England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM EXETER COUNTY COURT
(HIS HONOUR JUDGE MCKINTOSH)

		Royal Courts of Justice Strand, London, WC2A 2LL
		27/06/2007

Mr Justice Lightman :

1. There are before the court an appeal by Ms Collete Murphy ("Ms Murphy") and a cross-appeal by Mr Ian Gooch ("Mr Gooch") against parts of the judgment ("the Judgment") dated the 8^th August 2006 of His Honour Judge McKintosh ("the Judge") sitting in Exeter County Court. The Judgment was given on an application by Ms Murphy under section 14 of the Trusts of Land and Appointment of Trustees Act 1996 ("the 1996 Act") for a declaration of the nature and extent of the interests of the parties under the trusts of a property at 5 Tudor Close, Paignton, Devon ("the Property") which they acquired as their home in 1991. The relationship between Mr Gooch and Ms Murphy broke down in 1993, upon which event Ms Murphy (with their daughter) left the Property. Since that date Mr Gooch has remained in sole occupation and made all payments arising due in respect of the Property. The issue on this appeal is the entitlement of Ms Murphy on the taking of accounts between the parties to offset a credit in her favour in respect of the continued occupation of the Property by Mr Gooch against the credits to which he is entitled in respect of the payments which he has made..

FACTS

2. Ms Murphy and Mr Gooch formed a relationship in 1973. One child was born of that relationship, Chantelle Murphy ("Chantelle"), on the 24^th August 1990. In April 1991 Ms Murphy and Mr Gooch purchased as their family home under a shared ownership scheme a 25% interest in a 99 year lease of the Property (a three bedroomed home). The other 75% interest was vested in the Devon and Cornwall Counties Housing Association Limited ("the Association"). The purchase price of the Property was £59,500. Ms Murphy and Mr Gooch paid £14,875 for their 25% share and the Association paid the balance for its 75% share. Ms Murphy and Mr Gooch borrowed £15,000 in respect of this purchase from the Portland Building Society ("the Society") on the security of a mortgage ("the Mortgage") and took out an endowment mortgage policy ("the Policy") with Scottish Life.
3. The relationship between Ms Murphy and Mr Gooch irrevocably broke down in 1993 resulting in Ms Murphy and Chantelle vacating the Property.
4. Mr Gooch thereafter remained in sole occupation. Ms Murphy in 1994, 1995 and 1996 in letters to Mr Gooch made clear her wish to realise her interest in the Property and asked him to purchase it. Mr Gooch declined. It would appear that Mr Gooch had no available funds. In 1999 Mr Gooch became entitled to and was thereafter in receipt of incapacity benefits.
5. On the 27^th February 2006 Ms Murphy commenced these proceedings seeking a declaration that she and Mr Gooch were entitled to the Property as tenants in common in equal shares, an order for sale, all necessary accounts, and an order that, if Mr Gooch continued in occupation of the Property, his continued occupation should be subject to various conditions, including the condition that he should pay Ms Murphy such sum as the Court thought fit as compensation for her exclusion from the Property. The Association agreed to abide by any order for sale made in the proceedings.
6. At the trial it was common ground that Mr Gooch had made between 1994 and 1999 three categories of payment in respect of the Property totalling £18,158 namely £5,257 by way of interest instalments under the Mortgage ("the Interest"), £8,870 by way of rent to the Association in respect of its 75% interest in the Property ("the Rent") and £4,032 by way of premiums under the Policy ("the Premiums"). It was also common ground that the value of the Property was £140,000, that the balance due under the Mortgage was about £15,000 and that the surrender value of the Policy was about £4,577. On this basis (leaving aside any entitlements to credits) there would be available on sale for division between the parties (prior to deduction of the costs of sale) the sum of about £24,577 and on the agreed basis that Ms Murphy and Mr Gooch were tenants in common in equal shares, this sum was to be shared equally between them. The issue between the parties was whether Mr Gooch's entitlement to credit in respect of his payments of Interest, Rent and Premiums was to be offset by an obligation on his part to give credit in an equivalent sum in the nature of an occupation rent in respect of his sole occupation of the Property since 1993. Whilst Ms Murphy claimed an order for sale, she made clear that she did not insist on a sale of the Property to realise her interest. She was content that Mr Gooch purchased her interest at its full value. Mr Gooch denied her right to make any offset in respect of his continued occupation since 1993 and maintained that he had made further repayments before 1994 and after 1999, that he was entitled to credits in respect of these further payments and that taking these further credits into account the value of Ms Murphy's interest was nil. He accordingly sought an order that Ms Murphy transfer her interest to him for its value, namely nil. It was common ground before the Judge that the question of entitlement to credits and offsets was to be determined by reference to the doctrine of equitable accounting.
