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Pre-acquired Assets – a new approach?

Liz Cowell and Abigail Lowther both of Slater & Gordon analyse the case law to see whether any general principles can be identified as to how the court will deal with pre-acquired assets in financial remedies cases.













Liz Cowell, principal lawyer and Abigail Lowther, solicitor, both of Slater & Gordon

Pre-acquired assets encompass a wide range of assets and can be acquired in many different circumstances. They include assets bought by one party before the marriage and those assets inherited or gifted to a particular spouse.

The argument, which faces the court when such assets exist, is whether they are to be treated as "matrimonial property" or "non-matrimonial property". If they are to be treated as the latter, does this mean that they should be excluded from the sharing principle or can they still be brought into the matrimonial pot for other reasons? If they are brought into the pot, are they to be shared in their entirety or can a spouse still seek to have a proportion of their value excluded?

The cases that come before the courts continue to highlight that the way in which pre-acquired assets are dealt with is fact specific. There is no accepted definition of what constitutes "non-matrimonial property" and the Law Commission has declined to offer any further recommendations in its report published on 26 February 2014 stating:

"Although we would have liked to recommend statutory provisions to address those situations, consultation responses have demonstrated that it is not possible to achieve sufficient consensus for us to recommend reform." 1

So where does that leave practitioners and their clients? What principles or general rules can be garnered from existing case law? 

The "needs" of the parties
According to the Law Commission:

"The courts' approach at present is generally not to make orders requiring former spouses to share property acquired by gift or inheritance, or acquired before marriage or civil partnership, unless that property is required to meet financial needs."  2

A definition of what constitutes a party's "financial needs" has been discussed as part of the Law Commission's recent report but consideration of a definition is beyond the scope of this article. What is clear, however, is that the assessment of a party's financial needs plays a pivotal role in the treatment of pre-acquired assets.

In GS v L [2011] EWHC 1759 (Fam), Eleanor King J held that, whilst the husband had brought substantial assets into the marriage, those assets were needed to satisfy the "immediate and long-term needs of the wife and the children".3  It was not appropriate to begin an investigation as to whether or not they constituted matrimonial or non-matrimonial property.

In N v F [2011] EWHC 586 (Fam), Mostyn J held that:

"it would be wrong and unfair for none of H's pre-marital wealth to be excluded from the sharing principle. It was the bedrock on which this marriage was founded….I have concluded that £1,000,000 should be excluded. This satisfies the justice of the sharing principle, and as I will show below, the residual sum will meet W's needs. Any greater excluded sum would not permit W's needs to be reasonably met. But for this factor, I would have excluded more." 4

Likewise, in B v B [2012] EWHC 314 (Fam), the court determined the extent to which it would be fair to include a husband's pre-marital wealth in the division of assets. The parties had been married for 15 years and there were no children. There was a 20 year age gap between the parties. The case came before Mr David Salter, sitting as a Deputy High court Judge, who stated that:

"In my judgment, it would be unfair not to exclude any of the husband's pre-marital wealth from the sharing principle. It underpinned the couple's future financial prosperity notwithstanding the wife's subsequent contributions. With some difficulty, I have concluded that a rounded figure of £820,000 should be excluded. The residual sum is sufficient to meet the wife's needs as identified at paragraph [90] and to do justice to the sharing principle."

He went on to say that:

"In summary, the wife's total capital needs in my judgment amount to £701,349. As Mostyn J observed in N v F, the assessment of need is not an insulated metric and the presence of pre-marital property may lead to a more conservative assessment of needs. In reaching my conclusion in relation to the wife's capital needs, I also have regard to the husband's pre-marital wealth." 5

But other factors will play a part in the court's consideration? How does this affect the majority of the cases before practitioners today? Do we require further guidance or have we really reached a plateau in decision-making?

Lifestyle, contributions and the source of pre-acquired assets
In Miller v Miller; McFarlane v McFarlane, [2006] UKHL 24 Baroness Hale said that: "the importance of the source of the [pre- matrimonial] assets will diminish over time".  6 The Law Commission's report reminds us that this points not to the length of the marriage being a determining factor when looking at pre-acquired assets, but that the nature of the marriage may result in an intermingling of pre-acquired and marital assets with the end result being that the parties cease to consider the pre-acquired assets as a separate entity.  How the parties have enjoyed or used the pre-acquired assets will therefore be relevant to the particular circumstances of the case.

Consider, for example, the somewhat contrasting outcomes in percentage terms of the cases of K v L [2011] EWCA Civ 550 and Robson v Robson[2010] EWCA Civ 1171. In K v L, the husband was awarded just 9% of the overall assets worth £57 million, whereas the wife in Robson v Robson received 33.33% of the assets of £22 million and was required to sell some of his pre-acquired estate to meet the settlement. What both cases had in common, however, was the importance that was placed on how the parties had lived during their marriage and the effect this had on the importance of status of the pre-acquired wealth.

In K v L, the wife had assets of just over £57 million which were entirely non-matrimonial, consisting of shares she had inherited before she and the husband were married. The wife had gifted the husband some of her pre-acquired assets to account for his assets of approximately £300,000. This case concerned a 21 year marriage where there were three children. Neither party worked during the marriage to generate an earned income. 

The distinguishing feature in this case was that despite the wife's wealth, the parties enjoyed a modest standard of living. They lived in a semi-detached property worth around £225,000 until the wife moved out with the children to a similar home worth £345,000. The family's average annual expenditure was around £79,000 and until shortly before the hearing all three children had attended state run schools.

