The equitable accounting exercise enables the co-owner who has provided monies towards a property to reclaim sums that have been spent post-separation. It has to take place in most TOLATA (Trusts of Land and Appointment of Trustees Act 1996) cases and will usually form part of the substantive claim.  In most cases one of the co-owners will continue to live in the jointly held property after the date of separation and thus, will be responsible for paying the mortgage instalments, rates and other outgoings.

The process of equitable accounting has its basis in 18th century chancery proceedings, many of which involved married co-owners (see Leigh v Dickenson (1884) 15 QBD 60). This Court of Equity case established that the proportions in which the entirety of the proceeds of sale should be divided between former co-owners must have regard to any increase in the value of the property brought about as a result of such expenditure. In Hill v Hickin [1897] 2 CH 579, Stirling J referred to the Court of Chancery practice of directing enquiries towards both occupation rent and expenditure on improvements. Under the old authorities, the Court of Chancery was keen to establish whether the occupant of jointly owned premises had excluded the other co-owner, in which case an occupation rent would be paid to the excluded party. By contrast, the co-owner who chooses not to occupy the property and is not excluded by any relevant factor or person, would not be entitled to claim an occupational rent from the owner in occupation.

More recent case law is not specific to cohabitants. This summary seeks to offer practical guidance as to how the exercise might be condensed and, if at all possible, avoided by identifying the common factors to be considered in the equitable accounting exercise.

Repayment of mortgage instalments by one party

Typically, the cohabitee remaining in the property after separation will be the cohabitee who continues to pay the monthly mortgage instalments. The case of Leake v Bruzzi [1974] 1 WLR 1528 deals with the question of interest-only versus re-payment mortgages. In this case the wife’s share of the proceeds of sale of the property was reduced to reflect the fact that the husband, who had remained in the joint property, had paid the monthly payments on the re-payment mortgage. Importantly, the husband was only credited for the capital repayment to the mortgage and not the interest element. This is because the court held that the interest element of the mortgage must be treated, “as something equivalent to rent or payment for use and occupation” (per Ormrod LJ).

Akhtar v Hussein [2012] EWCA CIV 1170 is the latest authority on equitable accounting.  Here was an appeal relating to the beneficial interest of a former matrimonial home.  On appeal the Judge said that the occupant of a property will not be credited with mortgage interest repayments when these are met from public funds (housing benefit).  The payment of mortgage interest when made from public funds should be deemed neutral as between the parties and therefore ignored. This had been one of the grounds for appeal although the outcome was, in our view, inevitable.

Occupation rent

Occupation rent is usually off-set against the interest element of mortgage repayments as the amounts are often broadly similar (Re Pavlou a bankrupt, [1993] 1WLR 1046). Therefore, unless there is evidence establishing that the payments of mortgage interest paid by the occupant are not equal to a fair occupation rent, then the notional occupation rent is simply off-set against the mortgage interest which would have fallen to the non-occupying partner but have instead been met by the occupying partner (Re Gorman (A Bankrupt) [1990] 1 WLR 616).

Typically, occupation rent will be such proportion of the fair rent as the value of the non-resident’s share bears to the value of the whole of the net proceeds of sale. A fair rent is the rent which would be assessed by the Rent Officer for an unfurnished letting of the whole of the property to a protected tenant.

The notion of occupation rent allows the non-occupying partner’s share to be credited with an amount to reflect the fact that the other party has benefited from enjoyment of the sole occupation and use of the joint property. In Dennis v McDonald [1982] Fam 63 the court held that occupation rent will be charged where the party in occupation has actually or constructively excluded the other party from occupation. In Re Byford (deceased) [2003] EWHC 1267 the court agreed that, typically, occupation rent is charged where the party in occupation has removed or caused the removal of the other party from the property, although ouster or forcible exclusion is not always conclusive. Changing the locks or adding an additional lock may be construed as exclusion and this is something that client’s should be aware of.

