This article concerns co-owned properties and the ultimate division of sale proceeds when a property is sold.
Where property is co-owned, disputes can occur over how to divide the equity (or 'beneficial interest') in the property. When, for instance, an unmarried couple separates, it is not uncommon for there to be disagreement over how the equity in their home (and thus the proceeds of sale) should be shared between them.
Even where the couple's respective shares in the property are undisputed, there remains potential for dispute over contributions made towards the property after the date of separation. For example, money paid towards the mortgage or for improvements to the house.
How does the law cater for such scenarios and provide an outcome that is fair between the parties? By a process known as equitable accounting.
Equitable accounting can be described as the 'fine-tuning' of the ultimate division of sale proceeds. It can be ordered at the court's discretion under the Trusts of Land and Appointment of Trustees Act 1996 ("TOLATA").
An equitable account will only be awarded where it is necessary or desirable to do so to achieve justice between the parties. It almost always considers the position post-relationship breakdown, and is generally not concerned with circumstances which arose during the course of the relationship.
By equitable accounting, the court makes adjustments to each party's share of the sale proceeds to reflect the post-separation state of affairs and achieve fairness. Once the sale proceeds are apportioned according to the parties' beneficial shares, the proceeds of sale that each party is due to receive becomes a pot, out of which sums payable as equitable accounting are made and received. By way of example:
- A couple purchase a property as tenants in common in equal shares and are thus each entitled to 50% of the equity
- The couple split up and their property is sold for £500,000
- They would each be entitled to £250,000 of the sale proceeds (assuming for present purposes that there is no mortgage to repay or costs of sale)
- Each party therefore has a pot of £250,000 available for equitable accounting
- If an equitable account is ordered, money will move from one pot to the other, such that the amount actually received by the parties ends up being unequal
Under the broad umbrella of equitable accounting, three issues are commonly encountered:
- claims for mortgage payments;
- occupation rent; and
- improvements to property
If one party moves out of the property upon relationship breakdown, it is not unusual for that party to cease contributing to the monthly mortgage repayments. For example, they may have to pay for alternative accommodation, and might not be able to afford both overheads.
The party remaining in occupation might choose to pick up the slack on the mortgage and pay the other party's share to avoid the property falling into arrears and damaging their credit rating.
In this scenario, the occupying party could seek an equitable account from the other, to compensate them for the additional mortgage payments they have made. The basis for this is that, on a capital repayment mortgage, the capital repayments will have increased the net equity in the property and thus the value of both parties' beneficial shares. A party who does not contribute towards the mortgage should not be entitled to benefit from contributions made by the other person.
The court typically, therefore, differentiates between interest-only mortgages and capital repayment mortgages (and capital vs interest payments made in the latter).
Both co-owners are entitled to occupy the property pursuant to section 12 of TOLATA. Yet, it is typically the case that only one of the co-owners will remain in occupation of the property following the breakdown of the relationship. If one person's occupation of the property is restricted in any way, the party who remains in occupation may become liable to pay a notional rent for his or her occupation of the other's share of the property.
A person's occupation of property is 'restricted' if they are excluded from it. In other words, exclusion triggers the right to an occupation rent. But, what acts or events constitute an exclusion?
While it remains the case that a co-owner cannot, by leaving voluntarily, make the other liable for rent, there is no need to prove actual physical exclusion from the property in order to qualify for an occupation rent. In the case of Amin v Amin, it was held that a person may be effectively excluded by reason of threat or unpleasantness.
If the court does award an occupation rent, the amount payable is usually based on the open market rent. The occupying owner would then pay a percentage of that market rent to the non-occupying owner, equivalent to the non-occupying owner's beneficial share. It is, however, open to the court to look at other factors, such as the cost of alternative accommodation.
To achieve practical justice and avoid wasteful enquiry, the courts may take a broad-brush approach. For example, by setting off a claim for occupation rent with credit for mortgage payments made by the occupying party, so that the two claims effectively cancel each other out.
If, however, there is a large imbalance between the open market rent and the mortgage payments, it may be unfair in that case to say that one should cancel out the other.
Improvements to the property
Where works or improvements have been undertaken or paid for by one party, that party may be able to seek an equitable account from their fellow co-owner. Per cases such as Re Pavlou , the amount payable is calculated by looking at (a) the cost of doing the work and (b) the increase in value brought about by the works. The owner who carried out the works will then typically recover a percentage (equivalent to the other owner's beneficial share) of the lower of these two values.
Distinctions must therefore be drawn between cosmetic improvements on the one hand and structural changes (like extensions and conversions) on the other. If painting a wall or replacing a kitchen does not increase the value of the property, the lower of the two aforementioned values will be 'zero', meaning that no money can be recovered from the other party.
The claimant will need to provide evidence of the cost of the work, together with evidence of the increase in value attributable to the work. Providing historical evidence of this nature can be difficult (for example, where tradespeople have been paid in cash).
The Birketts' view
Equitable accounting is very fact sensitive and subject to the court's discretion. It gives the court a vast and flexible discretion when distributing proceeds of sale, with the objective of achieving fairness between the parties.
This area of law is highly fact sensitive and subject to the authority of a vast bank of previous cases, such that a nuanced application of the principles is required. Specialist advice should therefore be sought if making or facing a claim for an equitable account.
Originally published by 24 October 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.