England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
On Appeal from the Romford County Court
(District Judge Chrispin)

		Royal Courts of Justice Strand London WC2A 2LL
		June 10 2003

 

Mr Justice Lawrence Collins:

I Introduction

1. In Re Gorman [1990] 1 WLR 616 and Re Pavlou [1993] 1 WLR 1046 the matrimonial name was in the joint names of husband and wife. In each case the marriage broke down, the husband left the home, and the wife thereafter discharged all mortgage payments (both capital and interest). In each case the husband was adjudicated bankrupt. The wife sought credit for the mortgage interest payments for the purposes of the equitable accounting on the sale of the home, and it was assumed or held that she could only have such credit against a set-off in favour of the trustee in bankruptcy for an occupation rent. This appeal from a decision of District Judge Chrispin in the Romford County Court raises the question whether the same result should follow where, as in this case, there was no breakdown of the marriage, and the husband continued to reside in the matrimonial home until his death nearly ten years after the bankruptcy.

II Facts

2. Anthony and Brenda Byford bought 18 Chittys Lane, Dagenham, Essex ("the property") in July 1986. They took out an endowment mortgage with Woolwich plc on the property in 1989 on which about £47,500 remains outstanding. Mr Byford was adjudicated bankrupt on June 5, 1991 with debts of about £50,000. He died in December 2000. Mrs Byford has acquired from the Official Receiver her late husband's interest in the endowment policy taken out to secure repayment of the capital. Mr Butler ("the trustee") was appointed Mr Byford's trustee in place of the Official Receiver in April 2001.
3. Until Mr Byford's death, Mr and Mrs Byford lived together in the property. After Mr Byford's bankruptcy, Mrs Byford worked full time as an administration assistant with National Westminster Bank and made all the mortgage payments on the property out of her own pocket. Mr Byford, who had previously run a business driving a Readimix Concrete lorry, did not work after his bankruptcy and made no contribution to the mortgage. There were no payments of capital as such because the mortgage was an endowment mortgage, and Mrs Byford has purchased the trustee's interest.
4. The property has, in line with market conditions, increased strikingly in value in recent years. It was valued at £75,000 in January 2001, £95,000 in May 2001 and £138,000 in October 2002.
5. Between the bankruptcy of Mr Byford in June 1991 and his death in December 2000 his trustee (then the Official Receiver) took no steps as against Mrs Byford to realise his interest in the property.
6. In January 2001 Mrs Byford offered to buy out the trustee's interest for £5,000, which she increased to £8,000 in June 2001. In August 2001 the trustee indicated that he would accept £21,157, and informed Mrs Byford that she was not entitled to any credit for the mortgage interest payments made by her following the bankruptcy.
7. In July 2002 the trustee issued an application in the Romford County Court for a declaration that the trustee was beneficially entitled to half the equity in the property, and an order for sale (but only if Mrs Byford did not pay an appropriate amount for his interest in the property). The trustee's position was that there was an equity of £47,000 in the property (increased to about £86,000 at the time of the hearing), of which he was entitled to half. Mrs Byford's position was that she was entitled to be repaid out of Mr Byford's share of the proceeds half of the mortgage interest payments which she had made since his bankruptcy, and that she was entitled to credit for repairs and improvements. The trustee replied that if Mrs Byford were entitled to credit for mortgage interest payments (which he denied) then any credit should be set off against an occupation rent arising against Mrs Byford.
8. Following a hearing in November 2002 District Judge Chrispin held in January 2003 that (a) Mrs Byford was entitled to a credit for the improvements which she had made to the property; (b) Mrs Byford was entitled to credit for the mortgage interest payments; and (c) the trustee was entitled to a set off for an occupation rent from Mrs Byford without further enquiry.
9. The judge held that it was not the physical occupation of the property which was the decisive factor in respect of a trustee in bankruptcy's entitlement to charge an occupation rent. Once the bankruptcy order had been made, then the trustee stood in the shoes of the bankrupt and it was no longer of relevance whether the bankrupt left the property or stayed after that time.
10. The result was that (a) there was an equity in the property of £86,254; (b) divided equally that produced a figure of £43,127; (c) Mrs Byford was entitled to a credit of £5000 for her improvements, which left a sum of £38,127 for the trustee's interest. The parties agreed at the trial that if an occupation rent was payable it should be treated as extinguishing the credit to which Mrs Byford was entitled for mortgage interest payments.