The court will also have regard to the intentions of the persons who created the trust, the purpose for which the land is held and the circumstances of each of the beneficiaries. These issues were considered in the Court of Appeal decision of Stack v Dowden (2006)1 FLR 254. Chadwick LJ made it clear that Miss Dowden would not be ordered to pay compensation in respect of Mr Stack’s exclusion from their family home, following an order for sale of that property where the timing of the sale was beyond Miss Dowden’s control. And, of equal importance, was the fact that Miss Dowden was obliged to house the children of the relationship at that property until the date of sale.  The House of Lords decision in Stack v Dowden [2007] UKHL 17 is more widely reported than the Court of Appeal decision and is regarded as one of the recent leading authorities on the issue of establishing a beneficial interest in co-ownership property disputes.  We shall deal with this further below.

Where the Court does award occupation rent during the period of postponement of a sale it will usually be 50% of the appropriate rent if the payer has a 50% beneficial interest in the property (Akhtar v Hussein).

Renovations and improvements to the property

According to Re Pavlou, where there has been expenditure involving the making of improvements to the family home, the improver should be credited with:

  1. one half of the increase in the value of the property resulting from the expenditure; or
  2. one half of their actual expenditure, if less.

In Re Gorman it was held that the improver should simply be awarded with a proportion of the costs of the works.

Therefore, when conducting equitable accounting, some thought must be given to any repairs and improvements to the property which the partner demonstrates were entirely funded from their own resources after separation.

Recent Authorities

The recent leading authorities on the issue of establishing a beneficial interest in co-ownership property disputes are the two House of Lords decisions in Stack v Dowden [2007] UKHL 17 and Jones v Kernott [2011] UKSC 53.  The question of equitable accounting was touched upon briefly in both cases.

In Stack v Dowden, Baroness Hale said in relation to the costs of Mr Stack’s alternative accommodation, having vacated the property in dispute, that the old principle of equitable accounting has been replaced by the statutory provisions of sections 12 to 15 of TOLATA.  In doing so she said that the provisions in TOLATA now govern the issue of whether the party who remains in occupation of the property is required to pay occupation rent to the party who has been excluded from the property, but commented that the results may often be the same.  Lord Neuberger similarly agreed that the payment of occupation rent is governed by TOLATA.

In Jones v Kernott the parties purchased a property in joint names in 1985 for £30,000 without any written document specifying their respective shares.  They used the proceeds of sale from Ms Jones’ mobile home to meet the £6,000 deposit and obtained a joint mortgage to cover the balance.  They lived there until they separated in 1993.  Mr Kernott did not contribute to the mortgage or towards the upkeep of the property.  He also made very little contribution towards the support of the family after the date of separation.  In 1996 the parties cashed in a jointly owned life policy to fund the purchase of alternative accommodation for Mr Kernott.  He would not have been able to afford to purchase the replacement property if he had been obliged to contribute towards the mortgage on the joint property with Ms Jones.  The Supreme Court restored the first instance judgment by unanimously holding that Ms Jones had a 90% share in the property and Mr Kernott had a 10% share.  In doing so, the court inferred that Mr Kernott’s interest in the property had crystallised at the date of separation and that after so many years of separation it was not fair for the parties to have equal ownership.  Lord Walker and Lady Hale commented that where the parties’ shares in the property remain unchanged over time, then the process of equitable accounting can apply.  However, where the parties’ shares in the property change over time then there is no scope for equitable accounting for such claims as occupation rent and mortgage interest.

Conclusion

Whilst equitable accounting is a flexible approach which enables the Court to do justice between co-owners by taking into account their post-separation contributions, responsible and aware co-owners who have access to specialist legal advice, should feel confident in quantifying their respective beneficial interests without the heartache of a protracted and expensive hearing. This involves considering the merits of a Declaration of Trust and a cohabitation agreement (where appropriate) when purchasing a property in joint names.