7. The Judge held that Mr Gooch was prima facie entitled to credit in respect of all three categories of payment, but that it was necessary to balance against the payments which he made the fact that Mr Gooch occupied the Property rent and mortgage free. He went on to hold that it was in the circumstances right that there should be offset against the credits to which Mr Gooch was entitled one half of all payments in all three categories, namely £9,079 and that Mr Gooch was entitled to credit for the balance. He decided that Mr Gooch should have an option exercisable within three months to buy Ms Murphy's half interest in the Property at its full value and for this purpose he then proceeded to value that interest. The process which he adopted was as follows. He took £140,000 as the value of the Property and accordingly £35,000 as the value of the parties' quarter share. He deducted from this sum the £15,000 outstanding on the Mortgage (reducing the figure to £20,000) and then added back the surrender value of the Policy of £4,577 producing a figure of £24,577. (No question arises as to this, the first, part of the process.) He then divided this sum into two and held that one half of this sum (£12,288) represented the value of each of the parties' prime facie entitlement. He then deducted from Ms Murphy's entitlement the sum of £9,079 being the sum to be credited to Mr Gooch in respect of the three categories of payment producing a valuation of the entitlement on the part of Ms Murphy in respect of her interest in the Property of £3,209. (There is a serious question as to the second part of the process.) On this basis he held that the value of Ms Murphy's interest in the Property (without provision for any deduction of the costs of sale) should be quantified at £3,209; that Mr Gooch should have the option to buy Ms Murphy's interest for £3,209; and that in case Mr Gooch should not purchase Ms Murphy's interest, there should be an order for sale of the Property and that out of the proceeds £3,209 (less half the costs of sale) should be paid to Ms Murphy in full satisfaction of her interest. He also ordered Mr Gooch to pay Ms Murphy one half of her costs, such order not to be enforced without the permission of the court.
8. Ms Murphy (with permission granted by Jonathan Parker LJ) has appealed against the decision of the Judge that the offset to which she was entitled was limited to half of the credits to which Mr Gooch was entitled in respect of Interest and Rent. She contends that Mr Gooch should not receive any credit in respect of these payments because of her entitlement to offset against the full sums of these credits a credit for the equivalent sum in respect of his sole occupation of the Property. She does not challenge his entitlement to credit for half of the payment in respect of the Premiums. She also contends that it should be a condition of any order for sale of her interest to Mr Gooch that he should procure her release from all liability under the Mortgage and that (in default of such release) Mr Gooch should be ordered to provide her with an indemnity against any liability which she may incur so long as her liability under the Mortgage remains undischarged. There can be and was no challenge to her entitlement to this protection.
9. Mr Gooch has cross-appealed contending that he was not obliged to give any credit in respect of his occupation of the Property and that the figures for credits allowed to him by the Judge required to be increased to reflect the fact that payments had been made by him before 1994 and after 1999 for which the Judge failed to give credit. He contends that, if such increased credit is given to him, the value of Ms Murphy's interest in the Property is reduced to nil and the court should order her to transfer to him the Property subject to the Mortgage together with the benefit of the Policy free from any obligation on his part to make any payment to her.

RELEVANT LEGAL PRINCIPLES

10. To resolve questions between co-owners of the character raised in this case Equity developed the doctrine of "equitable accounting" to facilitate the striking of the balance between the co-owners. This consisted of a body of (non-binding) guidelines or rules of convenience aimed at achieving justice between the co-owners. The thrust of these guidelines was that, where it is just to do so, co-owners may be given credit for monies paid and expenditure incurred on the jointly owned property, a co-owner in sole occupation of property may be charged with or required to give credit to his co-owner for an occupation rent and these credits may be offset against each other. At one time the prevalent practice appears to have been that a co-owner in sole occupation would only be required to give credit for an occupation rent if he had actually or constructively ousted the other co-owner or co-owners from the jointly owned property. But more recent authorities made plain that an occupation rent may be ordered in any case where this is necessary to do broad justice or equity between the parties: see Lawrence Collins J in Byford v. Butler [2004] 1 FLR 56 at 65. Lawrence Collins J cited with approval the judgment of Millett J in the case of In Re Pavlou [1993] 1 WLR 1046 at 1050 C-D where Millett J said:

