ESTABLISHING A BENEFICIAL INTEREST IN THE FAMILY HOME
Is Your Home really Your Own?
Individual Bankruptcies increased 11% between 11th April 2022 and 30th June 2023 with an increase of 4% 2023 Q1. In nearly every case, a debtor's most valuable asset will be the family home which will need to be sold should there be no other way of satisfying the debt.
This article examines when a beneficial interest of a spouse or other may arise where the sole legal owner has been subject to a judgement debt and their creditors or Trustee in Bankruptcy apply for an order of sale. It does not consider joint tenants or tenants in common.
WHAT IS A BENEFICIAL INTEREST?
In England & Wales the ownership of land is dealt with in 2 distinct ways. There is the legal ownership and the economic benefit i.e. what is commonly referred to as the beneficial ownership, which is an equitable interest.
The 2 ownerships are separate from one another insofar as the legal owner(s) will not necessarily be the same as the beneficial owner(s). The principle is that the legal owner holds the land on trust for the beneficial owners who will have a right (subject to being proven in court) to income from the property and a right to the proceeds of sale.
ESTABLISHING A BENEFICIAL INTEREST
The issue of a beneficial interest will arise when the couple separate at which point, the legal owner continues to hold the land on trust for another. There are 3 ways in which a beneficial interest can arise that in order of priority are:
1. By Express Declaration of Interests,
2. By Resulting Trust,
3. By a Common Intention Constructive Trust.
Pursuant to Bernard v Josephs (1982) 3 all er 162 CA the value of the respective shares should be decided when the property is sold, not when a couple separate
EXPRESS DECLARATION OF INTEREST
An Express Declaration as to how the legal owner intends to share the property with his spouse is made by the signing of a Deed or other written agreement that contains sufficient detail. This will always be enforced by the courts so long as there is no evidence of fraud of mistake (Goodman v Gallant [1986] Fam 106).
A RESULTING TRUST
A Resulting Trust is established based on the parties individual contributions to the property. These include, the deposit, conveyancing & legal fees, the mortgage and any substantial improvements. However, the High Court has ruled that the resulting trust analysis of beneficial interests in the property should not be applicable to family homes although, it may apply where former cohabitees were also business partners.
A COMMON INTENTION CONSTRUCTIVE TRUST
A ‘constructive trust’ is established when the court holds that the behaviour of the parties was such that one party should be regarded as trustee for another. Simply put, a trust is construed by the parties behaviour. A ‘common intention trust’ arises when the parties agree that the legal owner should hold the property on trust and the beneficial owner suffers a detriment in reliance on the agreement, but they subsequently fail to follow the formalities i.e. to execute a written declaration of trust or follow through on a promise to become joint tenants.
In these circumstances, the test for establishing the beneficial interest of the spouse in a property purchased as the family home but in the legal name of another was established in the cases of Stack v Dowden and Jones v Kernott :
The starting point is the proprietorship register. "Equity follows the law" is the maxim and so if 1 party is the sole legal owner then the default position is that they are the sole beneficial owner as well.
Should the Spouse claim a beneficial interest, they as the Claimant must prove their claim. There is no presumption of a beneficial interest just because the Claimant has resided in the property. Instead, the cases of Lloyds Bank plc -v- Rosset [1991] 1 AC 107 HL & Crossley -v- Crossley [2005] EWCA Civ 1581 establish a 4 stage test:
First, the claimant must show that there was an agreement that they should have a beneficial interest, even if there was no agreement about the precise extent of that interest. - This can only be achieved by evidence of the parties’ actual intentions, express or inferred, ascertained objectively (Thompson -v- Hurst). In undertaking this objective test, the courts should consider contemporary evidence of the parties intentions. A court cannot impute an intention to the parties at this 1st stage Capehorn v Harris [2015] EWCA Civ 955.
