England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY
IN THE ESTATE OF NICHOLAS KETTERINGHAM DECEASED

		The Court House Oxford Row Leeds LS1 3BG
		3rd February 2011

Judge Behrens :

1 Introduction

1. Nick Ketteringham and Jonathan Hardy were lifelong friends. They had a shared interest in motor racing but also were involved in each other's business ventures.
2. Three of these ventures involved the joint acquisition of land. Two of the pieces of land were industrial units in Market Overton, Leicestershire and were acquired, at least initially, to be occupied by a Company controlled by Jonathan Hardy. Although those pieces of land are included in these proceedings there are now no remaining issues^[1] relating to them. They are only relevant in so far as they throw light on the issues relating to the third piece of land.
3. The third venture involved the acquisition of a residential property 2 Fenton Fold Oakenshaw, Bradford ("2FF"). 2FF was purchased because it was believed that some of the land at the rear of the property could be used as part of a development of adjoining land.
4. The bulk of the purchase price was raised by way of a mortgage. Both parties contributed equally to the deposit but 2FF was conveyed into the sole name of Jonathan Hardy and he was the only person named as mortgagor. Just over a year later Jonathan Hardy executed a Declaration of Trust in which he declared that he held 2FF on trust for himself and Nick Ketteringham as tenants in common in equal shares. Shortly thereafter Nick Ketteringham, Jonathan Hardy and Sandra Welch entered into a Joint Venture Agreement in respect of the proposed development of the adjoining property.
5. Five weeks later Nick Ketteringham, who had been suffering from throat cancer for more than a year, died. The Claimants are his two brothers and the executors of his estate ("the estate"). Under the terms of his will the residuary estate passes to his wife, Chrissie Ketteringham.
6. Regrettably the proposed development cannot take place as planning permission has been refused. Partly as a result of this and partly as a result of the general fall in property prices the value of 2FF is significantly less than the amount outstanding under the mortgage. There is said to be negative equity of between £50,000 and £70,000. The issue to be decided is whether as between the estate and Jonathan Hardy, the estate is liable to contribute to that negative equity.
7. Much of the debate before me revolved round the question of whether Nick Ketteringham and Jonathan Hardy were partners within the meaning of the Partnership Act 1890 ("the Act"). Mr Howlett on behalf of Jonathan Hardy argued that there was a partnership with the result that the estate had to contribute to the loss in accordance with section 24 of the Act. Mr Entwistle on behalf of the estate argued that there was no such partnership so that section 24 of the Act had no application. Even if there was a partnership the general rule under section 24 was to be displaced on the facts of this case.
8. For reasons which will be elaborated later in this judgment I did not find the question of whether there was a partnership particularly helpful in resolving the issue in the case. To my mind a more helpful analysis of the situation lies in the cases concerning equitable accounting as between co-owners as explained in cases such as Clarke v Harlowe [2007] 1 FLR 1 and Wilcox v Tait [2007] 2 FLR 871. Ultimately the task before the court is to determine the common intention of the parties. In my view that task can only be undertaken after a more detailed examination of the facts.

