UK: Financial Interests When Separating – ‘Make Your Intentions Known'

Senior associate Lucy Gould reviews the recent case of Davis v Jackson [2017] EWHC 698 (Ch), in which the court determined the beneficial interests a separated (but not divorced) married couple each held in a property. The property was owned in joint names but occupied only by the wife, who had solely financed its purchase and the mortgage.

Background

The husband (H) and wife (W) separated (although did not divorce) in 2001. In January 2003, W remortgaged a property in her name in order to purchase the property that became the subject of these proceedings. She then lived in this new property with the children of the family. The property was registered in W's sole name and subject to an interest only mortgage, the cost of which was met by her alone.

In April 2003, a declaration of trust was executed between H and W stating that the property was owned beneficially by them in equal shares, although the legal title remained in W's sole name. The trust deed provided that H would pay half of the mortgage. However, he made no financial contribution whatsoever.

In March 2007, the property was remortgaged. At the time, it appears that W was suffering some financial difficulties. The legal title to the property was conveyed into the joint names of H and W and specifically expressed on the transfer form to be held as joint tenants (rather than tenants in common in specified shares). Again, both parties were responsible for the new mortgage, albeit H never paid (indeed he never made any financial contribution to the purchase, mortgage or running costs of the property). It appears that he was included in this transaction so that W could secure the remortgage.

H's bankruptcy

In 2012, a bankruptcy petition was filed against H and trustees in bankruptcy were duly appointed. In 2013 and 2014, the trustees wrote to W inviting her (i) to provide evidence that she owned more than 50% of the property (the assumed share given its ownership as joint tenants); and (ii) whether she wanted to make an offer to buy out H's share.

Having received no response to those enquiries, in 2015 the trustees issued an application for (i) a finding that H owned 50% of the property; and (ii) an order for sale in order that the trustees may realise H's share. An order for sale was made, but suspended to allow W time to take proper legal advice.

At a subsequent hearing, the order for sale was upheld on the basis that the law should follow the ownership as recorded on the face of the 2007 transfer document. It was noted that this document, conferring 50% of the ownership on H, had been signed when W already knew that H had not made any contribution to the mortgage despite the terms of the 2003 trust deed.

The issue for the court to decide was how to divide the proceeds of sale between W and the trustee. Specifically, it needed to determine whether there should be any equitable accounting to enhance W's share over 50% to take account of the contributions she had made to the mortgage and running costs (unmatched by H).

Court's decision

The court found that W should receive a greater share of the proceeds of sale to account for the mortgage payments she had made. This was the correct approach as the mortgage payments had preserved the capital value of the property (even though it was an interest only mortgage). (A repayment mortgage would have been an even clearer case, having enhanced the capital value.) By the same token, W did not receive credit for payment of general running costs, as these did not contribute to capital value.

The trustees agreed that W should be credited with one half of the mortgage payments made (ie the amount notionally referable to H's share) until the date of the bankruptcy. Thereafter, the trustees argued that account should be given for occupation rent as it would have been unreasonable for them to claim to exercise H's right of occupation and, therefore, rent was payable in respect of H's share of the property from the date of the bankruptcy. It was argued that this negated any entitlement for W to received credit for mortgage payments post-bankruptcy.

The judge disagreed and ordered that W receive 50% of all mortgage payments made. Mr Justice Snowden identified a tension between the provisions of the relevant statute and the common law equitable accounting rules, but considered that the statutory provisions were not intended to replace equitable accounting. In any event, there was never any intention that H would reside at the property, nor had he ever done so. Therefore it was not correct to characterise him as having a right to occupy. Had H had a right to occupy prior to his bankruptcy, it would have been more difficult for Mr Justice Snowden to resist the trustee's argument in this respect.

Matthew Humphries, partner, commented: "This case highlights the importance for couples (whether married, separated or unmarried) to ensure that their proper intentions in terms of ownership of a property are expressly recorded (either on the transfer documents or in a declaration of trust), so as to avoid the sort of ambiguity that in this case led to lengthy litigation."

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