Mortgages and Sch 1 Children Act 1989 applications

Following the successful appeal of the arbitral award in LT v ZU [2023] EWFC 179, the decision has been reversed in the further appeal to the High Court ([2024] EWHC 778 (Fam)).

LT v ZU is significant for two reasons as it provides authority to permit a court to require a party to: (1) take out a mortgaged loan to provide housing pursuant to Sch 1; and (2) pay the monthly mortgage instalments in cases where the court has no jurisdiction to make periodical payments.

The father is seeking permission to appeal the decision to the Court of Appeal so this may not be the end of the story.

Quick re-cap of the facts

The mother and father were both in their early forties by time of the second appeal. They met in 2007, had a relationship for a few years and then resumed their relationship and cohabitation in 2015. They had two children (a boy and a girl) born in 2016 and 2018, respectively. The parties finally separated in 2019.

Following separation in January 2022, HHJ Roberts made child arrangements orders providing for the children to spend exactly equal time with both parents. As a consequence, the Child Maintenance Service made a nil assessment of the father (pursuant to reg 50(1)/(2) Child Support Maintenance Calculation Regulations 2012 (SI 2012/2677)); this was made on 23 November 2022 and was backdated to 17 January 2022.

The mother’s Sch 1 application was first determined by arbitration in June 2022. At that time, she remained in the former family home, a two-bedroom apartment described as ‘Thames House’. This property was owned by the father. The father was housed nearby in a four-bedroom house. Both properties were heavily mortgaged.

Prior to the arbitration the parties submitted an agreed statement of issues to the arbitrator. This recorded, inter alia, the following:

(1) the mother and children would be permitted to make their home at the Thames House apartment;

(2) the mother and children would be permitted to move to a replacement property in substitution for the Thames House apartment;

(3) subject to provisos sought by the mother, the father could extend the mortgage on Thames House for the purpose of extracting up to £70,000 specifically to meet tax due in July 2022; and

(4) the father would be responsible for meeting the mortgage payments, whether interest-only or repayment, on the mother’s and children’s home at Thames House or its replacement.

During the arbitration, it was agreed that Thames House would be sold and that the father agreed that the equity in the property (found to be c £256,000) could be invested in a new property for the mother and the children. The father also agreed that the existing mortgage on Thames House (c £680,000) could be utilised for this purpose. The mother agreed to put her resources towards the new property as well as her own mortgage capacity of £184,000. The arbitrator directed that there should be a joint mortgage of £870,000 to purchase the new property and that the father should meet the mortgage payments in relation to that substantially higher mortgage. The parties had instructed a single joint expert to advise on the mortgage capacities of each party. That expert advised that the parties could borrow collectively in excess of the £870,000 directed. The issue of the jurisdiction of the arbitrator to make an order which forced the father to raise a greater mortgage than he had offered (i.e. c £680,000) and forced him to pay the instalments on that mortgage was not raised.

The father appealed the arbitral award. His complaint was that the court had no jurisdiction to make him borrow more than ‘he had conceded’ although the issue before the judge who heard the first appeal appears to have been framed as to whether ‘the Arbitrator had … power to require the applicant to borrow monies for the purposes of making a settlement of property under paragraph 1(2)(d) of Schedule 1’.

The father appealed on a number of other grounds that were fact specific and because his financial situation had changed dramatically for the worse. Those grounds are not considered here.

The appeal succeeded primarily because HHJ Evans-Gordon found that, as a matter of law, the ability to borrow money was not property to which the borrower ‘is entitled in possession or reversion’.

The judge also found that the staged process by which capital was provided for a property from existing capital, then supplemented by borrowing and finally a property was settled, offended against the principle enunciated in Philips v Peace [2004] EWHC 3180 (Fam), [2005] 2 FLR 1212 that the court ‘having previously made an order for settlement of property, it could not make a subsequent order for a transfer of property’.

The judge was clear that she did not regard it as relevant that the father had ‘offered to borrow monies’ by way of mortgage ([35]) to purchase a new home for the mother and children. Her essential view was that it would not be:

‘right to order a parent to borrow money when whether or not anyone will lend money is not in that parent’s control.’ ([34])

The mother appealed and sought an order upholding the arbitral award. The appeal was heard by Cobb J in February 2024. The appeal was successful in relation to the jurisdictional issues highlighted above although the court declined to make an order in the terms of the arbitral award because the father’s situation had altered radically since the arbitration (e.g. he was no longer employed).

