When advising a judgment creditor on his or her options for enforcement, obtaining an interim and final charging order followed by an order for sale over a UK property can be an attractive option. However, judgment creditors must be wary of the extra complications involved where the judgment debtor co-owns the subject property with one or more others. Particular difficulties arise where the subject property is the family home. This article will examine some of the potential pitfalls of attempting to enforce a judgment debt against a co-owned family home.
Principles of co-ownership
When a property is owned jointly by two or more people (whether individuals or corporate entities), a trust of land arises. Except in certain limited circumstances, it is only possible for a maximum of four trustees to jointly own the legal estate, although there can be an unlimited number of co-owners of the beneficial estate. The identities of the legal owners and the beneficial owners may be the same, but this is not always the case.
The terms of a trust of land will be governed by the Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996) and any separate deed of trust. There are also circumstances in which co-owned property can be held on an implied trust, and in such circumstances the court has the ability to ascertain the terms on which the property is held based on the parties' shared intentions.
There are two forms of co-ownership. Co-owners may own the property as beneficial joint tenants or as beneficial tenants in common. The key practical difference between the two forms of co-ownership is that joint tenants benefit from an automatic right of survivorship. This means that a joint tenant's interest in a property passes automatically to the co-owning joint tenant upon death. This is irrespective of any purported gift of the property in the deceased co-owner's Will or the intestacy rules.
A joint tenant cannot truly be said to own a separate share of the property, since joint tenants are regarded as co-owning the whole of the property equally. Therefore, a joint tenant cannot dispose of or otherwise deal with his or her interest in a property separately from a co-owner's interest, unless the joint tenancy is severed. Severance is the process by which a beneficial joint tenancy is converted to a tenancy in common.
Contrast this with the position of beneficial tenants in common, who own property in defined shares. These shares are divisible from one another and can be disposed of or otherwise dealt with separately from the shares of other co-owners. The right of survivorship does not apply to beneficial tenants in common: a deceased tenant in common's share of a property will not automatically pass to a surviving tenant in common. Instead, the deceased's share will pass under his or her Will or intestacy.
Beneficial tenants in common may own the property either in equal or unequal shares. Often, the proportion of the property held by each co-owner will be defined in an express declaration of trust. Otherwise, the proportions will fall to be ascertained by the courts based on the parties' shared intentions.
Enforcing a judgment against co-owned property
One of the first steps usually undertaken when a judgment creditor is looking to enforce a judgment is to investigate whether the judgment debtor has any significant UK assets. A well-advised, well-prepared litigant will have carried out some degree of investigation well before judgment is obtained, and often before litigation has even commenced.
During the course of these investigations, a property may be identified which is co-owned by the judgment debtor and one or more others. In these circumstances, the first question the judgment creditor may want to determine is how much equity is available in the property to enforce against. This will depend on the amount secured by any pre-existing charges by comparison with the value of the property. However, it will also depend on the proportions in which the judgment debtor co-owns the property.
Assuming there is sufficient equity available to justify enforcement action, various different co-ownership scenarios could apply with differing implications for the judgment creditor's tactics and prospects of success. Some of the trickiest and most commonly encountered scenarios are discussed below.
Scenario 1: All the co-owners of the family home are judgment debtors
This is the most straightforward co-ownership scenario for the judgment creditor. If there are multiple judgment debtors and all of them are co-owners of the entire legal and beneficial estate, the court may impose a charging order over the whole of the property pursuant to section 2(1)(b)(iii) of the Charging Orders Act 1979 (COA 1979). It is irrelevant in these circumstances whether the co-owners are beneficial joint tenants or tenants in common because the whole of the legal and beneficial estate can be charged.
A charging order granted under section 2(1)(b)(iii) of the COA 1979 would still be subject to any pre-existing legal charges granted over the property. The court has discretion whether to make an interim charging order and further discretion over whether to make the charging order final. It will consider all the circumstances of the case, including the personal circumstances of the debtor and whether any other creditors would be prejudiced by the making of the order (subsection (1)(5), COA 1979).
Once a final charging order has been obtained, the judgment creditor can apply for an order for sale under section 14 of the TLATA 1996. In deciding whether or not to make an order for sale, the court will consider the factors set out in section 15 of the TLATA 1996, and each case will turn on its particular facts. The factors set out in section 15 of the TLATA 1996 are as follows:
- The intentions of the person or persons (if any) who created the trust.
- The purposes for which the property subject to the trust is held.
- The welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home.
- The interests of any secured creditor of any beneficiary.
These factors are not exhaustive and are not ranked in order of priority. However, where all co-owners of the property are judgment debtors, absent any special circumstances this is likely to tip the balance in favour of the judgment creditor.
Scenario 2: Family home co-owned by the judgment creditor and their spouse or unmarried partner
This is one of the most common co-ownership situations encountered by judgment creditors in practice. Where only one of the co-owners is a judgment debtor, a judgment creditor can still make an application for a charging order under section 2(1)(a)(i) COA 1979. If the order is made, it will create an equitable charge over the judgment debtor's beneficial interest only; the partner's beneficial interest will not be affected.
