Introduction

This article aims to provide the busy family practitioner with a fairly comprehensive guide to the what, where, when, and how of equitable accounting, specifically in the context of trusts of land, to assist you in getting such claims off on the right footing.

In the experience of the authors, accounting issues are often overlooked, particularly at the pre-action stage, and treated as an afterthought. This reflects the fact that accounting issues tend to arise as a subsidiary issue to the main claim, particularly where the underlying beneficial interests are in dispute. However, in the right case, accounting issues can make a substantial difference to net outcome, or to the viability of one party buying out the other. As is also evident from much of the case-law on equitable accounting, claims also frequently arise where one of the co-owners has been made bankrupt and their share has vested in their trustee in bankruptcy.

Equitable accounting is a fact sensitive process. The ultimate outcome will depend on the common intentions of the parties and what they have agreed, either expressly or impliedly, in relation to the sharing of the property and its associated benefits and burdens as well as careful analysis of the nitty-gritty of the figures and supporting disclosure. In many cases, expert evidence will also be required. Such issues therefore need to be foregrounded from the outset and properly evidenced.

We concede that some might take the view that equitable accounting is not the most exciting of subjects. If you are an enthusiast like us, then read on! Otherwise, you may wish to bookmark this article for future reference.

In the hope of breathing a little more life into the topic and assisting you with understanding the practical application of the principles, we have included some worked examples to illustrate the most common issues arising in equitable accounting claims, including:

• Occupation rents.
• Credits for repairs and improvements.
• Mortgage contributions.

Before we look at some of the specific constituent elements of accounting claims, we will cover some considerations of general application, including:

• The ‘what’: understanding the essential aim of equitable accounting.
• The ‘when’: we look at what juncture in a relationship a liability to account will arise. We also consider some other timing related issues such as limitation and claims for interest.
• The ‘how’: we address the basic practical procedural considerations relating to equitable accounting and how equitable accounting sits with the factual enquiry to discern the beneficial interests in the property.

General principles and practicalities

Equitable accounting: What is it?

Equitable accounting is both a process and a remedy via which the court seeks to establish the balance sheet between the parties in so far as they have shared the benefits and the burdens associated with jointly owned land with a view to determining whether or not either of the co-owners has a liability to compensate the other by way of redressing any imbalance between them. Equitable accounting issues typically arise where:

• one or other of the parties has incurred property related expenditure, such as repairs or in meeting mortgage payments, to which the other has not contributed at all or not paid their due share;
• a party has derived a benefit from the property, such as rental income or occupation, that the other has not shared in;
• the court can use the remedy of taking an account coupled with such factual enquiries as are necessary to ascertain what if anything is due from one party to the other to redress the imbalance in the sharing of benefits and burdens.

The principles developed in case-law have been described as ‘(non-binding) guidelines or rules of convenience aimed at achieving justice between the co-owners’: Murphy v Gooch [2007] EWCA Civ 603. The rules are now partly codified in ss 12–15 Trusts of Land and Appointment of Trustees Act 1996 (TOLATA) (primarily of relevance to the issue of occupation rent between beneficial co-owners).

Griffiths LJ, in Bernard v Josephs [1982] 1 Ch 391, illustrates how this balancing exercise typically works:

‘When the proceeds of sale are realised there will have to be equitable accounting between the parties before the money is distributed. If the woman has left, she is entitled to receive an occupation rent, but if the man has kept up the mortgage payments, he is entitled to credit for her share of the payments; if he has spent money on recent redecoration which results in a much better sale price, he should have credit for that, not as an altered share, but by repayment of the whole or a part of the money he has spent. These are but examples of the way in which the balance is to be struck.’

The penultimate point that Griffiths LJ makes here, that we are not concerned when taking an account with altering the shares of the parties but rather with the payment of a sum by way of a contribution to the relevant expenditure or by awarding a share in the benefits associated with the property, is particularly important.

Two points flow from this. First, equitable accounting will always be secondary to establishing beneficial interests in the property. This is chiefly for the reason that the shares in which the parties hold the property will usually bear upon the apportionment of the benefits and expenditure between them in taking the account. Additionally, in cases where there is no express declaration of trust and constructive trust principles are in play, departure from an agreement relating to sharing of expenditure, or post-separation conduct including payment of expenditure and use of the property, may be relevant to a finding that the beneficial interests in the property have changed, which will preclude (or at least reduce the scope for) an accounting exercise based on the same conduct.1

Secondly, since we are not concerned with adjusting the underlying beneficial shares on taking an account, any sum found to be payable on the account will be fixed by reference to the value of the expenditure or benefits in question and will not rise and fall with the value of the property. In consequence, it is possible to have a situation where the liability to account could result in a negative balance due to the accounting party upon sale of the property, particularly if there has been a fall in property prices, and the accounting party would be required to make up the shortfall.

Equitable accounting: When does it come into play?

