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Equitable Accounting: Not Dead Yet

John Wilson, of 1 Hare Court, considers the impact of the recent case of Barcham on the uses of equitable accounting where an interest in the matrimonial home vests with trustees in bankruptcy.

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John Wilson, Barrister, 1 Hare Court

Lord Palmerston once said “Only three people understood the Schleswig-Holstein Question. The first was Albert, the Prince consort and he is dead; the second is a German professor, and he in an asylum: the third was myself – and I have forgotten it.”

Whilst equitable accounting is perhaps not as daunting many family lawyers felt a similar sense of unease about that subject as 19th Century politicians did about the Schleswig-Holstein Question. So when Baroness Hale told us, in Stack v Dowden [1], that the old equitable principles had been replaced by sections 12 and 13 of the Trusts of Land and Appointment of Trustees Act 1996 (“TLATA”) there was an audible sigh of relief. When the euthanasia was confirmed by the Court of Appeal in Murphy v Gooch [2] there was not exactly rejoicing in the streets but we all felt that the ground we were standing on was a little firmer. However, on reading Barcham v French [3], one cannot help but hear the unwelcome sound of a coffin lid creaking open. 

The material facts of Stack v Dowden
These should, by now, be relatively well known.  In brief, the parties separated after 27 years when Mr Stack left the family home.  Interim provisions required Ms Dowden to pay him £900 per month by way of compensation for his exclusion from the property pending trial and the trial judge ordered her to pay him £900 per month until sale of the property.   The Court of Appeal allowed Ms Stack’s appeal against this part of the order.  Per Chadwick LJ  [4] the judge had overlooked the fact that a home had to be provided for the parties’ four children.  He also highlighted the fact that the jurisdiction to exclude someone from the family home was to be found in ss.13(3) and (5) and s.14(2)(a) of TLATA.  That jurisdiction, he found, had to be exercised with regard to the intentions of the persons who created the trust, the purposes for which the land is held and the circumstances of each of the beneficiaries – see ss.13(4) and (8).  One also needs to take into account the needs of any minor children – see s.15(1)(c) of TLATA.

Baroness Hale confirmed that approach and, if anything, went further.  She said that the provisions of ss.12 and 13 “replaced the old doctrines of equitable accounting under which a beneficiary who remained in occupation might be required to pay an occupation rent to a beneficiary who was excluded from the property.” [5]   “The criteria laid down in the statute should be applied rather than in the cases decided under the old law, although the results may be the same.”  She agreed that, in the circumstances, no occupation rent was payable by Ms Stack.   Lord Neuberger looked at the same facts and, whilst concluding that the question of occupation rent was governed now by ss.12 to 15 of TLATA, was of the opinion that it would be a rare case where the statutory principles would produce a different result from those which would have resulted from applying equitable principles.  He also concluded, although he was in a minority of one, that Mr Dowden should have his £900 per month.

Whilst it was perhaps simplistic to say that equitable accounting had been totally swept away by TLATA – there is more to equitable accounting than occupation rent and there are likely to be cases where there is, for example, a joint obligation to pay  a significant sum of capital to a third party, e.g. a judgment debt to the freeholder of £10,000 which is paid by the party who remains in occupation – it is fair to say that the impact of the statutory changes introduced by TLATA had not been fully recognised prior to Stack v Dowden.

The position, post Stack v Dowden, could therefore be summarised, tentatively, as follows:

