Upper Tribunal (Administrative Appeals Chamber)

IN THE UPPER TRIBUNAL Case No. CCS/2074/2009

ADMINISTRATIVE APPEALS CHAMBER

1. This is an appeal by Miss M, the parent with care, brought with the permission of a First-tier Tribunal Judge, against a decision of a First-tier Tribunal sitting at Newcastle-upon-Tyne on 3 February 2009. For the reasons set out below that decision was in my judgment wrong in law and I set it aside. In exercise of the power in s.12 of the Tribunals, Courts and Enforcement Act 2007 I make the findings of fact set out below and re-make the Tribunal’s decision as follows:

The Secretary of State is to redetermine the amount of the child support maintenance payable by Mr M, the non-resident parent, as from 9 May 2008, in accordance with the principles set out in this decision. Any dispute or difference in relation to the working out of such redetermination may be referred to me by any party within one month from the date when such dispute or difference becomes apparent.

2. Mr M and Miss M (they were never married, but happen to have surnames beginning with the same letter) have a son, born in 2002, who lives with Miss M.

3. On 18 May 2007 a decision was made assessing the child support maintenance to be paid by Mr M at £44.07 per week from 15 December 2006.

4. On 2 June 2008 a decision was made (i) revising the assessment as from 15 December 2006 to £28.61 per week and (ii) superseding and reducing that assessment to nil with effect from 9 May 2008.

5. The reason for the revision to £28.61 per week with effect from 15 December 2006 was that the decision maker had erroneously failed to take into account, in determining the exempt income of Mr M, that Mr M had a child by his new partner (Miss H), who was then living with them, which meant (on the facts of this case) that half the amount of the child and family allowances should have been included in calculating Mr M’s exempt income.

6. The reason for the reduction to nil with effect from 9 May 2008 was that the decision maker had acceded to a request by Mr M that the amount of housing costs included in his exempt income be increased. It is this point which gives rise to the appeal to me.

7. The background to the calculation of housing costs is this. On 14 November 2006 Mr M and Miss H completed the purchase of their home, 27 A Street, at a price of £94,000. Of the purchase price and costs totalling £94,793, they borrowed £42,000 from Accord Mortgages Ltd under a first mortgage, at an interest rate of 6.38% per annum. They were registered as proprietors of the property at HM Land Registry on 22 November 2006, and the charge in favour of Accord Mortgages was substantively registered at the same time.

8. On 16 November 2006 (i.e. 2 days after completion) Mr M (as borrower) and a Mr and Mrs B (as lenders) signed a loan agreement (“the Loan Agreement”) under which Mr and Mrs B agreed to lend to Mr M the sum of £54,000, and Mr M agreed to repay that sum, with interest at 4.2% per annum on the principal outstanding from time to time, calculated yearly in advance, by 60 consecutive monthly instalments of £395, with the balance outstanding to be repaid at the end of that term.

9. Clauses 8 and 9 of the Loan Agreement provided as follows:

“Security

8. This loan is secured by the following security (the “Security”): 27 [A Street].

9. This Loan Agreement is made in connection with the purchase of the Security by the Borrower, from the Lender. The Lender will retain title to the Security until payment of the full amount of the Loan is made by the Borrower. Upon receiving full payment, the Lender will transfer title to the Security to the Borrower.”

10. The instalments of interest and capital payable under the first mortgage were included as housing costs in calculating Mr M’s exempt income under the maintenance assessment which was made with effect from 15 December 2006. The instalments payable under the Loan Agreement were not, apparently because the CSA were not told about the additional amount borrowed pursuant to the Agreement. Mr M said in evidence to the Tribunal that this was because he did not know that those instalments were eligible to be treated as housing costs.