A number of helpful points in terms of the juncture at which a liability to account is likely to arise can be distilled from the judgment HHJ Behrens in Clarke v Harlowe [2005] EWHC B20 (Ch) at [33]–[39]:2

• In commercial scenarios, there may be an express agreement that each will contribute to outgoings, any mortgage instalments, and to the cost of any improvements. Where one party is fails to honour this agreement, the property may still be developed and resold in the course of the relationship between the parties. Equity may take account of the failure by means of equitable accounting, such accounting is not prohibited simply because the relationship is not at an end.
• A breach or failure to comply with an obligation is at the heart of the matter and is necessary before a duty to account arises. This applies just as much in an ordinary cohabitation case as in any other.
• In a cohabitation case, whilst the common purpose of the trust and the ordinary arrangements for the discharge of the outgoings subsist, there will be no breach or failure by one of the parties to honour any obligation and thus no room or reason for equitable accounting.
• Equitable accounting in the cohabitation context usually becomes relevant after the relationship ends and the parties separate, since at that stage there are no longer common arrangements. Each party from this point should ordinarily pay their proportionate share of expenses. However, exceptional cases may warrant equitable accounting before separation if it can be clearly shown that one party is in breach of specific payment arrangements for improvements or expenses.

In a cohabitation scenario, it will therefore ordinarily (but not inevitably) be the case that it will be inferred that any liability to account will run from the date of separation. This reflects the common-sense assumption that cohabiting parties in a continuing relationship do not generally intend some sort of micro-accounting process between them and so it will usually not be possible to say that there has been a breach of an obligation owed to the other if there has not been an exact apportionment of expenditure between them. However, this is just an inference as to the parties’ intentions that may be drawn from the fact of cohabitation.3 Whether or not the court draws on that inference will depend on the particular facts of the case. Such an inference will not be applicable where the court concludes that the parties intended some other arrangement in relation to the sharing of expenditure.

Continuing with the theme of timing, three additional issues warrant consideration: whether the Limitation Act 1980 applies to equitable accounting claims, whether interest can be claimed on amounts due, and the question of timetabling the determination of the accounting claims.

Does the Limitation Act apply?

As we have seen, the root of the liability of co-owners to account to one another lies in a breach of their obligations towards one another in respect of the trust property. Section 21 Limitation Act 1980 prescribes the applicable time limit for actions in respect of trust property. The general time limit for actions for breach of trust is 6 years (s 21(3)). However, no time limit applies to actions in respect of fraud to which the trustee was a party (s 21(1)(a)). Further, and of most relevance to the co-ownership scenario, no time limit applies to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use (s 21(1)(b)).

In our view, the Limitation Act 1980 will not afford a defence to claims for adjustments as between accounting co-owners in most scenarios. This is because, in most cases the parties will be trustees who have either incurred a liability that they are entitled to be indemnified for from the trust property or otherwise who have received a personal benefit. In each of the foregoing scenarios, a limitation defence will not generally be available.

It was held in Re Howlett [1949] Ch 767 that where a trustee has had the benefit of rent-free occupation of trust property, he is treated for limitation purposes as if he has received and retained an occupation rent. Consequently, applying s 21(1)(b) Limitation Act 1980, no time limit applies to a claim to recover an occupation rent. The rationale underlying this principle is explained by Dankwerts J at 778:

‘a trustee who remains in occupation of trust property for his own purposes … cannot be heard to say that he has not received any rents or profits in respect of the property. Having received, therefore, in theory rents and profits, because he is chargeable with an occupation rent, he cannot discharge himself unless he can show that he has paid moneys away and therefore either discharge himself by proper payments or, indeed, perhaps escape under the Limitation Act having made improper payments. But here the trustee, it seems, did not make any payments out of any kind at all. He merely used the property for his own purposes … having received the occupation rent, for which he is chargeable, he must be considered as still having it in his own pocket at the material date and therefore cannot escape under the provisions of the Limitation Act 1939 …’4

However, it is important to note that while limitation may not apply, the equitable doctrines of acquiescence or laches could still be relevant, potentially barring a claim if there has been an unreasonable delay in seeking an account.

In the case of properly incurred expenditure, a trustee will have the right to be reimbursed from the trust property. That right is understood to be a proprietary charge or lien giving rise to an equitable interest in the trust fund with priority over the claims of the beneficiaries. No limitation period will therefore apply where a trustee (which includes parties holding legal title in a conventional co-ownership scenario) has incurred expenditure which the court considers is properly recoverable from the trust property.

Where a credit is sought via equitable accounting against an individual who is merely a beneficiary, and not a trustee, the rule in Cherry v Boultbee (1839) 4 My & Cr 442 may also apply. The rule rests on the equitable principle that no one should be entitled to share in the distribution of a fund until he has discharged any obligation to contribute to the fund. This principle has been held in the context of estate administration to permit executors to offset a debt owed by a beneficiary against their share of the estate, notwithstanding that the debt may be statute barred if the executor were to sue for it: Re Cordwell’s Estate (1875) LR 20 Eq 644. The fact that any liability owed by a beneficiary is yet to be established and quantified does not preclude the application of the rule in Cherry v Boultbee: Re Rhodesia Goldfields [1910] 1 Ch 239; Re Jewell’s Settlement [1919] 2 Ch 161. It would appear on this basis arguable that no time limit will apply where a credit is sought under accounting principles against a beneficiary who is seeking to share in the capital value of the property on sale.

Can interest be claimed?