2 The facts

2.1 The witnesses

9. There was in fact very little dispute as to the primary facts. Three witnesses were called in support of the estate's claim – Geoffrey, Simon and Chrissie Ketteringham. Jonathan Hardy gave evidence on his own behalf and called no other witnesses. Cross-examination of all four witnesses was relatively short and the whole of the evidence was completed in less than half a day.
10. I have no hesitation in assessing all of the witnesses as honest witnesses doing their best to assist the court. In fact, however, for reasons that are perfectly understandable, the estate's witnesses were only able to give assistance of the most general kind.
11. Gregory and Simon Ketteringham were Nick Ketteringham's brothers. They were also co directors of an estate agency in Leeds which they ran. They had both been estate agents for over 20 years. They knew that Jonathan Hardy and Nick Ketteringham were close friends. Nick Ketteringham carried on his business independently of them and did not discuss his affairs with them. Their knowledge of his affairs was dependent on separate conversations he had with each of them some three months or so before he died when he knew he did not have long to live. At that time they each discovered that he had an interest in the two industrial units in Market Overton, and an interest in 2FF. They did not know any of the details before he died. Equally they had not seen the Declaration of Trust or the Joint Venture Agreement before his death.
12. Chrissie Ketteringham married Nick Ketteringham shortly before he died. They had been together for about 5 years. She did not take an active role in any of his business affairs. She was simply not involved. If, for example, Jonathan Hardy was coming to discuss business she would be told that he was coming on business but not what the business was about. She knew very little about 2FF. She was at home during one of the meetings when it was discussed. She was simply told that Jonathan Hardy was coming to discuss a property in Bradford which he might or might not be involved with. On another occasion he described it as an investment. She was not involved and did not want anything to do with it. She did not know the details. She did not know anything about the Joint Venture Agreement before Nick Ketteringham died.
13. In her witness statement (especially paragraphs 10 and 11) Chrissie Ketteringham speculates as to what she believes were Nick Ketteringham's intentions when he got involved with 2FF. In the light of her frank and obviously honest answers in cross-examination I do not feel I can attach much weight to those speculations.
14. Jonathan Hardy has made 2 witness statements – a relatively short statement in September 2009 and a far more detailed statement dated 1^st September 2010 filed in order to justify the claim that there was a partnership between himself and Nick Ketteringham.
15. In addition to the witness evidence assistance can be gained from the documentary evidence including file notes and correspondence from Jonathan Hardy's former solicitors which have very properly been disclosed.

2.2 Unit F1 Market Overton Industrial Estate (Unit F1) and Unit E4 Market Overton Industrial Estate (Unit E4)

16. The business relationship between Nick Ketteringham and Jonathan Hardy was quite informal. They would lend each other money to support business ventures as and when the need arose. Often no lawyers were involved and there were no written records.
17. In 2003 Jonathan Hardy had a number of business interests. Amongst them was the right to distribute a brand of motor lubricants known as "Red Line". These were distributed through a wholly owned Company known as "Delta Oil Ltd" (Delta). In addition he carried out property development as a sole trader under the name of Market Overton Developments. Nick Ketteringham was also involved in property investment.
18. In 2003 Jonathan Hardy learned that Unit F1 was for sale. He agreed with Nick Ketteringham that they would buy it together. In the long term the idea was that the income would be shared between them equally. The purchase price was £49,000. Initially, however, almost the entire purchase price was provided by Nick Ketteringham. Completion of the purchase took place on 20^th June 2003. Unit F1 was transferred into their joint names and was duly registered under Title No LT208296. Nick Ketteringham and Jonathan Hardy signed a Declaration of Trust dated 20^th June 2003 under which it was declared that Unit F1 was held as to 95% by Nick Ketteringham and 5% by Jonathan Hardy.
19. Unit F1 was managed by Jonathan Hardy and let to Delta at an initial rent of £450 per month all of which was paid to Nick Ketteringham.
20. In 2004 Unit E4 became available. Nick Ketteringham and Jonathan Hardy agreed to purchase it on the same basis as Unit F1. The purchase price was £22,000 the vast majority of which was paid by Nick Ketteringham. Completion of the sale took place on 18^th February 2004. Unit E4 was transferred into joint names and duly registered under Title No LT363384. Nick Ketteringham and Jonathan Hardy signed a Declaration of Trust dated 18^th February 2004 under which it was declared that Unit E4 was held as to 95% by Nick Ketteringham and 5% by Jonathan Hardy.
21. Unit E4 was managed by Jonathan Hardy and also let to Delta. There was no increase in the rent already being paid by Delta. It was used for storage purposes.
22. In August 2005 Jonathan Hardy paid Nick Ketteringham his share of the purchase money for Units F1 and E4. At that stage it was agreed that Delta would pay an increased rent of £600 per month for the two units but that half of this sum would be paid to Nick Ketteringham.
23. In late 2005 Delta lost the right to distribute Red Line products. It vacated Unit E4 but did not reduce the rent payable in respect of Unit F1. Jonathan Hardy managed to let Unit E4 to Pipstrelle between January 2006 and April 2008 at a rent of £250 per month.
24. Delta remained in occupation of Unit F1 until June 2006. Prior to vacating Delta fell into arrears. These arrears were cleared in June 2006. In April 2007 Jonathan Hardy let Unit F1 to Mr Sainsbury at a rent of £500 per month. Mr Sainsbury vacated in August 2009.
25. On 31^st August 2007 Nick Ketteringham and Jonathan Hardy executed further Declarations of Trust in relation to Units F1 and E4. Under these Declarations they varied the declarations in the original Deeds so as to provide that the Units were held as tenants in common in equal shares.