Jurisdiction to order a party to settle a property with a mortgage

The court resolved the jurisdictional issue as to whether a court has the power to settle property for the benefit of a child of unmarried parents pursuant to Sch 1, which requires (in part) mortgage borrowing for its funding in the mother’s favour for the following reasons:

(1) ‘The parties’ respective mortgage capacities were a “likely” ‘resource’ available to them to be considered by the court (Schedule 1 sub-paragraph 1(4));’ [122]

(2) ‘“Property” can include a beneficial interest in a property subject to a mortgage;’ [122]

‘As I have illustrated above, “property” is broadly defined in both statute and caselaw. It can be mere “property rights” (section 24 MCA 1973), or the interest in property to which a mortgage can attach (see the MC(PM)A 1958). It can include ‘proprietary rights’ both legal and equitable (Prest, at §89 above) and/or beneficial interests (ibid.). Beneficial entitlement to property extends beyond the equity and, most pertinently here, includes occupation of the whole.’ [95]

(3) ‘Settlements of property’ under Sch 1 CA 1989 can be made subject to mortgage as is evident from the fact that, for example, the courts have the power ‘to release parties from a mortgage and/or to indemnify the other against liability’ (see CH v WH [2017] EWHC 2379 (Fam)), [98]–[99].

(4) The court is not ‘con?ned to the four corners of the Matrimonial Causes Act’, [100]; so, by a parity of reasoning:

‘No express power within Schedule 1(1) to order a sale of property (i.e., to assemble the sum to settle); nor is there express power to direct that a new property be purchased on trust. But that is overwhelmingly the way in which Schedule 1 housing provision is interpreted and routinely carried into effect – that is to say, a sum of money is paid over from one party to the other (usually in one tranche) to purchase a property on trust terms; after the property is purchased – at the point when the payer is then “entitled” to the property “in possession or reversion” – it is settled on Schedule 1 terms.’ [102]

(5) ‘The terms “in possession or reversion” do not necessarily contemplate that there is an existing property to “settle”, nor do the terms contraindicate a prospective property purchased with the assistance of a newly obtained mortgage; a reversionary interest is just that: a non-current, future form of interest;’ [122]

(6) The fact that there is no specific statutory power in Sch 1 for a party to raise funds by way of mortgage in order to make one of the defined forms of financial provision for the benefit of children does not exclude this approach; it is to be noted that other essential ancillary powers for carrying property adjustment into effect are routinely exercised by the court (i.e. the taking out of insurance, or discharging a debt for which the party is not contractually liable), even though these are not expressly set out within the statute.

(7) ‘The family court has not only the jurisdiction but also the duty to consider any proper applications relating to the fulfilment of its order and to give whatever directions appeared appropriate to give effect to it;’ (original emphasis) [103]

(8) The Family Court, like the High Court, has wide powers to make orders to give effect to its decision (orders must be made ‘to the satisfaction of the court’); Sch 1, para 13 can come to the aid of the court if there is any difficulty in executing relevant documents to secure the mortgage (as per CH v WH at [98] above).

Did the order offend against the prohibition in Philips v Peace?

The answer to the above question was ‘no’. The court determined that a ‘two-step process to achieve the settlement of property (payment of the lump sum, then identification of the property and settlement of the trust) does not offend against the prohibition on a second payment (Schedule 1 sub-paragraph 1(5)(b)) and does not cut across what Singer J had said in Phillips v Peace; the steps taken to achieve the settlement is a matter of form not substance; the statutory language contemplates a future settlement: “settlement to be made”’ [102].

Mortgage payments

The father ‘emphasised that the nil assessment of the father by the Child Maintenance Service had denied the court the power to make any “top up” award of maintenance to take account of mortgage repayments: see section 8(6) Child Support Act 1991. Therefore, in the absence of agreement as to child support, there was no mechanism for facilitating the mortgage payments by the parties, or either of them, or at all’ [80].