III The appeal

11. Mrs Byford's position on the appeal is that no occupation rent should be charged at all in the circumstances of this case. The trustee has chosen for his own reasons to leave her in occupation of the property with the bankrupt for nearly ten years and leave her to meet all the outgoings on it. Now that the property has substantially increased in value he wants to take for the bankrupt's creditors half of that increased value. He is entitled in principle to do that. What he is not entitled to do is to take that benefit without meeting his share of what it has cost to get the benefit. The District Judge's judgment enables him to do that and produces an extremely inequitable result.
12. It is argued on her behalf that (a) the general rule both at common law and in equity is that each of two joint tenants or tenants in common has a right to occupy the whole of the jointly owned property; (b) accordingly, one joint owner does not have to pay an occupation rent to the other merely because he is in sole occupation of the property; but (c) there are three circumstances in which such rent is payable: (1) by agreement; (2) where one of the joint owners actually receives rent for the property he must share it rateably with the other; (3) where one of the joint owners has occupied the property to the exclusion of the other and it is equitable to require such a rent to be paid.
13. The third circumstance requires that one co-owner must in some sense be excluding the other. A trustee in bankruptcy has no right to possession of the property except for the purpose of realising it for the benefit of the creditors. His right to enjoy the property is a right to require the property to be sold (subject to and in accordance with the provisions of the Insolvency Act 1986). The trustee asserts and the District Judge has held that whether or not the bankrupt is in occupation is irrelevant because he is no longer a co-owner of the property. If that is right the only way in which the bankrupt's spouse can in practical terms exclude his trustee in this type of case is by refusing to co-operate with a sale. That has never happened in this case at any stage. What the trustee is really contending for is an automatic right for trustees to charge an occupation rent to a spouse in this situation, which is wrong in principle and inequitable in its operation.
14. The factors that make it inequitable in any event to require Mrs Byford to pay an occupation rent are these: the trustee is essentially seeking to take the benefit of the increase in the property's value without meeting his share of the cost of achieving that increase. Mrs Byford has remained in occupation of the property because the trustee has chosen to do nothing. Had he acted earlier the position would have been resolved, almost certainly by Mrs Byford purchasing his interest. If the trustee is right what Mrs Byford should have done here immediately after the bankruptcy was call on the trustee to meet his share of the mortgage and other outgoings on the property. When he inevitably failed to do so she should have applied to the court for an order for sale. In reality an order for sale at that time would probably have realised nothing for the creditors. It is neither just nor realistic to put the onus of taking such steps on the bankrupt's spouse. The bankrupt occupied the property with Mrs Byford until his death. This is a relevant consideration because he had to live somewhere. At least in some cases there will be a positive benefit to the creditors if the bankrupt is housed free of charge by his spouse.
15. Parliament has now made it clear in the new section 383A of the Insolvency Act 1986 to be introduced by section 261 of the Enterprise Act 2002 (not yet in force) that it is undesirable for trustees to wait many years before resolving their rights in respect of the home of the bankrupt or his spouse. This introduces a general rule that the trustee must take steps to realise his interest in the home of the bankrupt or his spouse within three years of the bankruptcy, subject to specified exceptions. If he fails to do so the property vests in the bankrupt and the creditors lose all rights to it. All parties concerned would know where they stand within a reasonable time. Although the section is not in force and will not apply to this case when it is it can be taken as a strong indication of public policy, and the court should take into account that policy in deciding what is equitable.
16. The trustee's position is this. In what appear to be the only two relevant bankruptcy authorities (Re Gorman [1990] 1 WLR 616 and Re Pavlou [1993] 1 WLR 1046) the court directed that a separate account should (if required) be taken of mortgage interest payments by the bankrupt's spouse and occupation rent owed by her. 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 be paid.
17. The trustee submits that a trustee in bankruptcy is entitled to an occupation rent (at least where the remaining co-owner seeks an account of interest payments) because he is not free to occupy or use the property (e.g. by renting it out) while the remaining co-owner is in occupation. Once Mr Byford was bankrupt his interest in the property vested in the trustee, and it would be inequitable for Mrs Byford to claim an account of mortgage interest payments while she has remained in exclusive occupation of the property throughout, unless she is willing to submit to an occupation rent. Mrs Byford has lived in the property (and been able to house her husband) at the cost only of paying the mortgage. As a joint mortgagor she was from the outset jointly and severally liable with the bankrupt to repay the whole mortgage; the bankrupt's liability to make payments ceased on bankruptcy, but hers continued.
18. The trustee contends that if Mrs Byford is entitled to an account of interest without any corresponding occupation rent this will have an undesirable effect of forcing a trustee to make an application for sale immediately for fear that the payments of mortgage interest will exceed any appreciation in value of the property. The new section 283A of the Insolvency Act 1986 introduced by section 261 of the Enterprise Act 2002 (not yet in force) is of no assistance. It only provides for sale to take place within 3 years of the bankruptcy order (and not as soon as possible) and is subject to a number of possible exceptions.
19. In the court below Mrs Byford contended in addition for interest on the payments of mortgage interest that she has made. The District Judge did not rule on that point because if an occupation rent is payable it extinguished any such interest. The claim for interest on mortgage interest was not the subject of the notice of appeal, but Mrs Byford seeks to raise it if she does not have to give credit for an occupation rent.
20. Mrs Byford's position is that she has laid out her money to discharge her co-owner's debt over a period of more than eleven years. As a result of her expenditure a very substantial benefit has accrued to the creditors of her husband because of the increase in value of the property. She has been deprived of the use of that money. The right to recoup what she has paid is simply an example of the general equitable right of one co-debtor who has paid more than his share of the debt to contribution from his co-debtor.
21. The trustee says that the claim for interest on the payments of interest is incorrect in principle and is unsupported by any authority. The allowance on equitable accounting in respect of a payment arises only on sale (or partition) and not on payment. Since no right to reimbursement arises at the time the payment is made, there is no reason for interest to run from the date of payment.