2.3 Acquisition of 2FF

26. The circumstances surrounding the acquisition of 2FF is set out in paragraphs 15 and 16 of Jonathan Hardy's witness statement. As this is the only evidence of what happened I shall set it out substantially in full:

15. In late 2006 I found out about the property at [2FF] Through Michael Thompson I met a man called Justin Rushworth. He and Michael Thompson had done property deals together before. He told me he had a house in Oakenshaw adjoining 2FF with development potential. I later found out that the adjoining house belonged to his mother. He told me that there was land and an outhouse at the side of 2FF which could be sold off from the rest of the curtilage so as to create access to other land at the rear on which one or possibly more than one new house could be built. Mr Rushworth's mother, as owner of the land at the rear was willing to join with a purchaser of 2FF in order to enable the development to proceed. In order to take advantage of this deal, it was necessary to buy the whole of 2FF because the seller who was elderly, wished to move to a care home and wanted to sell the property in its entirety and quickly.

16. Mr Rushworth had first offered the deal to Michael Thompson … However Michael Thompson decided not to proceed. … Mr Rushworth then offered it to me. I thought it was a proposition in which Nick Ketteringham might be also be interested. There were two meetings. The first, in about July 2006 was at a public house called The Wellington in Darley. It was attended by Mr Rushworth, Nicholas, Tarina and me. At that meeting it was agreed in principle that I would buy the property with the aid of a mortgage and that Nicholas and I would pay the deposit equally. The second meeting was held at Nicholas' home. It was attended by Mr Rushworth, Nicholas, Christine (Nicholas' future wife), Tarina and me, although for Christine and Tarina it was a social rather than business occasion. The deal was discussed again and Nicholas and I agreed to buy the property on the same basis as we had discussed at the previous meeting, i.e. by me raising a mortgage and the deposit being shared. There is no doubt, at all, that Nicholas understood that the property would be purchased by me with the aid of a mortgage. We agreed that on the eventual sale of the completed development and of the house at 2FF we would share the net profit equally. We did not discuss what would happen if the venture resulted in a loss.

27. 2FF was duly bought for £130,000. £117,000 was raised by way of mortgage with Bristol & West Mortgages (now Bank of Ireland). The balance of £13,000 was paid by way of deposit. Nick Ketteringham contributed £7,522.79 towards the deposit and costs. Jonathan Hardy paid the remainder. Completion of the sale took place on 13^th September 2006 and 2FF was duly registered in the name of Jonathan Hardy subject to the Bank of Ireland charge under Title No WYK122746.
28. Nick Ketteringham had been diagnosed with throat cancer in June 2006. According to Jonathan Hardy it was initially thought not to be terminal.
29. It was agreed between Nick Ketteringham and Jonathan Hardy that the house at 2FF would be retained. Until shortly before he died the rent from the house was paid to Nick Ketteringham who paid all the outgoings except for the mortgage instalments. Jonathan Hardy has paid all the mortgage instalments. On 10^th October 2007 Nick Ketteringham instructed the managing agent to pay the rent to Jonathan Hardy.

