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Bankrupt's spouse liable to pay rent

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Posted by Caroline Benfield on 12 April 2010

Caroline Benfield Partner

Notwithstanding Stack v Dowden Case (case of French v Barcham)

The appeal judgment in French v Barcham (2008) considered the extent to which a beneficial tenant in common who continues to reside in the property following the bankruptcy of the other beneficial tenant in common ought to compensate the bankrupt’s estate for this continued occupation. The judgment will be of comfort to Trustees under fire from spouses and others as a result of Stack v Dowden. 

Background

Mr and Mrs Barcham purchased the property in 1992 and were registered as joint proprietors with title absolute, subject to a charge to Barclays Bank. They both occupied the property.

Mr Barcham was declared bankrupt on his own petition on 10 June 1994.  His trustees were appointed with effect from 18 August 2004.

An application for possession and sale was issued by one of Mr Barcham’s trustees, Mr French, on 14 December 2006 against Mr and Mrs Barcham.

There was no dispute over the trustee’s entitlement to possession and sale of the property nor that the beneficial shares in the property were held as to 50% for the trustees and 50% for Mr Barcham.

The dispute centred on two issues:

  • the deductions to be made from the trustees’ half share of the net proceeds to compensate Mrs Barcham for payments she had made towards the mortgage and for the upkeep of the property; and
  • whether any deductions should be made from Mrs Barcham’s share as both she and Mr Barcham had remained in joint occupation of the whole property since the date of the bankruptcy.

The District Judge held that Mrs Barcham was entitled to credit for half of the payments made by her in respect of the mortgage and on the property itself since the date of the bankruptcy. This credit was to be subject to a set-off in respect of a charge for use and occupation (known as occupational rent). He also decided that a trustee in bankruptcy was not a beneficiary who was entitled to occupy land under section 12 of the Trusts of Land and Appointment of Trustees Act 1996 ("TLATA") and therefore was not entitled to set-off against the claim for payments that had been made by Mrs Barcham for her occupation of the property pursuant to section 13 (6) of TLATA.

The judge ordered the sale proceeds should be divided equally subject to Mrs Barcham receiving a credit for half of the mortgage instalments and insurance premiums paid in respect of the property since the date of the bankruptcy order and half of the costs of the works she had carried out. There was no set-off against Mrs Barcham for her occupation of the property. 

Grounds of Appeal

  1. Whether the judge was correct in concluding that Stack v Dowden provided exhaustive code when compensation by a beneficiary in occupation of a property under Trusts of Land is payable to another beneficiary under the same trust who is not in occupation; and
  2. whether the judge was correct to accept Mrs Barcham’s evidence that she had made all the payments for which she was seeking a 50% uplift.

Ultimately the appeal with only pursued in respect of the first of these two issues. 

Decision of Blackburne J Chancery Division

Blackburne J held that sections 12-15 of TLATA did not provide an exhausted regime for compensation for exclusion of a beneficiary from occupation of a property held subject to a trust of land. For compensation to be awarded under section 13(6), the beneficiary must have had the right to occupy the land. The exclusion on restriction of that right triggers the award of compensation. Therefore, section 13 cannot operate where there is no such right of occupation.

However, he found that this does not mean that Mrs Barcham was free from liability for occupational rent or equitable compensation. He observed that the party who is not in occupation should not be denied compensation if the court’s equitable jurisdiction (such as the equitable accounting doctrine) would provide compensation.

Stack v Dowden was distinguished as that case considered the criteria when both parties have a right of occupation and the beneficiary claiming compensation had been excluded from the property that he would otherwise be entitled to occupy. In this case, the beneficiary claiming compensation were the trustees in bankruptcy. They had not been excluded from occupying the property because they had no right or reason to occupy.

Blackburne J concluded that:

  • the judge was wrong to find that his application for occupational rent should fail just because the trustee had no right under section 13(6) of TLATA; and
  • as the trustee had no right of occupation, he could not have been ousted or excluded from the property.

Blackburne J then considered the common law position, especially the cases of Re Gorman, Re Pavlou and Re Byford.

Re Gorman: that case did not consider occupational rent as the wife in that case conceded that her husband’s trustee was entitled to claim occupational rent.

Re Pavlou: that case considered when payment of occupational rent or equitable accounting should commence.  After consideration of Re Pavlou, Blackburne J stated that when it would be unreasonable to accept a co-owner is not to take occupation (such as a divorced spouse or trustee in bankruptcy) then it would normally be fair to charge a notional occupational rent to the occupying co-owner. Normally the co-owner remaining in occupation will have to account for occupational rent to the trustee to the beneficial interest to which the bankrupt co-owner was formally entitled.  However, if the co-owner was led by the trustee to understand that no occupational rent would be charged, or was unaware of or had no reasonable means of discovering the bankruptcy, it might not be just to provide for an occupational rent.

Re Byford: this case was broadly similar on the facts to the present case and an occupational rent was ordered to be paid.  Mr Justice Blackburne considered that, that decision was entirely correct in principle and did not agree with the respondent’s argument here that one should consider whether occupation of one is causative of the exclusion of the other.

Blackburne J also considered Murphy v Gooch but, in that case, both parties were in occupation and so, again, this did not assist here.

Therefore it was ordered that on the sale of the property, Mrs Barcham’s share would be reduced by a sum equal to half the property’s letting value since Mr Barcham’s bankruptcy. Here, the trustee did not claim occupational rent in excess of half of the mortgage and insurance payments credited to Mrs Barcham so her share was reduced to that extent only, with the one effectively cancelling out the other. 

Implications for insolvency practitioners

There is no automatic right for a trustee in bankruptcy to receive occupational rent as it would depend upon the circumstances. The mere fact that a co-owner is in occupation does not entitle the non-occupying co-owner to claim compensation from the occupier. However, it is manifestly unreasonable to expect the co-owner to take occupation (as where a trustee in bankruptcy succeeds to the beneficial interest), it would normally be fair and equitable to charge the occupier occupational rent.

This case also reinforces how important it is that the trustee ensures that no hint or suggestion is given that occupational rent will not be charged and to ensure that all co-owners are aware of the bankruptcy order on appointment, whether or not they also occupy the property. Moreover, practitioners should keep an open mind as to the prospect of claiming a notional rent in excess of one half of the mortgage and insurance payments, for instance if the mortgage is small or has been fully paid by the non-bankrupt spouse.

About the author

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.

Caroline Benfield

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.

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