Equitable Accounting For Family Lawyers
Rhys Taylor, from Temple Chambers, Cardiff, summarises the issues arising when the court deals with the question of equitable accounting in TOLATA cases and highlights some of the problem areas.
Rhys Taylor, Temple Chambers, 32 Park Place, Cardiff.
With the increase in couples cohabitating, specialists in ancillary relief have had to become conversant with proceedings under the Trusts of Land and Appointment of Trustees Act 1996 ("TOLATA"). Many family lawyers find the equitable concepts and civil proceedings unfamiliar. Equitable accounting is a particularly foreign field and there is little help in the standard ancillary relief textbooks. This article summarises the issues which arise when the court deals with the question of equitable accounting and highlights some of the knotty areas which are apt to cause confusion.
The article will concentrate on the issues of occupation rent, entitlement to mortgage repayments and improvements .
The right to an occupation rent arises when one party is actually or constructively excluded from his or her property. The party excluded may seek occupation rent from the party remaining in the property. A relationship breakdown will often be regarded as a constructive exclusion. In the domestic context, the right to occupation rent will frequently be cancelled out by a claim against the excluded party for re-imbursement of mortgage interest payments.
When dealing with the issue of mortgage repayments as a discrete issue, the court may take into account both the capital and interest element of the mortgage payments made but sometimes will only take the capital payments into account.
Claims for improvements to property will, save in the most exceptional case, be for post-separation improvements and will be for either a due proportion of the cost of the works or the increase in value, whichever is the lower figure.
What is equitable accounting?
Equitable accounting is the use of the proceeds of sale of a jointly owned property (whether owned as joint tenants or tenants in common) to meet personal obligations that have arisen between the owners . It was described by Lord Justice Griffiths in Bernard v Josephs  1 Ch 391 at 405, in the following way:-
"When the proceeds of sale are realised there will have to be equitable accounting between the parties before the money is distributed. If the woman has left, she is entitled to receive an occupation rent, but if the man has kept up the mortgage payments, he is entitled to credit for her share of the payments; if he has spent money on recent redecoration which results in a much better sale price, he should have credit for that, not as an altered share, but by repayment of the whole or a part of the money he has spent. These are but examples of the way in which the balance is to be struck."
Such debits and credits do not alter the shares in the property, but adjust the sums ultimately payable on sale. There are no rigid rules, but rules of convenience aimed at producing a fair result and avoiding expensive and protracted inquiries .
There are two ways in which the necessary calculations can be approached. After division of the sale proceeds, the money spent by the claiming party can be credited to his overall award in proportion to his beneficial entitlement (e.g. if co-owners are entitled in equal shares, 50% of money expended would be credited). Alternatively, before division of the net proceeds, the sum expended by the one party is credited to him, and the remainder is divided in such shares as each is beneficially entitled.
Cohabiting couples are each entitled to possession of their co-owned property, provided that the purpose of the trust is to make the property available for occupation and that it is available and suitable for occupation: s.12 TOLATA. If this right is restricted in any way then the occupying party may become liable to pay a notional rent for his or her occupation of the other's share of the property, hence the phrase "occupation rent."
When does the right to an occupation rent arise?
If one party is excluded from the enjoyment of the property then a right to an occupation rent arises.
In the courts of equity, this was available only once a party could establish there had been "ouster." This word should not be confused with the old ouster orders available under the Domestic Violence and Matrimonial Proceedings Act 1976, but is an equitable concept.
So the question arises, what circumstances amount to exclusion?
The modern authorities start with the case of Dennis v McDonald  Fam 63, where violence was clearly regarded as behaviour which justified the payment of an occupation rent to the departing party.
In Re Pavlou  1046, a married couple had separated but the wife was "willing and anxious" to have her husband back. She later served a divorce petition which the judge thought "…may well have been no more than a reluctant recognition of a fait accompli" on the part of the wife. The husband was then declared bankrupt and questions of equitable accounting arose between the trustee in bankruptcy and the wife. Mr Justice Millet (as he then was) stated, at 1050:-
"I take the law to be of the following effect. First, a court of equity will order an inquiry and payment of occupation rent, not only in the case where the co-owner in occupation has ousted the other, but in any other case where it is necessary to do equity between the parties that an occupation rent should be paid. The fact that there has not been an ouster or forceful exclusion is therefore far from conclusive. Secondly, where it is a matrimonial home and the marriage has broken down, the party who leaves the property will, in most cases, be regarded as excluded from the family home, so that an occupation rent should be paid by the co-owner who remains. But that is not a rule of law; that is merely a statement of the prima facie conclusion to be drawn from the facts. The true position is that if a tenant in common leaves the property voluntarily, but would be welcome back and would be in a position to enjoy his or her right to occupy, it would not normally be fair or equitable for the remaining tenant in common to charge him or her with an occupation rent which he or she never expected to pay."