IV Applicable principles

22. The principles of equitable accounting apply equally to beneficial tenancies in common and beneficial joint tenancies. The guiding principle is that neither party can take the benefit of an increase in the value of the property without making an allowance for what had been expended by the other in order to obtain it: see Re Pavlou [1993] 1 WLR 1046, 1048, citing Leigh v Dickeson (1884) 15 QBD 60; Snell's Equity (13^th ed. McGhee, 2000), paras 44-10 et seq.
23. There is no doubt that credit will normally be given for mortgage payments in respect of capital, and, as Snell points out (para 44-16) credit has sometimes been given for the interest element. In Re Gorman [1990] 1 WLR 616, 626, Vinelott J said:

"I can see no reason why, if an account is taken, the party paying the instalments should not be entitled to set a due proportion of the whole of the instalments paid against the share of the other party. The mortgagee will normally have a charge on the property for principal and interest and a right to possession and sale to enforce his charge. The payment of instalments due under the mortgage operates to relieve the property from the charge and gives rise to an equitable right of contribution by the co-owner who has not paid his due proportion of the instalments."

24. Where the party paying the interest has sole possession of the property, that party may be charged with an occupation rent. Leake (formerly Bruzzi) v Bruzzi [1974] 1 WLR 1528 was an application by a wife under the Married Women's Property Act 1882, section 17. She had left the matrimonial home, and the husband had paid all the mortgage instalments including interest. He was given credit for the capital payments but not for interest because he had had the sole use of the home and the interest payments could be regarded as "something equivalent to rent or payment for use and occupation." (Ormrod LJ at 1533)
25. This decision was applied in Suttill v Graham [1977] 1 WLR 819, another case under the Married Women's Property Act 1882, section 17, where the husband remained in the home after the divorce and paid all mortgage instalments. Stamp LJ said (at 821-2):

".. a beneficiary entitled to an equal share in equity of property of which he is a trustee, and which he himself occupies, is to be charged with at least an occupation rent so that if as here he seeks to charge his co-beneficiary trustee with half the outgoings he should be charged with half the occupation rent … That will normally produce a fair result and save costs and where, as here, the husband in possession does not submit to be charged with an occupation rent, it must be wrong that he should seek to charge the wife with half the mortgage interest which he has paid while living in the property rent free and resisting a sale of the property."