"I take the law to be to the following effect. First, a court of equity will order an inquiry and payment of occupation rent, not only in the case where the co-owner in occupation has ousted the other, but in any other case in which it is necessary in order to do equity between the parties that an occupation rent should be paid. The fact that there has not been an ouster or forceful exclusion therefore is far from conclusive. Secondly, where it is a matrimonial home and the marriage has broken down, the party who leaves the property will, in most cases, be regarded as excluded from the family home, so that an occupation rent should be paid by the co-owner who remains. But that is not a rule of law; that is merely a statement of the prima facie conclusion to be drawn from the facts. The true position is that if a tenant in common leaves the property voluntarily, but would be welcome back and would be in a position to enjoy his or her right to occupy, it would normally not be fair or equitable to the remaining tenant in common to charge him or her with an occupation rent which he or she never expected to pay."

The present case was argued before and decided by the Judge on the basis that the principles of equitable accounting applied.

11. But after the date of the Judgment on the 25^th April 2007 the House of Lords handed down its decision in the case of Stack v. Dowden [2007] UK HL 17; [2007] 2 WLR 831. The principal issue before the House of Lords in that case was the approach to be adopted by the court in determining the respective beneficial interests of co-owners of land. But there also arose a subsidiary issue as to the applicable principles to be adopted on the taking of accounts between co-owners and (most particularly) in determining claims by a co-owner out of occupation for an occupation rent from a co-owner in occupation. The House of Lords was unanimously of the view that the court's power to order payment to a co-owner of an occupation rent is no longer governed by the doctrine of equitable accounting but is instead governed by sections 12-15 (and in particular the statutory principles laid down in section 15) of the 1996 Act. The results may often be the same (see Baroness Hale in paragraphs 93-4 with whom three of the law lords agreed); indeed it may be that it would be a rare case when the equitable and statutory principles would produce a different result (see Lord Neuberger at paragraph 150). But the statutory principles must be applied.
12. Baroness Hale summarised the relevant statutory provisions and principles as follows:

"…. Section 12(1) gives a beneficiary who is beneficially entitled to an interest in land the right to occupy the land if the purpose of the trust is to make the land available for his occupation... Section 13(1) gives the trustees the power to exclude or restrict that entitlement, but under section 13(2) this power must be exercised reasonably. The trustees also have power under section 13(3) to impose conditions upon the occupier. These include, under section 13(5), paying any outgoing or expenses in respect of the land and under section 13(6) paying compensation to a person whose right to occupy has been excluded or restricted. Under section 14(2)(a), both trustees and beneficiaries can apply to the court for an order relating to the exercise of these functions. Under section 15(1), the matters to which the court must have regard in making its order include (a) the intentions of the person or persons who created the trust, (b) the purposes for which the property subject to the trust is held, (c) the welfare of any minor who occupies or might reasonably be expected to occupy the property as his home, and (d) the interests of any secured creditor of any beneficiary. Under section 15(2), in a case such as this, the court must also have regard to the circumstances and wishes of each of the beneficiaries who would otherwise be entitled to occupy the property." (see paragraph 93)

13. In broad summary section 12 of the 1996 Act confers on beneficiaries entitled to an interest in possession a right to occupy land available for his occupation. Section 13 confers on trustees, where there are two or more of such beneficiaries, the power (1) to exclude or restrict the entitlement to occupation of any one or more (but not all) of such beneficiaries; (2) to impose conditions on any beneficiary in relation to his entitlement to occupy, including conditions requiring him: (a) to pay outgoings and expenses in relation to the land; and (b) where the entitlement of another beneficiary to occupy land under section 12 has been excluded or restricted, to make payments by way of compensation to the beneficiary whose entitlement has been excluded or restricted and to forego any payment or other benefit to which he would otherwise be entitled under the trust so as to benefit that beneficiary. This section is designed to confer on trustees power to regulate and set the terms for future occupation of trust land. Section 14 confers power on the court on application by trustees or others interested to make such orders as it thinks fit: (a) relating to any of the trustees' functions (which includes their functions under section 13); and (b) to declare the nature or extent of a person's interest in property subject to the trust. It must be under the latter of these two powers that the statutory jurisdiction is conferred on the court to take accounts between co-owners.
14. Under the previous equitable doctrine the court was concerned only with considerations relevant to achieving a just result between the parties. The statutory innovation is section 15, which requires the court in determining all applications for an order under section 14 to include amongst the other matters to which it has regard: (1) in all cases (so far as applicable) the four matters referred to by Baroness Hale; (2) in the case of applications relating to the exercise by trustees of the powers conferred by section 13 the circumstances and wishes of each of the beneficiaries who is (or apart from any previous exercise by the trustees would be) entitled to occupy the land under section 12; and (3) in case of any other application (other than one relating to the conveyance of land to beneficiaries absolutely entitled) the circumstances and wishes of any beneficiaries of full age entitled to an interest in possession. The wider ambit of relevant considerations means that the task of the court must now be, not merely to do justice between the parties, but to do justice between the parties with due regard to the relevant statutory considerations and in particular (where applicable) the welfare of the minor, the interests of secured creditors and the circumstances and wishes of the beneficiaries specified.