If the judgment debtor and their partner own the property as beneficial joint tenants, the joint tenancy will be severed when the court makes a charging order against only the judgment debtor's beneficial interest. Where a joint tenancy is severed in this way, each joint tenant will become tenant in common of an equal share of the equitable estate. In this scenario, the final charging order would attach to the judgment debtor's 50% share of the equitable estate. (See, for example, C Putnam & Sons v Taylor  EWHC 317 Ch, at paragraph 20.)
Once the judgment creditor obtains a final charging order, the judgment debt is secured. However, in order to recover the debt, the judgment creditor will either need to wait for the property to be sold or make an application for an order for sale. The exercise of the court's discretion has thrown up particular difficulties. The courts try to strike a balance between the judgment creditor's entitlement to enforce the judgment on the one hand, and the interests of the co-owning partner and any children living at the property on the other. In every case these competing interests will be assessed and balanced against one another, and the courts should not automatically favour one party over another. (Austin-Fell v Austin-Fell  Fam 172, at pages 169-170 as approved by the Court of Appeal in Kremen v Agrest  EWCA Civ 41, at paragraph 13.)
Where there are no divorce proceedings pending and absent special circumstances, the interests of the judgment creditor are typically treated as an important factor weighing in favour of an order for sale. However, the court is required to have regard to the other factors set out in section 15 of the TLATA 1996 and the judgment creditor should not expect preferential treatment.
Scenario 3: Family home co-owned by the judgment creditor and their divorcing spouse or civil partner where divorce or dissolution proceedings are pending
Where the co-owners are married or in a civil partnership and there are divorce or dissolution proceedings pending or in progress, interim charging order applications are normally transferred to the relevant Family Court to be dealt with as part of the financial remedy proceedings. As above, each case will be dealt with on its own specific facts and the court will consider all the financial circumstances of the judgment debtor and their spouse or civil partner.
In the context of divorce or dissolutions proceedings, it is possible for the Family Court to make a property adjustment order under section 24(1) of the Matrimonial Causes Act 1973 or Part 2 of Schedule 5 to the Civil Partnership Act 2004. A key consideration for the court in deciding whether to make such an order will be whether there would be sufficient equity in the home to make adequate provision for the spouse or civil partner if the charging order was made final and the home sold. If the equity would not be sufficient, the court can make such order as is necessary to protect the spouse or civil partner's (and any children's) right to occupy the property. (See Harman v Glencross  Fam 81, at pages 98-99 for guidance on the approach the court should take.)
Where the interests of the judgment creditor are to be overridden in order to make appropriate provision for the spouse and children, the court can postpone the sale of the property for as long as is necessary to protect the spouse or civil partner's (and any children's) right of occupation: Kremen v Agrest, at paragraph 13. This is known as a Mesher order.
It is even open to the Family Court to transfer the judgment debtor's interest in the property to his or her spouse or civil partner, thereby frustrating the judgment creditor's charging order application entirely. This would only be done in exceptional circumstances. (Harman v Glencross, at pages 98-99.)
Scenario 4: Family home is registered in the name of the judgment debtor's spouse but the judgment creditor believes the judgment debtor has a beneficial interest
A judgment creditor may identify a property which, on the face of it, is solely owned by a third party (such as the judgment debtor's spouse). However, the judgment creditor may have reason to believe that the judgment debtor has a beneficial interest in the property.
This scenario sometimes arises in practice where a judgment debtor transfers their legal title to the property to a spouse with the intention of thwarting the judgment creditor's attempts at enforcement. Where a transfer of the judgment debtor's legal title to their spouse has occurred in the recent past, the judgment creditor may suspect that this was the true motivation for the transaction.
It is possible to apply for an interim and final charging order and an order for sale in these circumstances under section 2(1)(a) of the COA 1979. However, evidence of the judgment debtor's beneficial interest will need to be adduced at all three stages of the process (that is, when applying for interim and final charging orders and an order for sale).
The judgment creditor will need to rebut the presumption that beneficial ownership of the property mirrors legal ownership. (See Jones v Kernott  UKSC 53, at paragraphs 10 and 12.) There will then be a further evidential challenge in establishing the extent of the judgment debtor's beneficial interest. At both of these stages, it is likely that the judgment creditor will only be able to satisfy the evidential burden if they have access to specific evidence of the couple's intentions at the time of the transfer. This evidence may have been obtained during the proceedings which led to the judgment. Alternatively, the judgment creditor could apply for an order to obtain information under oath from the judgment debtor about his or her assets under CPR Part 71.
When considering whether to enforce a judgment against a property co-owned by the judgment debtor, judgment creditors should be mindful of the additional hurdles that co-ownership issues can present, particularly where the family home is involved. When advising a judgment creditor in these circumstances, it is essential to make clear the extent of the court's discretion at all three stages of the process, and manage expectations where the judgment creditor's partner or children may have competing interests.
This article was first published on the Practical Law Property Litigation Blog on 2nd December 2016