There is authority to the effect that interest is not claimable in respect of credits for expenditure. The case of Foster v Spencer [1996] 2 All ER 672, which involved professional trustees, held that a trustee cannot typically claim interest on the reimbursement of ad hoc expenditure. In Byford v Butler [2003] EWHC 1267 (Ch), which concerned a conventional equitable accounting scenario, the court did not find it necessary to resolve the issue on the facts, but it was suggested that interest could not be claimed on expenditure on the basis that the time for reimbursement of the expenditure is the date of adjustment of the proceeds of sale, and therefore, there is no basis for interest to accrue beforehand. Nonetheless, there are cases where the courts appear to have taken a contrary view and the issue may be one of discretion.

The position regarding interest on occupation rent is also less than clear. Older case-law suggests that trustees may not be liable for interest on arrears of income: Macartney v Blackwood (1795) Ridg L & S 602. This principle might be argued to extend to occupation rent between co-owners, on the basis that occupation rent is effectively income. Further, the reasoning in Byford v Butler that the time for reimbursement is the date of adjustment of the sale proceeds might also be thought to apply to retrospective awards of occupation rent. However, there are reported cases in which interest has been awarded on occupation rents: see e.g. Sinclair v Sinclair [2009] EWHC 926 (Ch) and Baynton-Williams v Baynton-Williams [2020] EWHC 625 (Ch). Again, the issue is likely one of discretion.

Timetabling the account

A claim to an account will usually be raised as a matter of pleading alongside any claim for a declaration as to beneficial ownership or an order for sale. However, it may be appropriate in some cases for the determination of the accounting issues to be postponed until after the beneficial ownership of the property has been resolved, if that is in issue, and potentially until after the property has been sold.

There is no fixed rule as to whether accounting issues should wait until post-sale. Waiting until the property has been sold offers the advantage that the final figures will be available, where otherwise there may be an ongoing liability to pay an occupation rent or mortgage instalments. The account will obviously not be an issue that can wait where one party is seeking permission to buy out the other and wishes to offset any credit owed to them against the purchase price.

Except in instances where there is a disagreement over whether one of the parties has any interest in the property and the accounting claim involves significant complexity – making it logical to delay those costs until the property’s ownership is settled – our experience is that it is generally better, to avoid extra cost and delay, to address all issues at once rather than postponing the accounting process.

Equitable accounting: How should it be raised?

Procedural rules: in terms of the governing procedural rules, unless dealing with an intervener claim in the context of existing financial remedy proceedings, it is the Civil Procedure Rules that apply to initiating an equitable accounting claim.

Pre-action considerations: a detailed letter of claim should be sent in compliance with the Practice Direction on Pre-Action Conduct and Protocols. Failure to comply can have costs consequences. The letter of claim and the defendant’s response should set out the parties’ positions and relevant facts in sufficient detail to enable the recipient to understand the basis of the claim/defence. Pre-action disclosure of the key documents relevant to the issues in dispute is also expected. The parties are also expected to consider whether or not negotiation or ADR might enable them to settle their dispute without commencing proceedings.

Part 7 vs Part 8: if the matter cannot be resolved pre-issue, the claimant will need to decide whether or not to proceed under CPR Part 7 or Part 8. Part 7 proceedings are initiated by claim form coupled with particulars of claim. Part 8 proceedings are initiated by a Part 8 claim form and a supporting witness statement. The choice of procedure hinges on the question of whether or not there is a substantial dispute of facts between the parties. In cases where there is no dispute concerning the beneficial interests in the property, and the remedies sought encompass a sale and accounting issues, opting for Part 8 is typically appropriate. Where there is a dispute as to the underlying beneficial interests in addition to any accounting issues, proceedings should be issued under Part 7.

Counterclaims: it is very commonly the case that the party out of occupation is seeking an occupation rent and the party remaining in occupation will have claims to contributions for expenditure on repairs or mortgage payments to offset, which will need to be raised by way of counterclaim. It is important to note that you will require permission under Part 8 (CPR 8.7) to raise a counterclaim, if the claimant has issued under Part 8. If the claimant has issued under Part 7, the counterclaim is made at the same time as filing the defence and within the same document.

Part 36: an early and well-pitched Part 36 offer can have considerable tactical benefits, particularly for a claimant who, if they meet or beat their offer, will be entitled to additional interest, costs on the indemnity basis and interest on costs from the date of expiry of the relevant period, as well as an additional amount of 10% on the sum awarded to them (see CPR 36.17). Part 36 is prescriptive and an offer that does not comply with the rules will not attract the enhanced costs provisions it provides for, although it will still be a Calderbank offer that may attract cost consequences. There is a form that can be used for making a Part 36 offer (form N242A) to avoid drafting mistakes.

Expert evidence: cases involving claims to an occupation rent or to recover expenditure on works will require valuation evidence from an appropriately qualified expert. In the case of expenditure on unauthorised works to the property by one of the parties, the surveyor will be required to provide an opinion as to the resulting increase in value (if any) to the property. In a case involving multiple properties over a longer time frame and income and expenditure that needs to be accounted for, consider whether it may be more economical to instruct a forensic accountant as a single joint expert to undertake the work instead of the parties’ lawyers.