11. However, by the time when the revised maintenance assessment was made on 2 June 2008 the CSA had been informed that an additional amount had been borrowed. A form was sent to Mr M by the CSA, in which he somewhat misleadingly advised that the “original loan amount” was £94,000, the interest rate 6.38% and the “monthly capital payment” £466.33. The decision maker, on the basis of this misleading information, calculated the amount to be included in exempt income, as from 9 May 2008 (i.e. presumably the date on which the CSA were notified of the additional loan) as being £107.61 per week in respect of interest and £5.48 per week in respect of capital. It was on that basis that the maintenance assessment of nil with effect from 9 May 2008 was arrived at.

12. It was argued on Miss M’s behalf before the Tribunal, in her appeal against the decision made on 2 June 2008, that sums payable under the Loan Agreement should not have been taken into account in calculating the amount of Mr M’s exempt or protected income on a number of grounds, including the following:

(a) the loan was not made until two days after the purchase of the property was completed (and so by implication cannot have been made in order to purchase it);

(b) the loan was not taken in order to pay for repairs or improvements to the property;

(c) no charge or other security was registered at HM Land Registry in respect of the loan.

13. It was further argued, in a letter from Miss M, that whereas the property which Mr M and Miss H had purchased and of which they were registered as proprietors, and to which the first mortgage related, was described as comprising both nos. 27 and 29 M Street, they were living only in no. 27 M Street. Miss M asserted (and this appears to be common ground) that no. 29 M Street was a separate flat with a separate entrance.

14. The Tribunal held an oral hearing, at which both Mr M and Miss M were present, and at which Miss M was professionally represented.

15. The Tribunal’s Statement of Reasons begins by stating that the only issue was whether the sums payable under the Loan Agreement were to be included in housing costs, for the purpose of calculating exempt and protected income. The Tribunal concluded as follows:

“Housing costs are not defined in the legislation and accordingly bear the natural and ordinary meaning of costs associated with the provision of housing. The housing costs allowable are those which are reasonably necessary for providing a home. They include for example loans to a partner to purchase an interest in property. (Commissioner Decision CCS/12/94).

The Tribunal is satisfied that the loan is to be treated as housing costs for the purposes of Schedule 3 to the extent of the interest on such part of the loan as is attributable to the balance of the amount required to purchase the home i.e. £51,570. The remained (sic) is expenditure incurred in the purchase of the home and is disregarded. The Tribunal finds that the absence of the loan against the property title is explicable by the fact that the loan is the personal liability of the respondent. It is not in joint names, therefore, the absence of registration as a charge is explicable though the loan could be registered as a caution against dealings. The Tribunal looks at the purpose of the loan not the administrative arrangements of registration.”

16. The Tribunal stated, both in its Decision Notice and the Statement of Reasons, that the appeal was allowed. At first sight that seems odd, because the Tribunal appears to have accepted Mr M (the Respondent’s) contention that sums payable under the Loan Agreement had rightly been taken into account in determining the amount of housing costs.

17. In my judgment the Tribunal’s decision was, on any view, wrong in law. If the Tribunal was right in concluding that sums payable under the Loan Agreement could in principle be taken into account in determining the amount of housing costs, it was wrong in saying that only the repayments of interest could be so included. That would be right in relation to protected income, but not in relation to exempt income, where both interest and capital repayments are included: para. 3(2) of Schedule 3 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992.

18. I do not understand what the Tribunal meant by saying, in the second of the paragraphs which I set out in para. 15 above, that “the remaind(er) is expenditure incurred in the purchase of the home and is disregarded.” I think that there may well be a “not” missing in that sentence. It was probably intended to read: “the remainder is not expenditure incurred in the purchase of the home and is disregarded.” If so, what the Tribunal appears to have had in mind is that the amount stated to have been lent under the Loan Agreement (£54,000) was more than the amount (£52,343.92) shown on the solicitors’ completion statement as necessary to complete the purchase after credit is given for the £42,000 advanced by the first mortgagee.

19. In these circumstances the most satisfactory solution is for me to set aside and then re-make the Tribunal’s decision, making all necessary findings for that purpose.

20. The main issue for decision by me is whether the sums payable under the Loan Agreement are eligible housing costs, notwithstanding that (i) Miss H, one of the registered proprietors of no. 27, was not a party to that Agreement, and (ii) the security purportedly created by it was not registered or protected at the Land Registry.