  1. If the issue is limited to that of an occupation rent then the court must direct its attention to the principles enunciated within sections 12 to 15 of TLATA;
  2. TLATA provides the court with a wider discretion to justice than was available under the common law;
  3. In particular, the reasons why one co-owner has ceased to occupy the property will have less significance than it was afforded in the decisions prior to TLATA coming into force – when issues of voluntary vacation of the property might affect the entitlement to an equitable account and the right to compensation for an occupation rent;
  4. That said, the equitable principles that have developed over the last two centuries do still have significance and, in general terms, the results of a judicial determination should be the same applying equitable principles as they would be applying the statute;
  5. Issues of equitable accounting will always be fact-sensitive;
  6. Generally speaking, and subject to the impact of TLATA, equitable accounting will only come into play in the period post separation unless one party has failed to meet an obligation placed upon him/her during the period prior to separation [6];
  7. Whether the tenants hold as beneficial joint tenants or tenants in common is not relevant to the question as to whether or not there should be an account;
  8. Generally speaking it is appropriate for an equitable account to be taken after the property has been sold;
  9. If the property is not to be sold then the court can assist by setting out, in outline form, the basis upon which the equitable account should be taken [7] ;
  10. If both parties want to buy the property then the court can either direct that the property be sold at auction leaving each party to bid competitively for it or direct that one party should be entitled to buy out the other at a specific price [8};
  11. If the court lays down in outline the basis upon which the equitable account should be taken and the parties still cannot agree on the account it is open to them to seek another hearing at which the account can be settled – although this will usually be disproportionate to the sums involved;
  12. There is a lack of certainty as to the basis upon which the occupation rent should be calculated.   A variety of suggestions have been made over time such as taking the fair rent assessed by the Rent Officer for a letting unfurnished of the whole of the property to a protected tenant [9] or by reference to the analogy with trespass damages with the court awarding compensation based either on the notional rental value of the house or the cost of alternative accommodation [10];
  13. In most cases the court will conclude that the occupation rent is offset in its entirety by the mortgage interest paid by the person who remains in occupation;
  14. Where there has been a repayment of capital as well as interest on the mortgage, generally speaking, the payee should be given credit for half of the capital repayments on the mortgage which enhance the equity of redemption[11];
  15. However, point (14) does not amount to a general rule and because equitable accounting is fact sensitive it would be necessary on any enquiry to examine the facts [12];
  16. Before embarking on the equitable accounting exercise it is necessary to quantify the parties’ respective beneficial interests – if a party has a one quarter beneficial interest he should not be expected to contribute as to more than one quarter of any equitable account;
  17. Where there have been renovations and/or improvements carried out without the authority or consent of the co-owners the person carrying them out or paying for them is not entitled, without more, to an account in respect of those works; 
  18. Where works or renovation and/or improvements have been carried out with the express or implied agreement of the co-owners or with their express approval or at their express request or subject to a mutual obligation of all the co-owners to a third party then the party carrying out the works is entitled to credit for one half of the increase in the value of the property or one half of the actual expenditure if less than the increase in value (assuming the parties are equal owners of the equity – if not the entitlement will be dependent upon the percentage share in the equity).

Although the above summary sounds relatively complicated, in reality, in the majority of cases, provided the court is properly directed to the statute, the equitable accounting exercise would be relatively simple.   It will only come into play post separation, it is likely to consist of deciding whether or not an occupation rent should be paid and, in many cases, the existence of a mortgage being funded by the person remaining in occupation and/or the fact that that person remains responsible for providing a roof over the children’s heads will mean that no occupation rent is payable.

Then we come to Barcham v French.  In that case Mr and Mrs Barcham purchased a property in their joint names in 1992.  It was subject to a mortgage with the Woolwich Building Society.  In May 2001 they married and at all material times it was their home and they were in joint occupation of it.  However, in June 1994 Mr Barcham had been made bankrupt so that his share in the property vested in the Trustee in bankruptcy.   In December 2006 the Trustee applied for the sale of the property.  It was common ground that the Trustee was entitled to possession and that Mr Barcham was entitled to a one half share in the equity to which the Trustee could lay claim.  The issue between the Trustee and Mrs Barcham was as to the deductions that should be made from the Trustee’s half share of the property in respect of payments which she had made towards the costs of the property and whether the Trustee was, equally, entitled to credit for an occupation rent.  The District Judge held that the Trustee was not entitled to an occupation rent as he was not a beneficiary entitled to occupy the land under section 12 of TLATA and accordingly he was not entitled to any compensation under section 13(6). 

On appeal Blackburne J distinguished Stack v Dowden and concluded that ss.12 to 15 of TLATA did not provide an exhaustive regime for compensation for the exclusion of a beneficiary from occupation of a property held subject to a trust.   Whilst accepting that the Trustee did not fall within section 12 and, consequently, within section 13(6) he found (see paragraph 18 of the judgment):

“Where, as is common ground, a person such as a trustee in bankruptcy who is entitled for the benefit of the bankrupt’s creditors to an interest in possession of land subject to a trust has no such right of occupation (and neither do the creditors), there is no scope for the operation of section 13.  I do not therefore accept that, because Mr Barcham’s trustee in bankruptcy has had no statutory right of occupation (a matter which given the terms of section 12(2) (Counsel for the trustee) readily conceded), Mrs Barcham was not liable to be charged an occupation rent (or if one prefers so to describe it, equitable compensation) for her occupation of the property from the time that Mr Barcham’s beneficial interest in the property vested in the trustee in bankruptcy.”