26. Ormrod LJ said (at 824):

"So far as my recollection goes, it has been the normal practice in this class of case to allow the occupying spouse to take credit for repayments of capital but not of interest, because he or she has had the benefit of the use of the house. It was certainly so where the husband was in occupation, although it may not always have been the case where the wife, and particularly the children, were in occupation."

27. In Re Gorman [1990] 1 WLR 616 (Vinelott J and Sir Mervyn Davies sitting on a bankruptcy appeal) Mr and Mrs Gorman had bought a property as their matrimonial home. One-third of the price was provided by Mrs Gorman's father and the remaining two-thirds was raised on mortgage. The parties were divorced after ten years and she remained in the property with the children. By that time there were considerable arrears on the mortgage repayments. Mr Gorman undertook to pay off the arrears and the court ordered him to pay maintenance to Mrs Gorman and the children and to pay the instalments due on the mortgage. Mr Gorman failed to pay the sums due, and Mrs Gorman paid them. Subsequently Mr Gorman was adjudicated bankrupt, and his trustee applied to the court for an order for sale. It was held that Mrs Gorman's payment of his share of the mortgage instalments could not entitle her to a greater than half-share, but she was entitled to bring such payments into the equitable accounting which would take place after sale to determine the respective shares, and accordingly there would be an order for sale and for equitable accounts.
28. After referring to Suttill v Graham, Vinelott J said:

"That practice is not, of course, a rule of law to be applied in all circumstances, irrespective of, on the one hand, the amount of the mortgage debt and the instalments paid and, on the other hand, the value of the property and the amount of the occupation rent that ought fairly to be charged. It is a rule of convenience and more readily applies between husband and wife, or cohabitees, than between a spouse and the trustee in bankruptcy of the other co-owner. Moreover, although the practice as recorded in Suttill v Graham is to set the interest element in mortgage instalments against a notional occupation rent, leaving the party paying the mortgage instalments free to charge a due proportion of any capital repayments against the share of the other, I can see no reason why, if an account is taken, the party paying the instalments should not be entitled to set a due proportion of the whole of the instalments paid against the share of the other party. The mortgagee will normally have a charge on the property for principal and interest and a right to possession and sale to enforce his charge. The payment of instalments due under the mortgage operates to relieve the property from the charge and gives rise to an equitable right of contribution in the co-owner who has not paid his due proportion of the instalments."

29. Mrs Gorman conceded that the interest payments could be set off against an occupation rent for the period following the receiving order, but sought full credit for the interest payments prior to that date. Vinelott J said (at 627):

"The position prior to the making of the receiving order was that Mr Gorman had been ordered to pay maintenance to Mrs Gorman and to pay the mortgage instalments and other outgoings on the house. Clearly he could not have asserted any equity to charge her an occupation rent on taking an account following the sale of the house, and the trustee in bankruptcy can be in no better position. The position after the making of the receiving order is different, because Mrs Gorman could assert no right against the trustee to remain in exclusive occupation of the property."