21. The Tribunal appears to have found that the sum lent under the Loan Agreement was used to complete the purchase of the property. There are, however, three features of the Loan Agreement which at least raise doubt as to whether that was so. First, Clause 9 of the Loan Agreement appears to indicate that Mr and Mrs B, the lenders, were in fact also the vendors of the property, and so in effect left the balance of the purchase price outstanding by way of loan. If that was indeed the case, the lenders were entitled to an unpaid vendors’ lien, to secure the outstanding balance. Such a lien is an equitable charge over the legal estate (Megarry & Wade, the Law of Real Property, 7^th ed., p.1078). However, no reference has been made, at any previous stage of the proceedings, to this feature of the Agreement, and it seems to me to be inconsistent with the rest of the evidence. The only possible explanation seems to me to be that the Agreement was wrong in this respect, probably owing to the inadequate adaptation of a standard form by the solicitors acting for Mr and Mrs B.

22. Secondly, the Loan Agreement was dated 2 days after the date of completion of the purchase. However, I accept that the explanation for that is that the lenders were (as Mr M is recorded as stating in evidence to the Tribunal) the aunt and uncle of Mr M. It would therefore not be particularly surprising that they did not insist on the Loan Agreement being executed at the same time as the money was actually advanced. The solicitors’ completion statement in respect of the purchase shows a balance of £52,543.93 as still being required from Mr M and Miss H in order to complete, after receipt of the funds from the first mortgagee, and there is no reason not to accept Mr M’s evidence that at that least that amount was advanced by Mr and Mrs B in order to enable the purchase to be completed. It was no doubt advanced with the intention that the Loan Agreement be executed, and can therefore be treated as having been advanced pursuant to the terms of the Loan Agreement, notwithstanding that that was not executed until two days later.

23. Thirdly, as the Tribunal in effect noted, the amount stated in the Loan Agreement to have been advanced was £54,000, whereas the amount necessary to complete the purchase is shown on the solicitors’ completion statement to have been only £52,543.93. In my judgment only that latter figure can be regarded as having been advanced for the purpose of purchasing the property.

24. I would further accept Mr M’s explanation in relation to the apparent discrepancy between the description in the property register of the property which he and Miss H purchased (i.e. nos 27 and 29 M Street) and the property referred to in the Loan Agreement and in the correspondence as having been purchcased (no. 27 M Street). Mr M’s explanation is that they purchased the freehold of both nos. 27 and no. 29 but that for practical purposes they own only no. 27, because no. 29 (the flat below no. 27) is “owned” by someone else. The Land Registry entries show that part of the land purchased is subject to a lease for 99 years from 15 October 1979 at a rent of £10 per annum. The inference is that a long lease of no. 29 at a nominal rent was granted long ago. The freehold of no. 29 is therefore of no more than nominal value.

25. I turn then to the main issue before me (see para. 20 above).

Did the charge by Mr M of his beneficial interest amount to a charge of his “home”?

26. Mr M and Miss H held the property on trust (a trust of land which was either declared expressly in the transfer to them of the property, or arose under s.1 of the Trusts of Land and Appointment of Trustees Act 1996) for themselves as either joint tenants or (more probably) tenants in common (it does not matter which for the purposes of this case).

27. The fact that Miss H, one of the registered proprietors, was not a party to the Loan Agreement means that Clause 9 of the Agreement cannot have created a charge over the legal estate. It operated only as a charge by Mr M of his beneficial interest. Such a charge, not being a legal charge, is not capable of substantive registration at the Land Registry: s.27 of the Land Registration Act 2002. Further, s.33 of the 2002 Act provides that no notice may be entered in the register of any interest under a trust of land. A charge over a beneficial interest, being a derivative interest under a trust of land, cannot therefore be protected by notice on the title. (Further, the view of the Land Registry is that such an interest cannot even be protected by the entry of a restriction: Ruoff and Roper, Registered Conveyancing, 44.011, discussing the meaning and effect of s.42 of the 2002 Act).