Practical tips: in the authors’ experience, it pays to give thought well ahead of the trial as to how the supporting financial information is to be marshalled and presented. In more complex cases, it will usually be sensible to seek a direction for the parties to prepare a Scott schedule with columns for each to set out their respective cases on the various heads of claim and for the judge to include their findings. Depending on the level of complexity, the Scott schedule may need to be supported by more detailed spreadsheets, itemising the underlying financial data and cross-referencing against the hearing bundle. In every case, you should aim to avoid having to argue issues of computation at trial. The judge is not going to appreciate being taken through a line-by-line analysis of bank statements in order to quantify particular heads of receipt or expenditure. Figure work should be undertaken well in advance of trial and the parties’ lawyers should aim to agree the figures and narrow points of dispute where possible, ideally leaving matters of principle for determination.

Equitable accounting: Where should such claims be issued?

Unless the claim has is particularly high value, the vast majority of claims should be issued in the county courts rather than the Business and Property Courts. In cases with an element of complexity, you might want to consider issuing in one of the county court centres with specialist business and property judges: Central London, Birmingham, Bristol, Cardiff, Manchester, Newcastle, Leeds, Liverpool and Preston. If there are (or are likely to be) conjoined financial remedy or claims under Schedule 1 Children Act 1989, proceedings should be issued in a court exercising both family and civil jurisdiction.

Constituent elements of the account

Occupation rent

An occupation rent, or statutory compensation under TOLATA, may be sought where one party has remained in occupation to the exclusion of the other. In each case, the overarching consideration in the exercise of the court’s discretion is whether or not it is necessary to order an occupation rent, or statutory compensation, in order to do justice between the parties.

An occupation rent will usually be payable where one party has been ousted by the other but will not normally be payable where one beneficiary has left the property voluntarily and would be welcome back at any time (In re Pavlou (a bankrupt) [1993] 1 WLR 1046). It is recognised, however, that a party leaving the home on the breakdown of a relationship should usually be regarded as having been constructively excluded from the property, although this is not a rule of law and is merely a prima facie conclusion drawn from the facts.

It is not necessary, therefore, to show forceable exclusion from the property on the breakdown of the relationship in order to succeed in claiming an occupation rent. In Bailey v Dixon [2021] EWHC 2971 (QB), it was held on appeal that the trial judge had erred in law in requiring the party seeking an occupation rent following her departure from the property upon the breakdown of the relationship to show something akin to forceable eviction by a landlord, such as changing the locks. Further, there is still scope for the court to order an occupation rent if the interests of justice require it, even in the absence of proof of actual or constructive ouster by the occupying party.

In Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432, Baroness Hale at [93]–[94] expressed the view that claims to an occupation rent between beneficiaries with an interest in possession entitling them to occupy the land (and so beneficial co-owners who have acquire a property as their mutual home) will now be governed by ss 12–15 TOLATA, instead of the case-law under the old doctrines of equitable accounting. In most cases, whether resolved pursuant to statute or the common law, the result will be much the same.

Section 13 TOLATA allows trustees (and thus the court pursuant to s 14(2)) to impose reasonable conditions on any beneficiary in relation to their occupation of the trust property (s 13(3)). This can include (s 13(5)):

• paying any outgoings or expenses in respect of the land – utility bills, mortgage payments, or ground rent charges, for example;
• requiring the beneficiary to assume any other obligation in relation to the land or to any activity which is, or is proposed to be, conducted there – for example assuming responsibility for repairs.

Where one beneficiary is occupying to the exclusion of another beneficiary they can also be required (s 13(6)):

• to make payments by way of compensation to the beneficiary whose entitlement has been excluded or restricted;
• to forgo any payment or other benefit to which they would otherwise be entitled under the trust so as to benefit the excluded beneficiary.

The court has a broad discretion to order an occupation rent, in a case governed by TOLATA, but must consider the following statutory factors (s 13(4) and s 15) as applicable or relevant on the facts:

• the intentions of the person or persons who created the trust;
• the purposes for which the property is held;
• the welfare of any minor who occupies the property or might reasonably be expected to occupy the property as their home;
• the interests of any secured creditor of any beneficiary; and
• the circumstances and wishes of each of the beneficiaries.

The presence of minor children living at the property, for whom both parties have an obligation to provide, will often be a factor weighing against the award of an occupation rent (as it did on the facts of Stack v Dowden itself). In other cases, it may be that the parties possessed a common intention that one co-owner would be able to occupy the property rent-free on a continuing basis.5

TOLATA does not provide an exhaustive regime governing every case in which payment for occupation is sought by one co-owner against another. In particular, the provisions of TOLATA permitting the award of statutory compensation have no application in claims by trustees in bankruptcy or by other co-owners who have no right to occupy the land, or by persons who may have a right of occupation but where the right of occupation has not been excluded or restricted. In all such cases, the statutory right to compensation under s 13(6) does not arise, since that section is only engaged where the statutory entitlement to occupy the property pursuant to s 12 has been excluded or restricted. There is also a view that s 13(6) operates prospectively only, and that retrospective awards remain governed by the equitable jurisdiction to make such awards, although the statutory principles will be treated as relevant.6

Where the right to statutory compensation under TOLATA is inapplicable, traditional equitable accounting rules continue to apply and the court has a broad equitable jurisdiction to do justice between co-owners on the facts of each case. For many years the position was that an occupation rent ‘… will ordinarily, if not invariably’ be ordered against the occupying co-owner in cases involving a trustee in bankruptcy, on the rationale that it is not reasonable to expect a trustee in bankruptcy to exercise the right to occupy the property (French v Barcham [2008] EWHC 1505 (Ch)). Doubt was cast on the correctness of that approach by Snowden J in Davis v Jackson [2017] EWHC 698 (Ch), who considered that the default position under the equitable jurisdiction is that occupation rent is not payable under the equitable jurisdiction unless there is some conduct by the occupying party, or at least some other feature of the case relating to the occupying party, that justifies a court of equity concluding that it is appropriate or fair to depart from the default position and to order the occupying party to start paying rent.