30. In the typical case an occupation rent has been charged where the party in occupation has actually or constructively excluded the other party from occupation.
31. The principal issue debated in this case is whether an occupation rent will be set off against mortgage interest payments made by the wife when there has been no marital breakdown and the bankrupt husband has remained in the matrimonial home.
32. In M'Mahon v Burchell (1846) 1 Coop. t. Cott 457 (47 ER 944) and SC 2 Ph. 127 (41 ER 889) Terence M'Mahon had left his house in St Christopher to his seven children as tenants in common. One of them (William) frequently occupied the house, three others occupied it occasionally, and three not at all. The executors of one of the children (Hannah) who had never occupied the house claimed that William was liable to Hannah's estate for a seventh of the rent in respect of his occupation. Lord Cottenham LC held that mere occupation (in the absence of agreement) would not make one co-owner liable to the others. The house was open to all the tenants in common, William had been in occupation, but there was no exclusion of the other tenants in common: "Where there was neither contract nor exclusion, nor anything received, occupation by one tenant in common created no liability for rent to the other tenants in common." ((1846) 1 Coop. t. Cott 457, at 475; 47 ER at 951).
33. In Dennis v McDonald [1982] Fam. 63 (Purchas J and C.A.) the plaintiff and defendant had lived together in a house held in their joint names. The woman left the home as a result of the man's violence, and he kept up the mortgage payments. Purchas J referred to M'Mahon v Burchell and said that the true position under the old authorities was that the court would always be ready to inquire into the position as between co-owners being tenants in common either at law or in equity to see whether a tenant in common in occupation of the premises was doing so to the exclusion of one or more of the other tenants in common for whatever purpose or by whatever means. If this was found to be the case, then if in order to do equity between the parties an occupation rent should be paid, this would be declared and the appropriate inquiry ordered. Only in cases where the tenants in common not in occupation were in a position to enjoy their right to occupy but chose not to do so voluntarily, and were not excluded by any relevant factor, would the tenant in common in occupation be entitled to do so free of liability to pay an occupation rent.
34. He held that the woman was not a free agent. She was caused to leave the family home as a result of the violence or threatened violence of the defendant. She fell within the category of person excluded from the property in the way envisaged by Lord Cottenham LC in M'Mahon v Burchell. Accordingly "the basic principle that a tenant in common is not liable to pay an occupation rent by virtue merely of his being in sole occupation of the property does not apply in the case where an association similar to a matrimonial association has broken down and one party is, for practical purposes, excluded from the family home." (at 71)
35. The decision was affirmed by the Court of Appeal. Sir John Arnold P (at 80), summarising the decision of Purchas J, said:

"The judge came to the conclusion that, in those circumstances, the case was equivalent to what, in the reported cases, is called an 'ouster' by one tenant in common of another and it is plain on the authorities that in such a case there is an exception from the general rule that each tenant in common has the right of occupation of the property in respect of which the tenancy subsists, while if one of them occupies that property to the exclusion of the other that does not give rise to any right of compensation. In the exceptional case of an ouster it plainly, in my view, does. That matter is not contested in this court."

36. But the references to exclusion or ouster in these cases cannot be regarded as an exhaustive statement of the circumstances in which an occupation rent is chargeable.
37. The holding by the court in Re Gorman that an occupation rent was chargeable for the period following the receiving order was based on a concession by counsel. In Re Pavlou [1993] 1 WLR 1046 Mr and Mrs Pavlou bought a house for £12,500 assisted by a mortgage of £9,500. After about ten years the husband left, and thereafter the wife remained in sole occupation and paid the mortgage instalments as they fell due. Thirteen years after the marriage she obtained a decree nisi, and less than a year later the husband was made bankrupt. The joint tenancy was thereby severed, and thereafter they owned the property as tenants in common in equal shares. It was agreed that there would have to be an order for sale and an equitable accounting. It was held that there would have to be an inquiry whether an occupation rent should be set-off against the mortgage interest payments.
38. Millett J re-stated the principles in this way (at 1050):

"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 conclusions 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."

39. Millett J (at 1051) approved Vinelott J's view that the rule that an occupation rent would be charged was not a rule of law, but a rule of convenience which "more readily applies between husband and wife or co-habitees than between a spouse and a trustee in bankruptcy of the other co-owner."
40. What the court is endeavouring to do is broad justice or equity as between co-owners. As Millett J said in Re Pavlou, the fact that there has not been an ouster or forcible exclusion is not conclusive. The trustee cannot reside in the property nor can he derive any financial enjoyment from the property while the bankrupt's spouse resides in it, and the bankrupt spouse's creditors can derive no benefit from it until he exercises his remedies. I do not consider that the policy expressed in the new section 283A of the Insolvency Act 1986 is of any assistance (even if it had been in force). It is true that the trustee could have realised his remedies earlier, but Mrs Byford benefited to a considerable degree by his inaction, while Mr Byford enjoyed the use of the property with Mrs Byford, without any benefit to his creditors.
41. In these circumstances, where Mrs Byford seeks and obtains an account of interest payments, the trustee is entitled to a set-off for occupation rent, and I therefore dismiss the appeal. I would have preferred the trustee's submission on interest on the interest payments, if that issue had arisen for decision.