DECISION

15. Since the case was argued before the Judge and the Judgment was given on the basis that the applicable law was the doctrine of equitable accounting and no reference was made to the 1996 Act, this court must reconsider and determine afresh the issues raised by reference to the 1996 Act.
16. The issues on this appeal are: (a) whether as a matter of procedure it was open to the Judge and whether it is open to this court even to consider whether Ms Murphy should be entitled to a credit in respect of Mr Gooch's occupation of the Property; (b) (assuming that it was and is so open) whether in law Ms Murphy was barred from claiming such a credit by reason of absence of proof of ouster of her from occupation by Mr Gooch; and (c) (assuming that she is not so barred) the size of the credit to be allowed to her.
17. I turn first to the procedural question. The gist of Mr Gooch's case on this question is that Ms Murphy made no claim (and indeed disavowed any claim) for payment of an occupation rent and that this precluded any claim to a credit for occupation rent to be set off against the credits to which Mr Gooch was entitled. It is apparent on a full reading of the transcript of the trial that it was clear to Mr Gooch and the Judge that the position taken on behalf of Ms Murphy was that, whilst she did not maintain a free-standing claim to payment of or credit for an occupation rent, she sought to set-off her entitlement to a credit for such a rent against the credits claimed by Mr Gooch. That was a perfectly sensible and proper approach to take. The fact that she disavowed any intention to maintain a free-standing claim to the credit did not preclude her from using her entitlement to this credit as a form of set-off.
18. I turn to the second question whether there was a need on her part to prove ouster from occupation. In my judgment, it was open to the Judge and it is open to this court to order credit for an occupation rent if it was or is just to do so, whether or not there was proof of any ouster. What (if any) credit could or should be given is a separate matter to be determined in accordance with the statutory principles. But even if ouster were necessary, it is quite clear that Ms Murphy left the Property on the breakdown of her relationship with Mr Gooch and I am satisfied (as the Judge was clearly satisfied) that, when she left the Property, she should be regarded (in the same way as a wife leaving a joint home on a breakdown of the marriage) as constructively excluded from the Property.
19. I turn now to the third question, namely the size of the credit to which Ms Murphy is entitled and in particular whether Ms Murphy's entitlement to a credit for occupation rent should offset the whole or only half of Mr Gooch's credits for Interest and Rent. Before answering this question I should remind myself of the statutory principles and consider their application. It is the duty of the court in this case under the statutory principles to do justice between the parties with due regard to the statutory considerations. The first and second of these considerations are the intentions of Ms Murphy and Mr Gooch as creators of the trust and the purposes for which the Property is held. The trust was created so that the Property should be their joint home (a purpose that has failed since 1993) and Mr Gooch has since that date alone used the Property as his home. The third consideration is the interest of any minor who occupies or might be expected to occupy the Property as his or her home whose welfare requires consideration. There is no such minor. The fourth consideration is the interests of the Society as mortgagee. The Society's interest will not be prejudiced by the outcome of these proceedings and in particular the success (or otherwise) of Ms Murphy's claim to set-off occupation rent against Mr Gooch's credits or a sale of the Property. The fifth consideration is the circumstances and wishes of Ms Murphy and Mr Gooch. They are both in straitened circumstances and whilst Ms Murphy wishes to set-off her claim to occupation rent against Mr Gooch's claimed credits and her wishes and circumstances require the realisation of her interest in the Property, Mr Gooch is anxious to avoid eviction from his long standing home.
20. The Judge held (applying the equitable doctrine) that her entitlement should be limited to one half of the credits claimed by Mr Gooch. But he gave no, and certainly no satisfactory, reason for limiting the credit in this way and there was no good reason or justification. The credits which Mr Gooch claimed were in the nature of the costs, expenses and outgoings of his continuing occupation of the Property: they were not payments of a capital nature or calculated to increase the capital value of the Property. It is not relevant that with inflation the value of the Property has increased since its purchase in 1991. The benefit of this increase in value accrues to the benefit of both parties in equal shares.
21. If the equitable principles continued to be applicable, I do not think that the Judge's decision could stand. There was no or no sufficient reason for limiting Ms Murphy's right to an offset to only one half of the credits to which Mr Gooch was entitled. But the question must now be decided by reference to the statutory principles and in my judgment they must likewise result in an entitlement to a set-off against the entirety of the credits for Rent and Interest.
22. If Ms Murphy had made or been able to make an application to the court before Mr Gooch's occupation commenced, the court would practically as a matter of course have imposed as a condition of Mr Gooch's continued occupation a requirement of his continued payment of the full Interest and Rent as proper and necessary in accordance with the statutory principles. Such statutory principles likewise require on an application made after the period of occupation that Ms Murphy should be entitled to offset a credit for occupation rent against the full payments of Interest and Rent made by Mr Gooch.
23. I should add that there must be available such a right of offset in respect of the full period of Mr Gooch's sole occupation and accordingly it is irrelevant whether the period during which Mr Gooch should obtain credit for payment of Interest and Rent exceeded that for which the Judge allowed, for all relevant payments were made during the period of his sole occupation.
24. On the agreed basis of a valuation of the Property at £140,000 Ms Murphy's half interest is to be valued as follows:

Value of Property - £140,000

Value of Quarter Interest - £ 35,000

Less deduction of Mortgage

of £15,000 - £ 20,000

Plus value of Policy - £ 4,577

Less deduction of credit to

Mr Gooch for Policy Payments

of one half of Premiums of

£4,032 (as directed by the

Judge) - £ 2,016

Net value of equity - £ 22,561

Ms Murphy's half interest - £ 11,280

25. Accordingly: (1) Ms Murphy should be entitled to setoff the credit to which she is entitled for an occupation rent against the credits to which Mr Gooch is entitled in respect of his payment of Interest and Rent and thereby to cancel them in full; (2) to secure his continued occupation of his home Mr Gooch should have the option (renewing the option granted by the Judge) exercisable within three months from today to buy the half share of Ms Murphy based on the agreed valuation of the Property at £140,000 subject to the Mortgage but with the benefit of the Policy for the sum of £11,280; (3) if Mr Gooch exercises the option he must assume an obligation to use his best endeavours to obtain a release of Ms Murphy from all liability under the Mortgage and enter into an undertaking to Ms Murphy to indemnify her against any liability under the Mortgage so long as it continues to subsist; (4) in default of exercise of the option or completion of the contract constituted by exercise of it in accordance with its terms, the Property shall be sold and the net proceeds of sale together with the surrender value of the Policy (after payment together with the surrender value of the Policy of the sum due under the Mortgage, satisfaction of the credit of £2,032 to which Mr Gooch is entitled in respect of the Premiums and all costs and expenses of sale) shall be paid in equal shares to Ms Murphy and Mr Gooch. Ms Murphy's share of these proceeds should not be limited to the option price of £11,280. There is no justification for imposing any such limit.

COSTS

26. Ms Murphy has entirely succeeded on this appeal and Mr Gooch has entirely failed on his cross-appeal. The appeal should accordingly be allowed with costs and the cross-appeal dismissed with costs. As regards the costs below, Ms Murphy should have succeeded on all issues save as to the claim to a set-off against full credit to which Mr Gooch was entitled in respect of the Premiums. The Judge held (and there is no appeal against his decision on this issue) that her set-off should be limited to one half of the credit allowed to Mr Gooch in respect of his payment of the Premiums. In the circumstances I think that she should be entitled, not to 50% as ordered by the Judge, but to 90% of the costs below.

CONCLUSION

27. I cannot leave this case without expressing my concern and anxiety that public funding has been available to both parties to pursue this action as far as the Court of Appeal. Public funds have been expended disproportionately to the sums at issue. If they are now recouped out of the proceeds of the Property it is doubtful whether anyone outside the legal profession will benefit. If ever a case called for mediation, this case did so, and if the process of mediation had been adopted a settlement should have been reached at an early date. Even if the mediation had failed, the course and outcome of the mediation should have given a powerful steer as to whether public funding should have been made available for further pursuit of the action.

Lord Justice Sedley

28. I agree.

Lord Justice Mummery

29. I also agree.