The Court of Appeal in Ali v Khatib & Ors [2022] EWCA Civ 481 has now confirmed the reasoning of Snowden J in Davis v Jackson.

Ali v Khatib concerned what had been a multi-generational family home. Mrs Bibi lived in her home with one of her sons and his family (the respondents to the appeal) and in a 2003 will left the home to them. Some years after her death, this will was successfully challenged. Thereafter, the beneficiary of an earlier valid 1997 will (the claimants/appellants) sought occupation rent against the respondents for the period from Mrs Bibi’s death to vacant possession.

At first instance, the judge refused to order an occupation rent or statutory compensation. The case was approached on the basis that the other beneficiaries under the 1997 will had a right of occupation under s 12 TOLATA.7 However, the claimant had not been excluded from or restricted in his use of the house. It was merely that all of Mrs Bibi’s children had moved out except for the respondents who had cared for her, and their occupation continued after Mrs Bibi’s death under the invalid will that named them as beneficiaries. The judge found that the claimant would not have wanted to occupy the property anyway, as he had his own family home. Consequently, the judge concluded that there was no entitlement to statutory compensation under TOLATA. Applying Davis v Jackson, he further concluded that there was no entitlement to an occupation rent under equitable principles. The fact that the property had gone up in value was also taken into account as weighing against awarding an occupation rent. The judge’s approach was approved on appeal. The Court of Appeal concluded that that the default position is that an occupation rent is not payable, absent some other feature of the case relating to the occupying party that justifies the conclusion that it is appropriate or fair to order the occupying party to start paying rent.

Following Ali v Khatib, the position would appear to be as follows:

• Statutory compensation under TOLATA is not available unless the absent party: (a) has a right of occupation; and (b) that right of occupation has been restricted or excluded – if those pre-conditions are satisfied, the court must then go on to consider whether to exercise its discretion to order an occupation rent having regard to the relevant statutory considerations as applicable on the facts.
• In all other cases, the court is exercising a broad equitable jurisdiction. The statutory factors are likely nonetheless to be a relevant consideration.
• The default position (and it would appear from the judgment that this is the case as between all co-owners, see Andrews LJ at [72]) is that an occupation rent is not payable, absent some feature of the occupant’s conduct that makes it just to order an occupation rent.

Examples of factors justifying an award were suggested in Khatib to include exploiting the property for financial gain or precluding the other co-owner from exercising a right of occupation that they otherwise wished to occupy. In many cases involving claims between formerly cohabiting couples, the departing party will often be able to argue that there has been a constructive ouster, justifying the award of an occupation rent or statutory compensation. Prolonged resistance to selling the property might support the decision to order occupation rent. However, an increase in the property’s value could weigh against such an order, as highlighted in both Davis v Jackson and Ali v Khatib.

Quantification and set off

When assessing the quantum of any occupation rent, the court will generally assess the claim by reference to the market rental value. This is usually evidenced by way of evidence from a single joint expert, such as a RICS surveyor. The party ordered to pay an occupation rent, will be liable to account to the other for a share of the rental value attributable to the property, in proportion to the parties’ respective beneficial interests (Akhtar v Hussain [2012] EWCA Civ 1762).

Alternatively, it has been suggested that occupation rent should be determined by reference to the actual costs of renting alternative accommodation incurred by the cohabitee who is no longer in occupation of the property. In his dissenting judgment in Stack v Dowden, Lord Neuberger considered that the court should be able to award compensation based either on the notional rental value of the property or the cost of alternative accommodation. We consider that there are difficulties with the ‘alternative accommodation’ approach, which raises the need to consider the relative difference between the standard of the co-owned property and the alternative accommodation. The cost of alternative accommodation will not do justice between the parties if the ousted party rents a mansion when a bungalow would do or, conversely, if, due to financial circumstances, the ousted party is forced to rent much more modest accommodation. In our experience, the prevailing approach is to assess occupation rent by reference to the market rental value of the property.

On a pragmatic basis, where the occupying party has discharged the mortgage and the mortgage payments and occupation rent are roughly equivalent, the court may simply offset one against the other if that is likely to do broad justice between the parties and avoid the costs of an accounting exercise.

Repairs and improvements

In the context of co-ownership, equitable accounting principles may come into play if one co-owner undertakes repairs or improvements on the property. As we have seen, unless in the course of the relationship there has been a breach of an agreement to contribute to works, equitable accounting will only come into play post-separation. We have already referred to the case of Clarke v Harlowe as authority for that proposition. On the facts, that case concerned an attempt by one cohabitant to claim a credit against the other for half of the sum of £90,000 he claimed to have spent on making improvements to the property. Since that sum had been paid whilst the parties were in a continuing relationship, and in the absence of any evidence that there had been an agreement that the other would contribute to the costs of the work, there was no basis for compelling her to contribute via equitable accounting.