Secondly, there must be evidence of express discussions giving rise to the common intention, i.e. what their shares were to be. – It is only without evidence of an express written or oral agreement of a common intention, that court may either infer the parties’ shared intentions in relation to the property in light of their whole course of conduct. Alternatively, it may impute an intention that the Claimant is to have 'a fair share' in the property and assess the quantum in light of all the circumstances. In both cases the court will consider:
Direct Contributions to the purchase price, deposit, conveyancing/legal fees and/or mortgage; paid by the Claimant whether at the time of purchase or subsequently through mortgage instalments should justify the inference to create a constructive trust pursuant to Lloyds Bank -v- Rosset. However;
Contributions to family outgoings including food & entertainment; under Burns -v- Burns, will not be sufficient to establish a beneficial interest. It was subsequently upheld in Morris -v- Morris that such outgoing can easily be explained by the fact the couple were making their lives together rather than by a belief that one was holding the land on trust for another. That being said, the principle established in Stark was that the courts should take a wide view of what amounts to a contribution which was echoed in Abbot v Abbot where the parties whole course of conduct should be taken into account. Clearly in cases where the couple have maintained separate bank accounts and paid their own contributions to council and utility bills, the Claimant will have little chance of proving even an indirect contribution.
The Claimant must have acted to their detriment by relying on the intention that they would both have a beneficial interest. The Claimant may argue that they suffered financial detriment by contributing to the family’s outgoings as this was money they could be investing elsewhere. In reality, this will need to be considerable amounts and the money cannot be spent just for the Claimant’s benefit.
If such an agreement was made but it is impossible to establish a common intention about the proportions in which they are to be shared then unless the proportions themselves are agreed, the court may impute an intention that the claimant was to have a fair beneficial share Jones v Kernott [2011] UKSC 53, Para. 31. This is to be assessed in the light of all the circumstances and is where the court will consider the whole course of dealings between them as per Oxley -v- Hiscock.
The presumption that equity follows the law applies in favor of a co-owner. However, in a case of sole ownership the Claimant will have a higher hurdle to cross at the first stage, especially if they did not contribute to the purchase, mortgage or fund any significant improvements to the property.
EXCUSES, EXCUSES
Outside of insolvency, the typical sole ownership dispute involves the Claimant alleging that the property would have been put in their joint names but for, 'an excuse'. It is this excuse which is used as basis for the court to infer that the parties intended one would hold the property on trust for another. In these scenarios, the Owner must be found to have made the following representations which the Claimant will rely upon:
The property is to be a family home for them both and any children.
The property would have been acquired in both names but for 'an excuse'. It is this excuse which gives rise to a reasonable expectation that the claimant will acquire a beneficial interest in the property.
There is no set method for quantifying the parties split with the overriding principle being one of 'fairness' having considered the parties conduct as a whole in relation to the property. That being said, the courts typically award <26% to the Claimant.
Eves v Eves [1975]: The parties were already cohabiting and following their daughter's birth, they found a property to be their family home. When purchasing the property in his sole name, the Owner told the Claimant that as she was under the age of 21, he had to be the sole owner. Simply put, the excuse was that 'but for her age, the property would have been purchased in joint names'. Relying on these representations, the Claimant, jointly with the Owner, undertook repair and renovation work to the property. The Court of Appeal declared that the Owner held the property on trust as to 75% - 25% in favor of the .
Grant -v- Edwards and Another [1986]: The Claimant, first defendant, their child and the Claimant's children from her previous marriage lived in property purchased by the first defendant and his brother. The brother had no beneficial interest in the property but had joined in the purchase to assist in obtaining a mortgage. The first defendant told the Claimant that her name could not been included on the title because it would prejudice her position in pending matrimonial proceedings with her husband. The excuse was, 'the property would have been held in their joint names, but for the Claimant's matrimonial dispute.'
The first defendant funded the deposit and mortgage repayments, while the claimant made substantial contributions to general household expenses, without which the first defendant would not have been able to repay the mortgage. By making these payments, the court found that Claimant had acted to her detriment and she could not have been expected to make these payments unless she had an interest in the property. Again, the court found the property was held on trust 75 - 25% in favor of the Owner.
The aforementioned cases were distinguished in Curran -v- Collins, in what was considered a ‘spacious excuse.’
Curran v Collins [2015]:The mere provision of a specious excuse by the Owner does not give rise to the inference that the Claimant can reasonably regard themselves as having an immediate entitlement to the property. The owner must make positive representations that legal title to the property would be held jointly with the Owner but for the excuse. In this case:
The property where cohabitation began had not been purchased as a family home for the parties. The defendant acquired it in his sole name in 1984 and the Claimant did not move to live with the defendant until 2002.
The Defendant made no positive representation that the Claimant would be a co-owner but for a specific reason. The defendant sold the property and purchased another. When the Claimant enquired about her having an interest the Owner stated it would be 2 expensive to have her name on the title as it would involve paying 2 life insurance policies.
