Articles

Financial Orders – The Sole Trustee Problem

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18th June 2015

When the court makes or approves a financial order, there is often not enough money in the matrimonial pot to house both parties and any children in owner-occupied accommodation. An outright transfer to one of the parties of what may be the only significant asset may be quite unfair to the other party (as in Clutton v Clutton – [1991] 1 All ER 340 (CA)). An immediate sale of the matrimonial home could be futile, in that both parties may have to move into rented accommodation, with geographical consequences including potential disruption to any children’s education. The parties each, of course need to take tax advice to ensure that liabilities for e.g. CGT (upon transfer / sale) and Inheritance Tax (upon creation of the trust and every ten-year anniversary thereof).

Mesher or Martin orders

In exercising its property adjustment powers under s 24 (b) MCA 1973, the court can therefore direct that the parties together hold a property upon trust for sale for themselves as beneficial tenants in common in specified proportions (e.g. 70:30). The trust can subsist until either the occupying spouse’s death, remarriage or cohabitation (for a specified period) – as in Martin v Martin [1977] 3 All ER 762, [1978] Fam 12, or until such time as the youngest child should attain the age of 18, as in the 1973 case of Mesher v Mesher & Hall [1980] 1 All ER 126. In either scenario there can also be provision for further order of the court to bring the trust to an end.

Ancillary to such orders, the court may direct that, pending sale, the occupying party (“OP”) should be at liberty to occupy and use the house to the exclusion of the non-occupying party (“NOP”) during her lifetime and, upon the sale of the property, the net proceeds of sale be divided in specified proportions. OP may be directed to be responsible for all outgoings and maintenance in respect of the property, to include mortgage interest (or indeed interest and capital), and to indemnity NOP in respect of the same.

But what if the property is in the sole name of the NOP, and is substantially mortgaged? What if OP is unable to procure the release of NOP from liabilities under the mortgage either because of a poor credit rating, or because of insufficient earnings? What are the arguments for preserving the property (as opposed to selling it) and how can this be achieved?

S 24A MCA 1973 – Deferred Order for Sale

S 24A MCA 1973 empowers the court to “direct that the order [for sale], or such provision thereof as the court may specify, shall not take effect until the occurrence of an event specified by the court or the expiration of a period so specified” – i.e. the sale and payment of any resulting lump sums could be deferred until certain specified trigger events (as with a Martin or Mesher order). Before arguing for such an order to be made, the parties would need to take advice as to the incidence and quantum of any capital gains tax, particularly if the sale is deferred for some years.

The sole trustee solution?

A third option has its own complications. Imagine that the court approves an arrangement for NOP to hold the property (being registered land) on trust for sale for himself and OP in agreed shares, and subject to various trigger events. Imagine that the parties subsequently fall out, and that NOP wishes to realise his interest in the property.

Occupying Party’s Overriding Interest

By living in the house, OP would have an overriding interest (Sch 3 § 2 Land Registration Act 2003). She would be able to keep an eye on the house, and alert any potential purchasers to her beneficial interest. For example, in Chhokar v Chhokar and Another [1984] FLR 313 (HC), NOP sold the property at an undervalue to a third party in an attempt to defeat OP’s beneficial interest. The court, however, found that OP (despite being in hospital having a baby) was in actual occupation of the house, and that the purchaser took subject to her overriding interest. The situation, nonetheless, was far from ideal for OP.

Entry of a Form A Restriction

However, there is additional protection. Upon creation of the trust, section 94 (1) (a) Land Registration Rules 2003 states that a Form A restriction must be entered at the Land Registry. The statutory basis for, and effect of, the restriction is to be found in Land Registration Act 2002 s 40 – 41. The Form A restriction would state: – “No disposition by a sole proprietor of the registered estate (except a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court” (see LRR 2003, Sch 4). The applicant (typically) must ensure that Form RX1 is lodged at the Land Registry (Land Registry Practice Guide 24 is particularly informative in this respect) – and it would obviously behove the respondent to ensure that this was done expeditiously! There is no requirement for it to be served on any mortgagee.

Effect of sections 2 and 27 of the Law of Property Act 1925

The restriction would notify a purchaser of the existence of the beneficial interest of OP. Is that enough? No: NOP could arrange for the OP’s beneficial interest to be overreached. How? Section 2 of the Law of Property Act 1925 states “A conveyance to a purchaser of a legal estate in land shall overreach any equitable interest or power affecting that estate, whether or not he has notice thereof, if…(ii) the conveyance is made by trustees for sale and the equitable interest or power is at the date of the conveyance capable of being overreached by such trustees under the provisions of subsection (2) of this section or independently of that subsection, and the statutory requirements respecting the payment of capital money arising under a disposition upon trust for sale are complied with”.

There is only one trustee, NOP. Section 27 (2) Law of Property Act 1925 states “Notwithstanding anything to the contrary in the instrument (if any) creating a trust of land or in any trust affecting the net proceeds of sale of the land if it is sold, the proceeds of sale or other capital money shall not be paid to or applied by the direction of fewer than two persons as trustees, except where the trustee is a trust corporation…”.

Overreaching the Occupying Party’s Beneficial Interest

The effect of s 2 and s 27 was confirmed by the House of Lords in City of London Building Society v Flegg and Another [1988] 1 FLR 98. In that case the Maxwell-Browns purchased Bleak House with money provided by Mrs Maxwell-Brown’s parents (the Fleggs), legal title being held by the Maxwell-Browns, but all four parties being tenants-in-common of the beneficial interest and living in the house. The house was mortgaged without the Fleggs being informed, and the bank were unaware of the Fleggs’ beneficial interest. There was insufficient money, when the relationships turned sour, to repay the Fleggs, and the House of Lords held that, there being two trustees, the requirements of s 2 and s 27 LPA 1925 were met, and that therefore the beneficial interests of the Fleggs were overreached by the bank! This contrasts with the position in the conjoined appeals in Williams & Glyn’s Bank v Boland / Brown [1979] Ch 312, HL in which, there being in each case only one legal owner, a bank to whom the legal owner mortgaged the matrimonial home took subject to the beneficial interest of the beneficiary (in fact the wife of the legal owner) in actual occupation.

S 36 Trustee Act 1925 – Appointment of Co-Trustee

In order to subvert the restriction, NOP could appoint a co-trustee (a written exercise pursuant to s 36 (1) Trustee Act 1925), to enable the requirements of s 27 LPA 1925 to be met, and to enable a sale to a third party to take place. A purchaser – even if that purchaser knew all about the beneficial interest of OP – would buy the property free from the beneficial interest. As a result of s 78 Land Registration Act 2002, the registrar would be immune from a compensation claim, as “the registrar shall not be affected with notice of a trust”.

Were a sale to be the subject of an agreement, but where there is only one legal owner, an order of the court authorising sale could be obtained by consent pursuant to s 14 TLATA 1996.

Evaluation

An order directing that a former matrimonial (or other) home is held on trust by a sole trustee presents a risky situation for the occupying spouse as neither an overriding interest, nor a restriction would fully protect her. OP has various emergency remedies available to her under Part 25 CPR 1998 (e.g. interim order preserving the property, or restraining dealings with the property), pending a full s14 TLATA 1996 application during the currency of the trust. However, these would come at a price.

In summary, a situation in which a home is settled upon trust with but one trustee is to be avoided. An overriding interest of a person in actual occupation is capable of being overreached, even where there is a restriction lodged with the Land Registry. It may be that various undertakings or indemnities are offered by NOP, but their impact would not necessarily protect the interest of the OP if NOP is determined to sell or charge the property over her head.

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