A credit may be obtained where such expenditure has been incurred post-separation. Two key principles established in Leigh v Dickeson (1884) 15 QBD 60 provide the foundation for the applicable rules.

• First, a co-owner cannot unilaterally execute improvements or repairs and then charge the other co-owner with a share of the cost. This principle arises because the law posits that a co-owner should not be burdened with expenses without having had the opportunity to either accept or reject them. Pollock CJ’s dictum in Taylor v Laird (1856) 25 LJ Exch 329, 332, though a contractual dispute rather than an equitable accounting case, encapsulates the essence of this principle: ‘One man cleans another’s shoes, what can the other do but put them on?’
• Despite the seemingly harsh nature of this rule, it is balanced by a second principle that prevents a party from reaping the benefits of an increase in property value without compensating the other for the expenses incurred to achieve it.

Therefore, the overarching rule is as follows.

In the absence of an agreement between the parties regarding sharing the cost of the work, a party can only recover a contribution to expenditure on repairs or improvements if that expenditure has resulted in an increase in the property’s value. Additionally, the recovery for such unilaterally incurred expenditure is limited to a proportionate share of whichever is the lesser of the actual expenditure or the increase in value brought about by the improvements, as affirmed in In re Pavlou (a bankrupt) [1993] 1 WLR 1046 at 1048–1049. In most cases the increase in value will be less than the expenditure, and recovery will usually be capped at a credit for the other party’s proportionate share of the increase in value.

Furthermore, it follows from these principles that parties cannot claim for improvements they have carried out without incurring any actual expenditure, whether through their own labour or other means, as per HHJ Matthews in Solomon v McCarthy (Trust law) [2020] EW Misc 1 (CC) at [28]. The party seeking credit for the cost of improvements and repairs must provide evidence of both the cost of the work and the corresponding increase in value. Failure to provide such evidence is likely to result in the dismissal of the claim (as happened in Solomon v McCarthy).

Case example 1 – repairs and improvements

• Alice and Bill have separated, they hold the property in the proportions 70% to Alice and 30% to Bill. The exterior of the property needs painting. Alice and Bill agree that this should be done, and Alice takes the lead in making the arrangements. Alice then decides, without consulting Bill, to also ask the builders to retile the roof and to install a new kitchen.
• The repainting cost £1,000 and adds nil to the value of the property.
• The retiling cost £5,000 and adds £10,000 to the value of the property.
• The kitchen cost £5,000 and adds nil to the value of the property.

What adjustment is required to division of the net proceeds of sale of £110,000?

Suggested solution:

Mortgage payments

Mortgage payments: capital

In relation to the period prior to separation, the principles considered in Clarke v Harlowe apply to mortgage payments as with other expenditure. Just as with other expenditure, it is open to court to find no intention to account even where substantial repayments have been made by one party during course of relationship. In Begum v Issa [2014] WL 5833780, a question arose as to whether under the principles of equitable accounting Ms Begum should give credit in respect of a substantial payment to reduce the mortgage which had been made by her former partner. The answer, applying Clarke v Harlowe, was no. The parties had agreed that Ms Begum would not work and would look after the children. All financial matters were dealt with by the man. It had been their common intention that neither should thereafter have to account to the other in respect of expenditure incurred by the other on the property during the period of cohabitation.

After separation, if one party repays more than their share of the mortgage principal, they are typically entitled to a proportionate credit for the resulting increase in the property’s equity of redemption. Millet J in In re Pavlou (a bankrupt) [1993] 1 WLR 1046 explained this as aligning with how repairs and improvements are treated – capital repayment enlarges the equity of redemption for the benefit of both parties.

Mortgage payments: interest

In Re Pavlou, Millet J also allowed the wife’s claim to a credit for interest payments, although he did not elaborate on the justification. The analogy with credit for repairs and improvements does not offer a clear basis for awarding credit for the interest component. Mortgage interest payments do not directly enhance the value of the parties’ interests and, the context of repairs and improvements at least, expenditure that does not result in an increase in the property’s value is generally not allowed.

The better view, perhaps, is that such expenditure is allowable by reference to the general principle at common law and equity that a party who has paid more than their fair share of a common liability can seek a contribution from the other party. There is commentary to this effect in Byford v Butler [2003] EWHC 1267 (Ch) and Davis v Jackson [2017] EWHC 698 (Ch).

In Emmanuel v Emmanuel [2016] SGCA 30 at [103], the Singapore Court of Appeal examined English equitable accounting principles and concluded that there should be no distinction between income and capital. Both payments help preserve or enhance the parties’ shares in properties – a failure to pay the interest due under the mortgage will be liable to place the property at risk of repossession by the lender. Moreover, distinguishing between interest and capital can lead to unfairness. It is generally the case that amortisation schedules result in a greater proportion of mortgage repayments made at the beginning of the mortgage being applied towards the payment of interest, whereas more of the payments made later in the lifetime of the mortgage will go towards capital repayment. If a distinction were drawn between payment of capital and of interest, the party who makes repayments at the beginning may end up worse off than a party who pays at a later stage. The court considered this approach to be unjustified, if the aim of equitable accounting is to achieve broad justice between co-owners.

