but that C had failed to discharge it. The trial judge interpreted Laskar v Laskar [2008] EWCA Civ 347 as meaning that the principle in Stack v Dowden [2007] AC 432, that the starting point for jointly held property is that the beneficial interest is also held jointly, as equity follows the law, applied only in the "domestic consumer context". The presumption could not apply where the primary purpose of the property purchase was as an investment, even if the parties were in a personal relationship.

Court of Appeal

The Court of Appeal focused on the intention of M, and in particular an email that the trial judge had not considered that stated that to M a joint purchase meant a 50% interest held by each party. The appeal court also held that the first instance judge was wrong to place the burden of rebutting the presumption of resulting trust on C. It ordered the properties to be sold and the case remitted to a judge to assess the parties' respective contributions to the improvement works, so that these could be reflected in the division of sale proceeds. M appealed to the Privy Council.

Decision by the Privy Council

The Privy Council allowed the appeal and remitted the case for hearing before the Supreme Court of the Bahamas.

Where a property was bought in the joint names of a cohabiting couple, even if that was as an investment, it did not follow inexorably that the resulting trust solution must automatically provide the inevitable answer as to how its beneficial ownership was to be determined. The principle in Stack v Dowden was not confined exclusively to a domestic setting. In Laskar, the financial arrangement between mother and daughter was not associated with a mutual commitment to each other for the future, so the investment could be described as purely financial. Laskar was not therefore authority for the proposition that the principle in Stack v Dowden (that beneficial ownership follows legal ownership unless the contrary was proved), only applied in a domestic context (see Lord Kerr at para 49).

The Privy Council identified a “clash of presumptions”: the presumption that joint legal ownership should signify joint beneficial ownership appeared in conflict with the presumption of a resulting trust, where joint owners had contributed unequally to the purchase price. The answer was not that one presumption triumphed over another (unless there is no evidence from which the parties' intentions could be identified). Context was key, informed by the parties' common intention (or lack of it). If it was the parties' mutual wish that the joint beneficial ownership should reflect their joint legal ownership, effect should be given to that wish. If that was not their wish, or they had formed no intention about beneficial ownership, then the resulting trust solution may be the answer.

Intentions can change over time, which is why the majority in Stack v Dowden emphasised that examination of the parties' course of conduct over the years in which they dealt with the property is crucial. Here, properties were still being purchased in joint names years after M alleged he expected C to have contributed financially. If the financial contributions had not materialised, why did he continue to agree to purchase the properties in joint names? The trial judge and Court of Appeal had not adequately examined the central question of intention.

Comment

This case provides important clarification about the approach that should be taken where cohabitees jointly own property purchased as an investment, rather than for a domestic purpose. This judgment emphasises that no one presumption must triumph. Instead, the focus must be on the parties' intentions during the course of dealing with any investment property.

Illegality

Undue influence – influence of the community - illegality - housing benefit fraud

Kliers v Schmerler
[2018] EWHC 1350 (Ch)

Summary

The Court granted the declarations sought by Mrs Kliers as to the beneficial ownership of the former matrimonial home. She had been unduly influenced by her family and other members of her society into agreeing to the purchase arrangements for the property. Those arrangements raised matters of illegality but did not militate against the declarations sought on the facts and circumstances of the case.

Facts

Mrs Kliers began proceedings in 2015 for a declaration as to the beneficial ownership of the former matrimonial home (“FMH”). The FMH was purchased in August 2004, when Mr and Mrs Kliers had been married for nine years and had three children. It was purchased and registered in the legal ownership of the first defendant, Mordechai, who was Mrs Kliers younger brother.

All parties were members of a particular Hasidic sect in North London. Mrs Kliers claimed that the FMH had been acquired in Mordechai's name at the directions of various authoritative men (including Mr Klier's Grand Rabbi in Israel) because of his poor employment status and precarious income, and that her father had supported that; so had their London rabbi and a community adviser.

Both fathers had, at one point, intended to offer money towards the purchase but that did not happen. Mrs Kliers claimed that she and Mr Kliers beneficially owned the property in the proportions of 75:25 in accordance with their financial contributions. It was agreed that Mordechai would act as nominee and would hold the property on trust for herself and Mr Kliers (the second defendant).

Against that cultural background, Mrs Kliers submitted that she eventually consented to such an arrangement which enabled a mortgage to be obtained on an interest-only basis from the Bank of Scotland. However, she claimed her consent had been procured by undue influence from the men in the community. Further, that Mordecai provided no sums towards the purchase price, and that it was advised that despite the family connection if the FMH was purchased in Mordecai’s name Mr and Mrs Kliers could claim housing benefit. She also alleged Mordecai made a false declaration, amongst other things stating that the property was being purchased for his sole occupation when he obtained the mortgage.