2.4 The Declarations of Trust

30. On 13^th June 2007 Jonathan Hardy consulted Sean Garner, the sole proprietor of Garners, a firm of solicitors in Stamford, Lincolnshire. He gave instructions relating to the Declarations of Trust for Units F1and E4. He also had discussions about 2FF. The initial discussions were to the effect that 2FF needed to be transferred into joint names. Mr Garner pointed out that the proposed transaction would need the consent of the mortgagee. He suggested as an alternative Jonathan Hardy could execute a Trust Deed declaring that he held 2FF on trust for himself and Nick Ketteringham as tenants in common in equal shares. He was instructed to proceed on that basis. On 14^th June 2007 Mr Garner wrote a letter to Jonathan Hardy enclosing the three draft Trust Deeds. The letter includes the following paragraph:

As discussed, given that [2FF] is in mortgage to [Bank of Ireland], this will negate the need to contact the lender to obtain its consent to transfer the ownership and will mean that Nick will not acquire any liability under the mortgage dated the 13 September 2006.

31. All three Declarations of Trust were executed by Nick Ketteringham and Jonathan Hardy on 31^st August 2007. They were witnessed by Mrs Farrell. Nick Ketteringham was advised by Mr Garner to take independent legal advice before he signed. It is not clear whether he did.
32. I have referred to the Declarations of Trust in relation to Units F1 and E4 earlier in this judgment. The Declaration of Trust in respect of 2FF was in the terms proposed by Mr Garner. Jonathan Hardy declared that that he held 2FF upon trust for himself and Nick Ketteringham as tenants in common in equal shares.

2.5 The Joint Venture Agreement

33. On 17^th September 2007 Nick Ketteringham, Jonathan Hardy and Sandra Welch entered into a Joint Venture Agreement in relation to the proposed development. The Agreement was prepared by Mr Garner on behalf of Jonathan Hardy. The other parties were advised to take legal advice but it is not clear whether they did.
34. Both Counsel have relied on the Agreement as supporting their submissions. Mr Howlett referred me to clauses 11, 12 and 13 under which Nick Ketteringham and Jonathan Hardy were each to contribute by way of capital the access land, and cash to an agreed value of £10,000. In each case the capital contribution of cash was to be made available for obtaining detailed planning consent and building regulation consent. Mr Entwistle relied on clause 62 which provided expressly that:

The Venture is termed a contractual joint venture and will not constitute a Partnership. Members will provide services to one another on an arms' length basis while remaining independent business entities. There will be no pooling of profits and losses. Each Member is responsible only for its own actions and will not be jointly or severally liable for the actions of the other Members.

35. When asked about this clause Jonathan Hardy described it as badly drafted and not representative of his intentions.

2.6 Death of Nick Ketteringham

36. Nick Ketteringham died on 26^th October 2007. He had known he did not have long to live for at least 3 months. He had thus known this when he executed the Declarations of Trust and the Joint Venture Agreement.
37. He executed a will on 3^rd October 2007. After providing for pecuniary legacies totalling £170,000 to a number of beneficiaries including his two brothers the residue of the estate passed to his intended wife whom he married shortly before he died. Probate of his will was granted to his two brothers on 2^nd April 2008.
38. Despite an appeal to the Secretary of State planning permission for the development of the adjoining land at the rear of 2FF was refused. That meant that the joint venture had failed. As a result of this and the general fall in property values 2FF is now worth significantly less than the moneys outstanding under the mortgage.

