When it comes to property interests, arrangements between friends and family members are often informal. With rising house prices, these arrangements – particularly 'the bank of mum and dad' – are increasingly common. Such arrangements may work well while everyone is on good terms. But what happens if you and your spouse get divorced?
Reaching a financial divorce settlement with your spouse can be difficult at the best of times. However, if a third party has – or alleges to have – an interest in relevant property, this could make matters even more complicated.
Ways in which a third party may have an interest
One spouse may assert that the other is beneficially entitled to property held in the name of a third party, or that they have a proprietary estoppel claim in respect of property held in the name of a third party. For instance, you may believe that your spouse has a beneficial interest in their parents' property because they contributed part of the purchase price of that property.
Alternatively, a third party may have a beneficial interest, or a proprietary estoppel claim, in property held in the legal name of one or both spouses. This is what happened in Pamela Jane Teasdale v Rebecca Sarah Carter v Daniel James Teasdale [2023] EWHC 490 (Fam), 2023 WL 02372885 (the "Teasdale Case"), discussed later in this article.
For more information on when a non-legal owner can acquire a beneficial interest in property, see our previous article "How can I prove that I own a share in a property?". For more information on proprietary estoppel, see our previous articles "You broke your promise! Estoppel in the commercial property context" and "One day my son, all this will be yours".
Resolving matters where an amicable settlement cannot be reached between you, your spouse, and the third party
You or your spouse can commence financial remedy proceedings in the family court if an agreement cannot be reached outside of court (e.g. in mediation, 'around the kitchen table', or between solicitors). In financial remedy proceedings, the court is asked to make a decision about how the matrimonial assets should be split. Often, financial remedy proceedings are needed where there is a purported third party interest in a 'matrimonial asset' and the parties cannot agree on this issue.
If a third party has an interest – or alleges an interest – in relevant property, they may be joined to the proceedings as an "intervenor". This allows the court to determine the nature and extent of the third party's interest. This is an important ('preliminary') step before the court makes an order about how to divide the matrimonial pot, as such an order cannot sensibly be made before the size of the pot is determined. Therefore, the third party's interest will need to be determined as a preliminary issue, before the court decides how the matrimonial assets should be split.
The court will proactively invite the third party to the proceedings at the First Directions Appointment if they are aware of the issue and the third party has not directly applied to join the proceedings by this point.
Note that the third party could instead opt to commence their own civil proceedings under section 14 of the Trusts of Land and Appointment of Trustees Act 1996 ("TOLATA"), though this is not often advisable. This option shall not be considered in detail in this article. If the third party takes this option, they may seek an order that the civil proceedings should be determined before the conclusion of the financial remedy proceedings or that both should be considered together.
What legal principles apply in intervenor claims?
As indicated above, it is the law of trusts/ beneficial interests/ proprietary estoppel which is typically relevant in intervenor claims. Some of these principles are enshrined in TOLATA; others are contained in the case law. Issues such as fairness, resources, and needs play little or no part at the preliminary stage of the financial remedy proceedings to determine the nature and extent of the intervenor's interest. However, despite the issue being a civil one, the matter is heard and determined in the family courts.
Once the nature and extent of the third party's interest has been determined, the court will then be able to make an order on the appropriate split of the matrimonial pot between the spouses. However, it is worth noting that the court's power under the Matrimonial Causes Act 1975 is vast and expands to varying trust arrangements with third parties (where this trust can be seen as a nuptial settlement) and if this should prevail as 'fair' under the s.25 factors. A nuptial settlement is not defined, but it is commonly imputed where there is help to a couple for the purposes of providing them with matrimonial property (e.g. house, school fees etc). It is therefore not always the case that a third party's interest is cleanly removed from the matrimonial pot after their interest has been determined on a preliminary basis and this is an inherent risk of matrimonial finance proceedings.
A good way around this issue is to invite the parties to reach an agreement by way of private FDR Hearing, mediation or other form of alternative dispute resolution – this can be before or after the preliminary issue has been determined. If before, then the private FDR judge can provide an indication on the preliminary issue in the morning and provide an indication on overall matrimonial finance settlement in the afternoon (all on a without prejudice basis). By using these alternative dispute resolution options, you have more control over the outcome of these proceedings and this often leads to more satisfactory outcomes for all parties.
Do I want a third party to intervene?
In some circumstances you may want a third party to intervene. For example, if your sister has contributed towards the purchase price of your matrimonial home on the understanding that she would receive part of the sale proceeds when it is sold, and if your spouse now alleges that your sister's contribution was a non-refundable gift, it may be appropriate for your sister to intervene so that her interest can be ring-fenced.
Cost risk
However, intervening could be disproportionate in terms of costs for you and/ or your sister (in this example) even if your sister's intervenor claim is successful. Although the ordinary rule in financial remedy proceedings (namely that each party bears their own costs) does not apply to an intervenor's claim, there is no presumption that the intervenor and/ or you will recover your costs if the intervenor's claim succeeds. Although it is likely that the successful party/parties will have a costs order made in their favour, this outcome cannot be guaranteed, and any such costs order would not usually cover 100% of the costs incurred.
By way of illustration: in the Teasdale Case, collectivelythe family spent more than £1 million on legal costs in connection with the intervenor's claim. This figure did not include the costs of the financial remedy proceedings. As the appeal judge observed, the costs of the intervenor's claim vastly exceeded the value of the disputed property (Cow House, valued at £245,000). Partly for this reason, the appeal judge described the case as "one of the most regrettable pieces of litigation" that they had ever come across. More details on the Teasdale Case are in the next section.
Illustration: the Teasdale Case
This case went to appeal in January 2023. The hearing being appealed was a preliminary issue hearing in financial remedy proceedings. Pamela and Daniel were the divorcing couple; their daughter Rebecca was intervenor.
By way of background, Pamela petitioned for a divorce in November 2018. Daniel commenced financial remedy proceedings. In June 2020 Rebecca applied to be joined as intervenor, asserting that she had contributed financially to the renovation of Cow House in reliance on a promise that Cow House would be hers. Cow House was in the joint legal names of Daniel and Pamela. Daniel accepted Rebecca's claim in proprietary estoppel, but Pamela opposed it. The parties came close to settling in October 2020 but no lasting settlement was reached.
The preliminary issue hearing took place in December 2021 before the Family Court in Leeds. Rebecca's main claim was successful, though she lost on some other points. The hearing had occupied seven days of court time to hear the oral evidence. Pamela was ordered to pay one half of Rebecca's costs and one half of Daniel's costs.
Pamela appealed to the High Court of Justice Family Division, arguing among other things that the costs orders should be set aside. Her appeal was unsuccessful.
Summary
If you are divorcing, and you believe that a third party may have an interest in property owned by you/your spouse, there are a number of strategies available to you. The best strategy will depend on the following factors, among others:
- the value of the third party's claim;
- the merits of the claim;
- the goals of the parties;
- the parties' appetite for litigation; and
- the financial resources of the parties.
It is prudent to seek legal advice at an early stage, to protect your position and to ensure that you are adopting the best possible strategy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.