The court determined that it did have jurisdiction to order the father to make the monthly mortgage payments. The reasoning of the court in this respect is particularly interesting:

(a) ‘The payment of the instalments of capital/interest to the mortgagee in this case was founded on the father’s undertakings/agreement; the contract of borrowing (mortgagor/mortgagee) is and would always have been between the father (or father and mother) and the lender; the standard template orders (Order 2.2 …) plainly contemplate that the court can make orders to regulate this;’ [122]

(b) ‘The Standard Orders template (Order 2.2), approved by the President of the Family Division, contains the appropriate form of wording for the settlement of property subject to mortgage; it specifically includes the formula for direction for one or other party to make all payments of capital and interest on the mortgage. In short, there is an extensive menu of suggested formulae from which the parties may draw, in particular undertakings … and orders …’ [122].

The judgment makes specific reference to the Standard Family Orders template 2.2 paras 57(c)/(g)(ii) and (iii) and 58(c)/(h)(iii). These read:

‘57 Provision of Family Home on Trust

(c) the [respondent] / [applicant] shall from [the date of this order] / [date] be [solely] / [jointly] / [insert other] responsible for all payments of capital and interest on the mortgage;

(g) [in the event of the [applicant] / [respondent] wishing to move to another property during the subsistence of this trust with the agreement of the [respondent] / [applicant] such agreement not to be unreasonably withheld:

i. the [applicant] / [respondent] shall be entitled to direct the trustees to sell the property and to apply the proceeds in the purchase of such other freehold or leasehold property (“the new home”) for [his] / [her] occupation and for the occupation of the child[ren] as [⁠[she] / [he] may choose, provided it is a reasonable investment for the [respondent] / [applicant]] / [may be agreed between the parties or in default of agreement determined by the court];

ii. the costs of the sale and purchase shall be borne by the [applicant] / [respondent] / [other];

iii. the new home shall be held upon the same trusts, terms and conditions as the property and the trustees shall have full power as if they were beneficial owners thereof to execute such mortgage deed as may be necessary to enable the purchase thereof to be completed;

58 Provision of New Home – New Home on Trust

(c) the [respondent] / [applicant] shall from [the date of this order] / [date] be [solely] / [jointly] / [other] responsible for all payments of capital and interest on the mortgage;

(h) in the event of the [applicant] / [respondent] wishing to move to another property during the subsistence of this trust with the agreement of the [respondent] / [applicant] such agreement not to be unreasonably withheld:

i. the [applicant] / [respondent] shall be entitled to direct the trustees to sell the property and to apply the proceeds in the purchase of such other freehold or leasehold property (“the new home”) for [his] / [her] occupation and for the occupation of the child[ren] as [⁠[she] / [he] may choose, provided it is a reasonable investment for the [respondent] / [applicant]] / [may be agreed between the parties or in default of agreement determined by the court];

ii. the costs of the sale and purchase shall be borne by the [applicant] / [respondent] / [other];

iii. the new home shall be held upon the same trusts, terms and conditions as the property and the trustees shall have full power as if they were beneficial owners thereof to execute such mortgage deed as may be necessary to enable the purchase thereof to be completed; …’

Conclusion

Cobb J expresses surprise in his judgment that the issues of jurisdiction outlined above have not been determined before. In relation to the payment of mortgage instalments it may well be that there was an assumption held previously that the court did not have jurisdiction. Indeed, the judgment refers to a decision of HHJ Hess in the case of SP v QR [2024] EWFC 57(B), which was decided only a fortnight before the final hearing in this case, where the court determined that the court did not have jurisdiction to order the father to make monthly mortgage payments. HHJ Hess relied on the cases of Dickson v Rennie [2015] 2 FLR 978 and Green v Adams [2017] EWFC 24, [2017] 2 FLR 1413 which ‘both support this conclusion’.

If there is to be an appeal, then no doubt the jurisdictional inter-relationship between the Child Support Act 1991 and the Standard Family Orders will be explored further. It will also be interesting to note whether, in the future, this case will be distinguished because the father agreed to make mortgage payments, albeit at a much lower level than that determined by the Arbitrator.

It seems also likely that an appeal court would be asked to consider whether funds that were to be borrowed by the father in this case comprise property to which he is entitled ‘in possession or reversion’.