3 Submissions and discussion

3.1 Partnership

39. Mr Entwistle referred me to the definition of partnership in section 1 of the Act ["partnership is the relationship between persons carrying on business in common with a view to a profit"], and to the rule in section 2(1) as to whether a partnership exists ["tenancy in common does not of itself create a partnership as to anything so held whether or not the tenants do or do not share profits. He also referred me to two authorities^[2] where there are statements effectively re-iterating the provisions of section 2(1). He pointed out that in none of Nick Ketteringham's tax returns had he ticked the box that indicted that he was trading in partnership.
40. Mr Howlett invited me to accept Jonathan Hardy's assertion in his witness statement that there was a partnership. He reminded me that they had acquired not one but three properties, that they had shared the income from two of them and that in his witness statement Gregory Ketteringham had described them as partners.
41. As I indicated in the course of argument I did not find the question of whether there was a partnership or not as being particularly helpful in resolving this dispute. There are two reasons for this. First I do not think the issue in this case is really about whether the losses are to be shared equally. If, for example, 2FF had been sold for a sum equal to the amount due under the mortgage there would have been a loss because Nick Ketteringham and Jonathan Hardy each contributed over £7,500 to the deposit and costs of the purchase. In those circumstances it is to my mind plain that Nick Ketteringham would not have been able to claim back any part of his £7,500. It would have been shared equally. Thus if it is necessary to analyse this case in terms of partnership the question is not the simple question of whether the loss is to be shared equally but whether Nick Ketteringham is bound to contribute to any loss over and above his initial investment.
42. Second, the question of whether there is a partnership is by no means determinative of the issue in this case. Mr Howlett seeks to establish a partnership to rely on the general rule in section 24(1) of the Act that partners must contribute equally to the losses. However section 24 is subject to an express or implied agreement of the partners so that even if there is a partnership it is then necessary to determine whether or not the general rule applies.
43. If, contrary to my view, it is necessary to determine whether there was a partnership I would have preferred the submissions of Mr Entwistle. In my view the purchase of 2FF was different in kind from the purchase of Units F1 and E4 and thus it is not possible to look at all three together to determine if there was a partnership. The acquisition of Units F1 and E4 were concerned with the acquisition of commercial property which would be available for occupation by Delta. They were each conveyed into joint names.
44. It would no doubt have been possible for the acquisition of 2FF and the subsequent development of the adjoining land to have been carried out as a partnership. However in this case it was expressly agreed between the parties that the Joint Venture Agreement did not constitute a partnership. The fact that Jonathan Hardy may now consider that the Joint Venture Agreement was badly drafted does not to my mind affect this. If, as the parties agreed, the joint Venture Agreement did not create a partnership it is difficult to see how the acquisition of 2FF could have created one. It is plain from section 2(1) of the Act that there must be something more than the mere joint ownership of property. In my view there would have been nothing more.

3.2 Equitable Accounting

The authorities

45. In Clarke v Harlowe a house was bought in joint names in bad condition. There was an express declaration of trust that they held as beneficial joint tenants. One of the joint tenants was earning much more than the other. He paid all the mortgage instalments. Very substantial building work was carried out during the relationship – all of which he paid for. Following a breakdown it was conceded that the other joint tenant was entitled to a half share and that there was no intention to alter the shares; it was argued that principles of equitable accounting applied and that he should be entitled to credit for the cost of the improvements. The argument was rejected on the basis that it was the common understanding that he would pay for the improvements and thus there was no obligation to account.
46. In paragraphs 32 to 35 of the judgment I said:

32. There are a wide variety of situations in which a property may be bought in joint names with an express declaration of trust in relation to the beneficial interest. These vary from the common situation where a man and a woman form a relationship and decide to live together to the commercial type situation where for example two people buy a house intending to do it up and resell it at a profit.

33. In the commercial type of situation there may be an express agreement between the parties that each will contribute equally to the outgoings, any mortgage instalments and to the cost of any improvements. It may be that one of the parties is unable to honour this agreement with the result that he or she pays less than his or her fair share of the outgoings or the cost of the improvements. Notwithstanding this failure the property may still be developed and resold during the course of the relationship between the parties. On such a resale the division of the proceeds will of course have to be in accordance with the express declaration of trust. However I do not see why a court of equity should not take account of the failure by one of the parties to honour their agreement as to the contributions to the outgoings and the improvements by means of equitable accounting. I equally do not see that such equitable accounting is prohibited simply because the relationship is not at an end.

34. It is to be noted that in the example I have given the considerations leading to equitable accounting involve a breach or failure by the accounting party to honour the arrangements or agreements between the parties as to the payments for the outgoings or the improvements to the property.

35. It seems to me that this failure or breach is at the heart of the matter. Before there can be a duty to account by one party to the other there must be a breach of or failure to comply with some obligation owed by that party to the other. There may be a debate in individual cases as to the nature of the obligation necessary to give rise to a duty to account but there must still be an obligation.