At first instance, the husband was awarded £5.3 million which represented just over 9% of the total assets. The husband appealed, arguing, amongst other things, that the judge had failed to give sufficient weight to the fact that the source of the pre-acquired assets would diminish over time. He sought an order for approximately £18 million or one third of the assets which he said was justified by previous case law.

Lord Justice Wilson (as he then was) disagreed. At paragraph 18 of his judgment he said that:

"Thus, with respect to Baroness Hale, I believe that the true proposition is that the importance of the source of the assets may diminish over time. Three situations come to mind:

(a) Over time matrimonial property of such value has been acquired as to diminish the significance of the initial contribution by one spouse of non-matrimonial property.

(b) Over time the non-matrimonial property initially contributed has been mixed with matrimonial property in circumstances in which the contributor may be said to have accepted that it should be treated as matrimonial property or in which, at any rate, the task of identifying its current value is too difficult.

(c) The contributor of non-matrimonial property has chosen to invest it in the purchase of a matrimonial home which, although vested in his or her sole name, has – as in most cases one would expect – come over time to be treated by the parties as a central item of matrimonial property.

The situations described in (a) and (b) above were both present in [White v White]. By contrast, there is nothing in the facts of the present case which logically justifies a conclusion that, as the long marriage proceeded, there was a diminution in the importance of the source of the parties' entire wealth, at all times ring-fenced by share certificates in the wife's sole name which to a large extent were just kept safely and left to reproduce themselves and to grow in value."

The husband's appeal was dismissed. The award was not to be limited to an assessment of the husband's needs generously interpreted, but the parties' frugal lifestyle and the way they had conducted their marriage, had meant that the wife's pre-marital wealth was little called upon and therefore it wasn't a fair outcome to apply the sharing principle in this case. 

It was the husband's pre-acquired wealth that formed the largest asset in Robson v Robson where  the parties had been married for 20 years and had two children. The wife's assets were minimal but the husband's were worth just over £22 million comprising an Oxfordshire and a Scottish estate, all of which were inherited or could be traced back to inherited wealth.

In contrast to K v L, Mr and Mrs Robson enjoyed an extravagant lifestyle. Their lifestyle at first instance was described in the following terms:

"The husband's sporting and leisure activities focus on shooting, stalking and fishing and the wife's on horses and in particular dressage. They respectively can fairly be described as having a passion for these sporting and leisure activities and, because of wealth and land inherited by the husband, they have had the ability to indulge and enjoy them to the full." 7

Both at first instance and in the Court of Appeal, the parties were criticised for their spending habits. Whilst the husband tried to argue that his pre-acquired assets should be preserved for the future generation as they had been for him, Ward LJ disagreed and commented:

"I must stand back and look at the case in the round. It seems to me it leaves her well provided for. He can afford to make the payment out of the proceeds of sale of the Estate. The essential balance between needs and resources is struck. A good part of his inheritance is still intact provided he can learn to be a more careful steward of it. They must both learn to tighten their belts but that they ought to have done years ago. They lived off the fruit of the land without properly husbanding it." 8

Lord Justice Hughes agreed and added:

"That the origin of assets in inheritance is a relevant factor for the court in no sense means that the approach to inherited assets ought always to be the same. What is fair will depend on all the circumstances; those cannot exhaustively be stated but will often include the nature of the assets, the time of inheritance, the use made of them by the parties and the needs of the parties at the time of trial. In the present case, although the assets were inherited from the husband's family, the parties had jointly elected to live off them and, in effect, to use them as a substitute for earned income. There can be no possible complaint about an order which treated the capital in this case in the way the parties had themselves jointly treated it." 9

The wife had shared in the pre-acquired assets during marriage and so it was fair that she should be awarded a share in them on divorce.

Conclusion
The Law Commission has declined to make recommendations in relation to the treatment of "non-matrimonial property", given the fact specific nature of past judicial decisions. The cases touched upon in this article are just a few of the examples of recent cases that have considered the treatment of pre-acquired assets. It is clear that the parties' needs continue to dominate the judiciary's approach to the exclusion or otherwise of pre-acquired assets but in a "big money" case, other factors related to the parties' lifestyle and recourse to the pre-marital wealth has a part to play.

Of note is the Law Commission's comment that once non-matrimonial assets have been identified and it is agreed they are to be excluded, they are to be deducted from the total net assets before any calculation of sharing is to be applied. This was the approach taken in Jones v Jones 10 as compared with Robson v Robson where the whole of the property was shared but in differing proportions to reflect the pre-acquired assets. The Law Commission believe that this will create the clarity needed to have fruitful negotiations but accept that it is only to be applied in those cases where there is no concern about covering either party's needs.  11

_______________________

1 The Law Commission, Matrimonial Property, Needs And Agreements, February 2014, para 1.39
2 Ibid
3 [2011] EWHC 1759 (Fam), para 85
4 [2011] EWHC 586 (Fam), para 44
5 [2012] EWHC 314 (Fam), paras 85, 89.
6 [2006] 2 A.C. 618, para 148
7 As quoted in [2010] EWCA Civ 1171, para 37
8 [2010] EWCA Civ 1171, para 94
9 Ibid, para 96
10 [2011] EWCA Civ 41
11 The Law Commission, Matrimonial Property, Needs And Agreements, February 2014, para 8.81

5/3/2014