The Claimant could not be said to have acted to her detriment in reliance on the specious excuse or at all. There was no indirect contribution towards the mortgage because she had no excess of what she spent on herself. Nor was it suggested that she had made a non-financial contribution such as carrying out improvements, child-rearing or domestic activities.
BANKRUPTCY
In all cases of insolvency, the Claimant faces an even steeper challenge as not only do they bear the burden of proof, but are challenged by the overriding principle that permeates all insolvency matters:
The Interests of the Creditor Must Prevail.
When an Individual is declared by bankrupt either through their own application or that of another everything they own, including their beneficial interests (i.e. the Bankrupt’s Estate) rests in the Trustee In Bankruptcy (TIB) which on making the Bankruptcy Order will be the Official Receiver (OR).
Should the Bankrupt be the sole legal owner of the property then as equity follows the law, the TIB is entitled to treat the bankrupt as the sole legal and beneficial owner of the property. As before, the onus is on the spouse/Claimant to prove their interest.
Enquiries the TIB will undertake will include whether there is a Declaration of Trust, when it was made and whether it was protected by an entry into the H.M. Land Registry? Without this, it is unlikely the TIB will be satisfied that there is a beneficial interest unless a constructive trust can be established and in the case of bankruptcy, it will be difficult for the Claimant to establish this without contemporary evidence of financial contributions to the property.
A witness statement signed by the now divorced couple stating the non-legal owner was to have the majority if not all of the equity will have no weight as the 1st stage of establishing a constructive trust, is an objective test.
As for domestic duties, in insolvency these alone will always be insufficient to establish a beneficial interest as will paying a proportion of the council tax and utility bills. However, the funding of substantial improvements to the property, so as to enhance its material value may be sufficient but in general, the beneficial interest will relate to the financial value.
In all circumstances, the conduct of the parties will need to be considered objectively and there must be a common intention that a trust was to be created which would be inequitable to deny.
Example:
The following is a fictional example of a typical scenario commonly seen in a 'sham-divorce' case:
Mr Twaddle purchased a house now valued at £550’000. He marries Mrs Twaddle whom moves in several years later. During their 11 years of marriage Mr & Mrs T maintain separate bank accounts, pay their own proportions of the council tax and Mrs Twaddle never contributes to the mortgage. However, she does pay approximately £10’000 in home improvements. The couple never sign a Declaration of Trust and there is no other contemporary evidence as to how they intended to split the property in the event of separation.
Mr Twaddle then gets into trouble, quickly divorces Mrs Twaddle whom alleges a beneficial interest and the TIB looks to sell the property to realise the asset.
In this scenario, Mrs Twaddle’s financial contribution to the property is approximately 1.82% of the property’s value. If she has undertaken domestic duties she can plead for these to be considered but as there is no evidence that she ever acted to her own detriment and she pays her own proportion of the bills it will be difficult to establish a constructive trust but. Especially in light of the fact that the property was purchased prior to their involvement and Mrs Twaddle’s residency. Consequently, it would be unlikely that the TIB would find that there is a beneficial interest but if Mrs Twaddle does succeed, it will be minimal.
However, in the event that Mrs Twaddle was found to have given false information to either the TIB or the courts such as by over-exaggerating her residency and the couple's relationship, then she will likely face a host of penalties that would make failing to establish a beneficial interest completely inconsequential.
HOW WE CAN HELP
Unlike most law firms, our standard retainer includes a commitment to support our clients past judgement and through enforcement. Our job is not complete until our clients have received their compensation & costs.
Prior to commencing any litigation, we undertake a detailed search of your opponents' assets in order to ensure the cost of litigation never outweighs the benefits. Thereafter, we maintain a watchful vigil over these resources so you can be secure in the knowledge that you will receive your due judgment.
Gavin Renwick has successfully dealt with fraudulent debtors many of whom have supplied false information to county court bailiffs, High Court Enforcement Officers and/or made false representations in the Insolvency Courts in a bid to frustrate enforcement, hinder judgement and inflict further financial pain on their creditors. We are intimately familiar with matters concerning the conduct of the spouse and cases where the debtor has attempted to hide assets in faux-companies, family run business or through sham-divorces and fake addresses.
We have successfully advised and appeared for creditors at hearings for Charging Orders and are one of the few legal practices to secure a Charging Order over a bankrupt's property following the bankruptcy order.
Should you require legal advice whether as a debtor or creditor then contact us today.
Comments