47. My decision in Clarke v Harlow was analysed without disapproval by the Court of Appeal in Wilcox v Tait [2006] EWCA Civ 1867. It is now clear that, like much in this field of law, the question of whether there is a liability to account depends on the intention of the parties. This is of course fact sensitive. Thus in paragraphs 64 and 65 of his judgment Jonathan Parker LJ said:

64. Moreover, it is in any event risky in my judgment to attempt to formulate general principles to be applied in carrying out an equitable accounting exercise in any given case, if for no other reason than that, as the judge put it in the instant case, equitable accounting, is "fact sensitive". What can at least be said is that an exercise of equitable accounting is not to be confused with an enquiry as to the extent of the parties' respective beneficial interests in the property in question. Questions of equitable accounting only arise once the extent of the parties' beneficial interests has been determined, since the requirement to account (where it exists) is a reflection of and derives from those beneficial interests.

65. As to the period to which equitable accounting should relate, in a case such as the instant case where the property has been used as a home for both parties but the relationship between the parties has come to an end (what was described in argument as a cohabitation case), the judge was in my judgment right to conclude that that depends upon the intentions of the parties as to how the relevant expenditure should be borne as between them.

48. The common intention of the parties means, of course, the intention of both of the parties. The unexpressed intention of one party cannot, in my view, possibly suffice.

Discussion

49. It was, of course, accepted by Mr Entwistle that in the event that the development of the adjoining land had been carried out at a profit then the amounts payable under the mortgage would have been taken into account in determining the amount payable to the estate. Similarly, as it seems to me, it cannot have been the intention of the parties that Nick Ketteringham would have been entitled to the return of any part of his £7,500 investment unless the loss (after taking into account moneys payable under the mortgage) was less than £15,000.
50. Thus the real question to be determined is whether it was the common intention of the parties that Nick Ketteringham would contribute to the liability under the mortgage in the event that the net proceeds of sale were less than the sum outstanding under the mortgage.
51. The following factors seem to me to be relevant:

1. There were no discussions about the position. Thus there was no express agreement about it.

2. 2FF was conveyed into the sole name of Jonathan Hardy; the mortgage was in his sole name. This is in marked distinction to the purchases of Units F1 and E4 which were both conveyed into joint names even though Nick Ketteringham had provided the bulk of the purchase money. If it had been intended that Nick Ketteringham should incur any liability under the mortgage it would have been a straightforward matter to convey 2FF into joint names.

3. All of the mortgage instalments for 2FF were in fact made by Jonathan Hardy. At no stage was it suggested that Nick Ketteringham should contribute to them. Indeed (and this may be a reflection of the friendship between the parties and Nick Ketteringham's illness) the income from 2FF was paid to Nick Ketteringham.

4. Mr Garner's letter of 14^th June 2007 clearly shows that it was Jonathan Hardy's intention that Nick Ketteringham should incur no direct liability to the mortgagee under the mortgage. If it had been his intention that he should incur an indirect liability over and above the sums he had already invested one might have expected that to have been mentioned in the instructions to Mr Garner.

5. Nick Ketteringham knew that he was ill from June 2006 although he may well not have known or accepted that the cancer was terminal. This may well have accounted for the decision to place 2FF in the sole name of Jonathan Hardy and to make him solely liable under the mortgage. In that way there would be no unexpected future liabilities on Nick Ketteringham beyond his original investment.

52. All of these factors seem to me to point to the conclusion that there was no common intention between Nick Ketteringham and Jonathan Hardy either when 2FF was purchased in 2006 or when they executed the Declaration of Trust in 2007 that Nick Ketteringham should contribute to the mortgage. In my view, therefore no equitable accounting obligation arises in respect of the outstanding mortgage.
53. It follows that the estate is not liable to contribute to the loss arising on the sale of 2FF.

Note 1   It is possible there may be some accounting issues relating to the payments of rent as between the parties but they have never featured in the proceedings. In any event the sums involved are relatively small and within the jurisdiction of the Small Claims court.    [Back]

Note 2   French v Styring (1857) 2 CBNS 357, 366 and Jaenicke v Schulz [1924] 4 DLR 488    [Back]