Mrs Kliers separated from the second defendant in about 2012. Mr Kliers did not acknowledge service in the instant proceedings and was debarred from defending without permission. Mordechai served a defence claiming that he had purchased the FMH as the sole beneficial owner with his own funds and denied that Mrs Kliers had any interest except as an assured shorthold tenant with Mr Kliers.

In the course of the proceedings, in September 2016, Mordechai was debarred from defending for failure to comply with a disclosure order. Mordechai applied for relief and that led to a consent order in January 2017 which permitted him to defend on various conditions, including a condition that in the event of further breach of any order he would be automatically debarred and would not be able to apply for relief from sanctions.

A breach of that order resulted in another debarring order. Consequently, he was again debarred from defending and that remained in place at the trial. At trial his representative argued he should still be permitted to cross-examine Mrs Kliers due to her inconsistencies and as the evidence gave rise to a question of illegality as to the way in which Mr and Mrs Kliers obtained moneys in cash or through charitable contributions which meant them not having to treat them as income for the purposes of tax. However, this point was not put forward in Mordecahi’s defence.

Issues
  • Whether Mordechai was permitted to cross-examine notwithstanding being debarred from defending?
  • Whether or not Mordechai was a bare trustee and nominee holding on trust for Mr and Mrs Kliers?
  • What the common intention of the parties had been?
  • Whether there was any possibility of illegality; and if so what was it’s affect?
Decision

Cross-examination

There was no absolute rule that the debarred party was still entitled to participate by cross-examination and submissions without being able to put forward any positive case. A trial judge could decide under his or her case management powers (having regard to the overriding objective) to do what was just and expedient as regard the need and justification for cross-examination and further submissions in the particular case. The submissions on the morning of the trial did not justify the court allowing cross-examination or further submissions, on behalf of Mordechai, unless specifically invited. In this case the question of illegality arose on the Mrs Klier’s own case regarding the claims made from housing benefit in particular. The court had to be astute to ensure fairness between the parties. This was a one-sided trial because Mr Kliers has chosen to take no part and Mordechai had declined, despite so many opportunities, to comply with the court's processes in support of his purported case that he provided the funds for and was the beneficial owner of the FMH.

Bare trustee?

On the evidence in the witness testimony and looking at the documents, including the solicitors' file of Clifford Watts Compton ("CWC"), the Court was satisfied that Mordechai was a bare trustee. Mrs Kliers' uncontested evidence that the agreement was that she and her husband would provide the money for their matrimonial home, and Mordechai would be their nominee, was entirely consistent with the documents in the bundle.

Common intention

The respective financial contributions of the parties was not the be-all and end-all in relation to the ascertainment of common intention as regards the apportionment of respective beneficial interests. However, in this case it was the best evidence as to what that common intention was. The way matters proceeded had been very heavily reliant on, as the breadwinner as well as the homemaker, to put everything into the purchase of the FMH. Again, in the absence of contrary evidence from Mr Kleirs, it seemed a strong likelihood that the common intention had been that Mrs Kliers should be a 75% owner in proportion to her contribution to the purchase price. Mrs Kliers in her honest and, as found, accurate evidence and recollection, did not allege that the division of beneficial interest between her and her husband was the subject of any express agreement or discussions between them. The Court accepted that in the context of this particular community, it is not implausible that there were no such discussions.

Illegality

Mrs Kliers had accepted that the purpose of putting the FMH into Mordechai’s name, and the tenancy which was also involved, were to obtain funds from the Bank of Scotland as mortgagee, from housing benefit, from the London Borough of Hackney and the Department of Work and Pensions, to which there would have been no entitlement had the true state of affairs been fully and frankly disclosed to those third parties. The Court accepted an undertaking from Mrs Klier’s regarding disclosure and steps to ensure that both the Bank of Scotland and social security authorities are fully repaid from the sale of the FMH.

When faced with a claim based on a contract or arrangement involving illegal activity (whether or not that illegal activity had been undertaken the court should, when deciding how to take into account the impact of that illegality on the claim, bear in mind the need for integrity and consistency within our justice system, both civil and criminal, and in particular (a) the policy behind the illegality, (b) any other public policy issues; and (c) the need for proportionality. The principled exceptions were: (a) cases in which the parties to the illegal act were not on the same legal footing; (b) where overriding statutory policy required that the claimant should have a remedy notwithstanding his [or her] participation in the illegal act; and (c) the wide availability of restitutionary remedies should mitigate injustices which had resulted from the principle that “the loss should lie where it falls” as per Patel v Mirza [2016] UKSC 42.

The Court accepted that the arrangement had resulted from the exercise of undue influence upon Mrs Kliers; the pressure which had been exerted on her by her father and others, under the aegis or justification of what they had been told by the Rabbis should be done, had constituted undue influence.

Although there were considerations of restitution and public policy which militated for and not against the declarations sought, the policy which required all courts to try and protect that purpose did not militate against the Mrs Klier’s remedy as regards the declaration sufficiently to outweigh all other matters or, arguably, at all.


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