A practical approach can be taken when the monetary amounts involved can be seen to be broadly similar, such that a detailed accounting process would result in unnecessary time and expense. In such cases, the court may direct that the interest component of the mortgage payments be offset against the occupation rent claim without further investigation, as suggested in Re Gorman [1990] 1 All ER 717 at 726.

This practice is one of convenience rather than a rule of law. It is more commonly applied between former cohabitants and less likely when the party seeking the account is a stranger or more remotely connected to the occupant (e.g. a trustee in bankruptcy): Re Gorman; Re Pavlou. Such an approach will also not be appropriate where it appears likely to lead to an injustice, for example where there is substantial disparity between the mortgage interest and the rental value of the property. In other situations, offsetting will be inapplicable. For instance, when the party entitled to the occupation rent, having vacated the property, has also been paying the mortgage or where the court decides that the party remaining in occupation should not be liable to pay an occupation rent.

Mortgage payments: proportions

The question of the proportions in which the parties should be expected to contribute to mortgage payments was also considered in Emmanuel v Emmanuel [2016] SGCA 30, where the court concluded at [105]:

‘In our judgment, the extent to which each party is expected to contribute to mortgage repayments will largely depend on the common understanding or agreement between the parties at the time the mortgage is taken out. … If there is a material departure from that common understanding, and one party repays more of the mortgage than was initially envisaged, then equitable accounting may be brought into play, unless it is shown that at the time the mortgage repayments were made, the payor had the intention to benefit the other co-owners.’

We consider the focus on the parties’ intentions to be the correct approach, and consistent with the reasoning underpinning equitable accounting as considered in the English case-law.

The mortgage is usually the largest property-related expense that will be incurred by the parties and typically there will have been some sort of discussion or agreement about how the parties intended to contribute to the mortgage from the outset. There are a range of potential conclusions that could be drawn depending on the facts of the case. For example:

• Where the agreed beneficial shares of the parties in the property reflect the fact that there was an understanding between the parties that the mortgage capital would be treated as having been contributed by each of them in particular proportions and that they would service the mortgage in those proportions, it is likely that any liability to account will be assessed by reference to that agreement. For example, an agreement of this description may be struck between the parties where party A has contributed more of the deposit and party B agrees, as a quid pro quo of the property being held as joint tenants or as tenants in common in equal shares, to discharge a greater share of the mortgage repayments. We consider that in such a scenario, the parties will most likely be held to the bargain struck at the outset – it would be unfair to allow party B to retain the benefit of the bargain struck in terms of their beneficial share in the property but allow them to wriggle out of their agreement to shoulder a greater share of the mortgage.
• In the absence of any explicit or implicit agreement to share mortgage liability in specific proportions, or when the court determines that any existing agreement on contribution has ended, the parties are likely to be deemed liable in one of two ways:
• In accordance with their respective shares in the property. For instance, if party A owns 30% and party B owns 70%, and party A makes excess payments toward the mortgage, party A will be credited for 70% of these payments, reflecting the benefit received by party B (consistent with the rationale in Re Pavlou and the result in Emmanuel v Emmanuel).
• Alternatively, it could be argued that both parties should contribute equally to the mortgage, as their liability to the lender is typically joint and several. We favour the proportionate approach, which is consistent with the approach taken to apportioning other expenditure and occupation rent, where that would lead to a different outcome.

Case example 2 – mortgage and occupation rent

• Alice and Bill purchased a property for £200,000. The property is held by them as beneficial joint tenants pursuant to an express declaration of trust.
• Alice contributed the deposit of £50,000 and the remainder was raised by way of mortgage in joint names.
• They agreed from the outset that Bill would pay 60% of the mortgage instalments, as Alice had paid the deposit.
• After the birth of their child, Alice reduces her hours. From this point, Bill pays the whole mortgage making payments (in interest and capital repayment) totalling £10,000 for this period, instead of his originally agreed share of £6,000.
• One year later they separate in acrimonious circumstances. The atmosphere at the house is intolerable and Alice and their child move into a spare room at Alice’s mother’s house. Bill alone remains in occupation paying the whole mortgage for 2 years paying a further £20,000 (in interest and capital). The property is sold, by which date the property is worth £250,000 and the outstanding mortgage is £120,000.
• The market rental value of the property is £1,200.00 per month.

Suggested solution:

In the above table, in calculating the net proceeds prior to adjustment, we have treated the mortgage liability on redemption of the mortgage at the point of sale as being apportioned equally between Alice and Bill. Note that the property is held as express joint tenants and, absent fraud or undue influence or some other vitiating factor justifying the recission of the declaration of trust, the declaration of trust is conclusive as to their respective beneficial interests in the property: Pankhania v Chandegra [2012] EWCA Civ 1438. There is therefore no scope for Alice to seek to argue on constructive trust principles that she should have a larger share on the basis of her greater contribution to the purchase price.

However, we consider that there is an argument here that the burden of the repayment of the outstanding mortgage should be apportioned as between the parties’ gross shares of the proceeds of sale in accordance with the agreement that Bill should be responsible for 60% of the repayment. This approach may be said to be consistent with the intentions of the parties. Why should Bill share in the increase in value in the property on sale, without first deducting the proportionate share of the mortgage that he was expected to ultimately bear over the lifetime of the mortgage and which he had agreed to pay in recognition of Alice’s greater contribution to the purchase price?