28. It may of course be that Miss H was aware of and consented to the advance of the monies by Mr and Mrs B, and the creation of a charge in their favour. If the intention was that she and Mr M should be entitled to the beneficial interest in equal shares, she also benefited from the loan. In those circumstances it may well be that she would have been estopped as against Mr and Mrs B, under the doctrine of proprietary estoppel, from denying that the charge also took effect in relation to her interest. In those circumstances there will in effect have been a charge over the legal estate (capable of protection by notice). However, there is no sufficient evidence before me to make a finding to that effect.

29. The question is therefore whether a charge by a non-resident parent of his beneficial interest in the home, to secure monies lent for the purchase of the home, means that the sums payable in respect of the capital and interest of the loan qualify as housing costs for the purpose of calculating exempt and (in the case of interest, but not capital) protected income.

30. The directly relevant provisions of Schedule 3 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 are as follows:

“1. Subject to the following provisions of this Schedule, the following amounts payable in respect of the provision of a home shall be eligible to be taken into account as housing costs for the purposes of these Regulations –

……………………………………………………………………….

(b) amounts payable by way of mortgage interest;

3. - (1) The additional provisions made by this paragraph shall have effect only for the purposes of calculating exempt income.

(2) Subject to paragraph (6), where the home of an absent parent or, as the case may be, a parent with care, is subject to a mortgage or charge and that parent is liable to make periodical payments to reduce the capital secured by that mortgage or charge of an amount provided for in accordance with the terms thereof, those amounts payable shall be eligible to be taken into account as the housing costs of that parent.”

31. Para. 3(6) contains a proviso which appears at first sight to prevent sums payable under a second mortgage or charge from being included in housing costs, but which on analysis does not do so: see CCS/1137/2008. .

32. Para. 3(2) provides that the mortgage or charge must be of “the home”. That applies only in relation to exempt income, but it is in my judgment implicit that it must apply equally to the “mortgage interest” which by para. 1(b) can qualify as housing costs in respect of both exempt and protected income. Does the requirement that the mortgage or charge be of “the home” mean that the mortgage or charge must be one taking effect as against the legal estate, or at least the entirety of the beneficial interest, as opposed to one taking effect as against the beneficial interest of one or more (but not all) co-owners?

33. In a statutory provision or document whose purpose was to define or affect proprietary rights and interests, it would not be usual to find a mere charge of one co-owner’s beneficial interest described as a charge of “the property” (or “the home”, if that expression were used instead). A property lawyer would draw a very clear distinction, as indeed does the Land Registration Act 2002, between a charge (whether legal or equitable) of the property, which would prima facie be taken to mean the legal estate in the property, and a charge merely of one co-owner’s beneficial interest.

34. However, Schedule 3 to the 1992 Regulations is of course concerned not with property rights but with determining what can be eligible housing costs for the purpose of assessing the amount of child support maintenance. The most important condition is the general one to be found in para. 4(1)(a) – i.e. that the costs should have been incurred for the purpose of purchasing, renting or otherwise securing possession of the home, or for the purpose of carrying out repairs and improvements. In the case of sums payable in respect of a loan to purchase the home, the sums must in addition be secured by a mortgage or charge. (In the case of a loan for repairs or improvements, payments of interest qualify even if the loan is not secured (para. 1(d)), although capital repayments cannot qualify as exempt income unless the loan is secured (para. 3(2)).