Whilst not called upon to decide the precise date from which an occupation rent should be paid, the judge expressed the obiter view 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 thereafter."
The above approach provides a useful guide for those cases dealing with married couples. However, for a departing cohabitee there is nothing as formal as the service of a divorce petition. When can it be said that occupation rent arises?
Snell suggests that, "In most cases of break down of cohabitation it is unrealistic to say that the absent party is free to return."  The problem with this on a theoretical level arises where a co-habiting party has left the home, perhaps to form a new relationship, but would be welcomed back by the remaining cohabitee to try and patch things up. Re Pavlou makes it clear that simply leaving the property on a voluntary basis cannot, in the eyes of equity, make the occupying party liable to an occupation rent.
In Byford v Butler  EWHC 1267 (Ch),  1 FLR 56, there had been no ouster or exclusion at all. Following the husband's bankruptcy, the trustee in bankruptcy simply failed to bring proceedings in respect of the matrimonial home for many years. The husband lived at the home until his death. Despite the court noting that in "the typical case an occupation rent has been charged where the party in occupation has actually or constructively excluded the other party from occupation"  the widow still had to pay an occupation rent. The court emphasised the words of Millet J, in Re Pavlou, that the finding of ouster or forcible exclusion were "far from conclusive". The court was exercising discretion to bring justice and equity to the parties. The widow had benefited for many years from the half share vested in the trustee in bankruptcy, who was not able to occupy the property for the benefit of the creditors.
Essentially, it comes down to evidence. In all but the clearest case to the contrary, the court may well be driven to find that a party departing from a property following a relationship breakdown is not welcome back and so a liability to pay an occupation rent arises.
On what basis should the rent be calculated?
In Dennis v McDonald it was held that the rent should be assessed on the basis of the relevant proportion of a fair Rent Act rate, rather than a rack or market rate. Others have argued  that this is a very outdated method of calculation. It does not appear to have been followed in reported cases. It is suggested that the modern approach, notwithstanding the precedent of Dennis, should be the relevant proportion of the market rent. Subject to proportionality, expert evidence will have to be called to deal with this. This question will often not even arise due to the convention of setting occupation rent off against mortgage interest repayments (see below).
Does the court take into account the fact that the remaining party is caring for the parties' children?
Dennis v McDonald held that the occupying party would still be liable, notwithstanding their care for the children, as the payment is in the nature of compensation by a trustee to a beneficiary. The court would be blind to the "family" aspect of the injustice this produced. This was decided in 1981 before there was any statutory equivalent to s13(4) TOLATA.
In Stack v Dowden  EWCA Civ 857,  1 FLR 254 the Court of Appeal was in no doubt about its power to order a beneficiary under a trust of land who is in occupation of that land to make payments to a beneficiary whose own entitlement to occupy the land has been excluded or restricted . However, this was subject to the factors set out in s.13(4) TOLATA which required the court to have regard to the intentions of the person who created the trust, the purposes for which the land is held and the circumstances of each of the beneficiaries. The trial judge had overlooked the fact that the occupying party (Miss Dowden) continued to provide a home for the four children of the couple. Consequently, there was no continuing obligation to pay occupation rent (or in the words of TOLATA "…make payments by way of compensation…"  ) pending sale of the property. It is clear from the judgment of Lord Justice Chadwick that the position may have been different if the court concluded that Miss Dowden was deliberately stalling the sale of the property.
Liability to account for mortgage payments
The remaining party may well be continuing to make mortgage payments due under a joint mortgage. How does equity deal with the fairness of this situation? A particular confusion in the case law is whether a claim can be for a proportion of the capital only or capital and interest? Snell notes, "He is indubitably entitled to them [repayments] so far as they consist of capital. In some cases he has been permitted to take credit for the interest element as well." 
In Re Pavlou Millet J explained the entitlement to a contribution for mortgage capital repayments as being akin to a claim for improvements to a property (see below). Essentially, the capital repayments have increased the value of the beneficial share that is co-owned and a non-contributing party should not be entitled to take advantage of that contribution to which he has played no part. Millet J went on simply to state  that the wife was also entitled to her interest payments. The rationale for an account for interest payments, which has added nothing to the value of the property, does not sit comfortably with the stated rationale for an account against capital repayments. 
Earlier authorities had denied that there was a liability to account for mortgage interest repayments . In Suttill v Graham  1 WLR 819 Lord Justice Ormrod stated  :-
"So far as my recollection goes, it has been the normal practice in this class of case to allow the occupying spouse to take credit for the repayments of capital but not of interest, because he or she has had the benefit of the use of the house."