If this argument was accepted, this would change our starting figures in the above scenario (prior to the other adjustments), as follows:

This is not an argument that the parties’ beneficial shares in the property should be varied on constructive trust principles, rather it is about indemnification. The argument on our facts is that Alice has effectively stood surety for the portion of the mortgage that they agreed at the point of purchase was to be Bill’s responsibility to discharge and should be entitled to be indemnified and to have her interest in the property relieved from repayment of that portion of the mortgage debt. This approach is consistent with the doctrine of exoneration, whereby co-owner A may be entitled to throw on the share of co-owner B the burden of borrowing taken against jointly owned property for the sole purposes of B, so that A’s own share of the property is ’exonerated’ from repayment: see the helpful analysis of the law relating to the doctrine in Armstrong v Onyearu [2017] EWCA Civ 268, [2017] 3 WLR 1304. Where jointly owned property is charged to secure the indebtedness of one of the joint owners, there is an evidential presumption that the parties intended that, as between themselves, that the liability should fall on the debtor’s share of the property. The application of the doctrine of exoneration turns on the presumed or actual intentions of the parties. The underlying rationale of the equity of exoneration is that parties can agree between them the extent to which they will bear responsibility for discharging the secured borrowing. We have found no authority dealing with the question of whether parties can be held to an express informal agreement to apportion a mortgage raised for the purchase of a property. However, in Cadlock v Dunn [2015] EWHC 1318 (Ch), it was held that the wife’s beneficial interest in a jointly owned property was to be exonerated, based on the presumed intentions of the parties, to the extent that a mortgage had been used to buy back the husband’s share in the property from his trustee-in-bankruptcy. Whether or not this argument would succeed on the facts of our scenario would depend on the court’s willingness to extend the exoneration line of authority, as well as the court’s findings as to the parties’ intentions. The same conclusion may arguably also be reached on unjust enrichment principles.

Case example 3 – bringing it all together

• Alice and Bill are separated and living apart. They nonetheless buy a property in joint names pursuant to an express declaration of trust for Alice’s sole occupation, and subject to a joint mortgage which they agree will be paid equally. Bill did not pay the mortgage as agreed and is subsequently declared bankrupt.
• Alice of her own accord undertakes repairs to the property in the sum of £10,000, but this has not resulted in any increase in value. The rental value of the property is about equivalent to the sums Alice has paid by way of mortgage.
• The property is worth £450,000 and the outstanding (interest only) mortgage is now £200,000. Alice has paid £120,000 in mortgage instalments since the date of purchase.
• Alice seeks adjustment to her share in respect of the excess mortgage payments she has made and for a contribution to the costs of the repairs. Bill’s trustee-in-bankruptcy seeks to offset the mortgage interest against an occupation rent.

Suggested solution:

We can be relatively confident of our answer here, as the factual scenario is drawn from the case of Davis v Jackson [2017] EWHC 698 (Ch).

Snowden J could not see how it could be in accordance with equity or justice for his trustee-in-bankruptcy, who has simply stepped into the Mr Jackson’s shoes, to become automatically entitled to claim an occupation rent from the wife in circumstances where it had never been intended that Mr Jackson would live at the property.

The court considered it relevant that Mrs Jackson had paid all of the mortgage instalments and other outgoings in respect of the property. Mr Jackson had done nothing other than contributed his willingness to assume liability under the mortgage. If Mrs Jackson were to be charged occupation rent for the period since the vesting in the trustee-in-bankruptcy of the husband’s interest in the property, so as to offset the substantial mortgage payments which she had continued to make after that time, the result would represent an unjust windfall for the creditors. The limited involvement of Mr Jackson and the trustee was properly reflected in his share of the equity in the property, which had substantially increased in value over time, after giving credit for the excess mortgage payments Mrs Jackson had made.

The court ordered the proceeds of sale of the property to be split equally between the trustee and Mrs Jackson, with credit to be given to Mrs Jackson for one half of all the payments she has made under the mortgage from the date of purchase until sale. No allowance was made in respect of other payments which she had made. Although she had paid for some repairs and improvements to the property, there was no evidence that these had resulted in an increase in value.

Conclusions

By way of summary, the following points can be made about the court’s jurisdiction to adjust the parties’ shares in the property to take account of the benefits and burdens or the property, whether under TOLATA or the old equitable accounting principles:

• The golden thread that runs through the body of applicable case-law is whether or not it is necessary to make such credits or debits in order to do justice between the parties.
• In all cases, the court has a discretion whether to order such adjustments.
• The result in every case will turn on the particular facts of the case and the intentions of the parties will usually be of particular importance.
• In most cases, the accounting process is going to be confined to the period post-separation.

We offer a final word of caution: always consider carefully whether the costs of the accounting exercise will be proportionate to the result achieved. Accounting claims in the typical case often involve fairly marginal figures and it is quite often the case that cross-claims between the parties will largely cancel one another out. No one wants to be in the position that the parties found themselves in, in Murphy v Gooch [2007] EWCA Civ 603. It took a trip to the Court of Appeal in that case to reach the conclusion that the woman’s entitlement to an occupation rent should be set off against the credits due to the man in respect of his payment of interest and rent (the property having been purchased under a shared ownership scheme), with the result that each credit cancelled the other out.