35. The purpose of stipulating, to the extent that the legislation does so, that the loan must be secured, is presumably to ensure that there continues to be the necessary direct connection between the sums payable and the parent’s continued entitlement to occupy the property. If sums payable under a legal mortgage or charge are not paid, the mortgagee has his remedies by way of seeking possession of the property and sale. The parent’s continued occupation will therefore be in jeopardy. The remedies of a chargee of one co-owner’s beneficial interest are somewhat less extensive (see Megarry and Wade, op cit, pp.1127-8). He cannot take possession, but he is clearly a person who has “an interest in property subject to a trust of land” and therefore can seek an order for sale from the court under s.14(1) of the Trusts of Land and Appointment of Trustees Act 1996. Further, in deciding whether to order sale the court is expressly required to have regard to “the interests of any secured creditor of a beneficiary” (s.15(1)(d)). The case law under the legislation applicable prior to 1996 showed that the voice of the secured creditor would normally prevail, and a sale would be ordered in the absence of exceptional circumstances. Although that case law is not necessarily directly applicable under the 1996 Act, it can be expected that the courts will adopt much the same attitude: see, generally, Megarry & Wade at pp.528-9.

36. In practice, therefore, the failure to pay sums secured by a charge of one co-owner’s beneficial interest will place his continued occupation of the property in jeopardy to much the same extent as if the loan was secured on the legal estate. Against that background, and in the context of this legislation, it seems to me correct to describe that parent’s “home” as being “subject to a mortgage or charge”, within the meaning of para. 3(2) of Schedule 3, and I so hold.

37. In my judgment the Tribunal was right to hold that it is no objection that the charge is not (and indeed cannot be) registered, or even protected by notice or restriction, at the land registry. (The Tribunal was wrong to state that the charge could have been protected by a caution against dealings – such cautions are no longer available under the 2002 Act regime). That is a matter relevant to the binding effect of the charge on third parties acquiring the property, but does not affect the existence or validity of the security as against the parent.

38. In my judgment, therefore, the sums payable under the Loan Agreement were eligible housing costs, as to both interest and capital for exempt income purposes, and as to interest only for protected income purposes, to the extent that the sum lent was used to purchase the property. In my judgment only the sum of £52,543.93, and not the whole sum of £54,000 stated to have been lent, can be regarded as having been lent in order to enable the purchase of the property. However, as the monthly sum of £395 payable under the Agreement would not, by the end of the 5 year term, have repaid more than a total of £23,700 (less when interest is taken into account), the entirety of the £395 per month (or the interest element in relation to protected income) was in my judgment eligible.

39. My decision is therefore to remit the matter to the Secretary of State for recalculation of the maintenance assessment as from 9 May 2008, in accordance with this decision.

40. I would make one further point in relation to that recalculation. One of the points made by Miss M, in her initial appeal to the Tribunal, was that Mr M’s income must have increased since the calculation as at 15 December 2006. His earnings for the purposes of that calculation were taken, on the basis of wage slips, as £207.06 per week net. Page 2 of the Secretary of State’s written submission to the Tribunal recites some of the history relating to the Secretary of State’s requests to Mr M for updated information as to wages. The papers now contain a copy of a wage slip indicating that by August 2008 his wages were £246.40 per week net. The slip also contains a figure for the total wages paid in that financial year to date At present I can see no reason why that should not be taken as evidence that for the purposes of the recalculation as at 9 May 2008 Mr M’s net income was £246.40 per week. I give no binding direction to that effect, as I do not know what additional evidence the Secretary of State may since have received.

41. It seems, however, that this additional income will make little or no difference, because on the basis set out above I calculate Mr M’s housing costs at 152.43 per week, and his exempt income at 240.80 per week, which is only £5.60 per week less than his net income. That leads on to another point, although it is not one which can affect my decision. In Miss M’s representative’s submission to the Tribunal (p.47) it was submitted that, if Mr M’s housing costs were found to be as stated, the Tribunal should examine whether Mr M’s overall lifestyle was inconsistent with his income. The Tribunal had no jurisdiction to do so, because no decision on a departure application was under appeal to it. However, the submission itself was arguably an application for a departure direction on the ground of Mr M’s lifestyle being inconsistent with his declared income. I do not know whether any such application has been considered, but if not the CSA will no doubt wish to consider whether there was or has since been an effective application, and if so to determine it.

Charles Turnbull

Judge of the Upper Tribunal

25 February 2010