There is simply no consistent principle emerging from the case law.
In Re Gorman (A Bankrupt)  1 WLR 616, sub nom Re Gorman (A Bankrupt) ex parte the Trustee of the Bankrupt v The Bankrupt and Another  2 FLR 284, Mr Justice Vinelott noted the practice of setting occupation rent off against mortgage interest payments and stated:-
"That practice is not, of course, a rule of law to be applied in all circumstances irrespective of, on the one hand, the amount of the mortgage debt and the installments paid, and on the other hand, the value of the property and the amount of the occupation rent that ought to be fairly charged. It is a rule of convenience and more readily applies between husband and wife or cohabitees than between a spouse and a trustee in bankruptcy of the other co-owner. Moreover, although the practice as recorded in Suttill v Graham  1 WLR 819 is to set the interest element in mortgage installments against a notional occupation rent, leaving the party paying the mortgage installments free to charge a due proportion of any capital repayments against the share of the other, I can see no reason why, if an account is taken, the party paying the installments should not be entitled to set a due proportion of the whole of the installments paid against the share of the other party. The mortgagee will normally have a charge on the property for principal and interest and a right to possession and sale to enforce his charge. The payment of installments due under the mortgage operates to relieve the property from the charge and gives rise to an equitable right of contribution by the co-owner who has not paid his due proportion of the installments."
In support of being able to claim an account for a due proportion of mortgage interest payments, as well as capital, it should be noted that the law of contract recognises a restitutionary right of contribution amongst joint debtors. 
A lick of paint is unlikely to engage a call for an account. But what if the occupying party, perhaps the sole owner who is met with a constructive trust claim three years after separation, has had his attic converted, or a new kitchen or bathroom? Should he claim for the cost of doing the work or should he claim for the increase in value? It was made clear in the case of Re Pavlou that the claim should be for whichever is the lower figure.
The basis for this is that a co-owner cannot simply expend money on a property and expect the other co-owner to contribute. The right to account arises only upon an order for sale. At this stage, it is deemed wrong for the party to take advantage of work which he has not paid for. If A spends £1000 on improvements but the increase in value is £1500, B (an equal tenant in common) will have "paid his share" of the works by paying £500. If A spends £1000 on improvements, but the increase in value is £500, B should only have to account for £250, as the work was not of his doing and he has only benefited to the extent of £250.
It is clear from the recent case of Clarke v Harlowe  EWHC 3062 (Ch) that the date from which to apply the account should usually be after separation. In this case the parties were joint tenants. Prior to separation, extensive works or refurbishment had been paid for by Mr Harlowe, amounting to approximately £90,000. His Honour Judge Behrens, sitting as an additional judge of the High Court, was not persuaded by Mr Harlowe's arguments that there should be an account for the cost of works prior to separation. Whilst the parties were together in a relationship there had been no breach of any obligation which would have given rise to an account. However, the court did go on to note that there may be exceptional circumstances  when it can be shown that during the currency of a relationship one party has failed to honour a clear agreement to fulfill an obligation and that may give rise to a pre-separation equitable account. It must be stressed that this eventuality would very much be an exception to the rule and only upon the clearest of evidence as to the parties' intentions at the relevant time.
A final point arises in light of Oxley v Hiscock  EWCA Civ 546,  Fam 211. In those cases where it is clear that a share was intended, but the parties were silent as to the quantification of the shares, the court must conduct a review of "the whole course of dealing" between the parties . After the court has carefully carried out such an exercise, arguably it can take into account those kinds of factors which would normally wait until the account stage of the case. Both the quantification and account stage could be wrapped up into the "whole course of dealing" review. There is, as yet, no authority as to how the courts will approach this question.
1. Practitioners should also be aware of the "equity of exoneration", where, if there is a charge on a jointly owned property to secure the debts of only one of the parties, that debt should be discharged from the equitable interest of the debtor: Re Pittortou  1 WLR 58. A further feature of equitable accounting is the liability to account for rents received.
2. Elizabeth Cooke ," Equitable Accounting." Conv  391.
3. Snell, 31st Edition (2005) at paragraph 18-30
5. Para 30
6. Cooke, ibid, 402 and Johnson  Fam Law 548
7. Para 63
8. TOLATA s.13(6)(a)
9. Para 18-30
10. At 1050 H
11. Cooke, ibid at 397
12. See e.g Leake (Formerly Bruzzi) v Bruzzi  1 WLR 1528 and Suttill v Graham  1 WLR 819.
13. At page 824
14. Chitty, 29th edition, paragraph 17-027
15. Paras 33 -39
16. Para 69