The learned judge, having concluded that TLATA did not apply, looked again at the common law authorities on equitable accounting and, in particular, those concerning bankruptcy, namely Re Gorman [13], Re Pavlou [14] and Byford v Butler [15].  He approved the reasoning of Collins J in Byford v Butler at paragraph [40] and at paragraph [35] Blackburne J said:

“When a trustee in bankruptcy has been appointed of the estate of a co-owner so that the co-owner’s interest vests in the trustee, but the other co-owner remains in occupation of the property, application of the principle will, ordinarily, if not invariably, result in the occupying co-owner having to account to the trustee of the beneficial interest to which the bankrupt co-owner was formally entitled for an occupation rent.  This is because it is not reasonable to expect – even if it were otherwise practicable for him to do so – the trustee in bankruptcy to exercise the right of occupation attaching to the interest in the property that vested in him on his appointment as trustee of the bankrupt owner.  If it could be shown that the occupying owner was given by the trustee to understand that no occupation rent would be charged or was unaware of, and had no reasonable means of discovering, the other co-owner’s bankruptcy, the court might take the view that it would not be just to require the occupying owner to pay an occupation rent.   But short of such circumstances it is difficult to see why the occupying co-owner should not be charged with an occupation rent.”

Thus it is comparatively clear from the judgment [16] that in cases not covered by TLATA, such as those involving the trustee in bankruptcy, the pre-existing principles of equitable accounting (so far as relevant to determine when and to what extent a charge should be made for an occupation rent) should continue to apply.    This may well be a matter of some moment as, in cases involving the trustee in bankruptcy, the time-scale being considered for the purposes of equitable accounting may be significantly greater than in a case where the pressing need of the person out of occupation to be rehoused from the equity means that a sale of the property will be measured in months rather than in years. 

In truth, the result contended for on behalf of Mrs Barcham would not have been a fair one so far as the creditors of Mr Barcham were concerned.  Whilst many of us subscribe to the view that, when the final trumpet blows and we are summoned from our graves, a lawyer will pop up brandishing The Trustees in Bankruptcy (Unfair Day of Judgment) Act, so as to give the trustee a way out, it would have been an odd state of affairs if the decision in Stack v Dowden removed altogether the principles that applied in cases which were not covered by the wording of TLATA.    It does mean, however, that we cannot throw away our equity textbooks just yet.  Equitable accounting is alive and well and will continue to haunt the fringes of practice concerning cohabiting couples.

[1] [2007] 1 FLR 1858
[2] [2007] 2 FLR 934
[3] [2008] EWHC Civ 1508 – decided on 4th July 2008
[4] [2006] 1 FLR 254 at paragraph [63]
[5] See paragraph [94]
[6] See Clarke v Harlowe [2007] 1 FLR 1  and Wilcox v Tait (2007) 2 FLR 871
[7] See Young v Lauretani (2007] 2 FLR 1211
[8] The latter option is controversial: see Lawrence v Bertram (Family Law May 2004) where this option was used but contrast this with Rahnama & Rahbari –v- Ansari, Dean & Dean & Rahnema (26th January 2008) where at [45] Thomas Ivory QC sitting as a Deputy High Court Judge doubted that there was jurisdiction for the Court to order one party to buy the other out: although the Court has “all the powers of an absolute owner”,  “But that is only `for the purpose of exercising their functions as trustees’ which begs the question: is a compulsory buy-out of the co-owners’ interest one of the functions of the trustee? It is not obvious to me that it is.”
[9] See Dennis v McDonald [1982] 3 FLR 398
[10] See Lord Neuberger in Stack v Dowden at paragraph [57]
[11] See Leake v Bruzzi [1974] 1 WLR 1528; Suttill v Graham [1977] 1 WLR 819; Dennis v McDonald
[12] See Millett J in Re Pavlou [1993] 2 FLR 751
[13] [1990] 1 WLR 616
[14] [1993] 1 WLR 1046
[15] [2003] 1 FLR 56
[16] See paragraph [42]