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Credit for occupational rent

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Posted by Caroline Benfield on 19 April 2010

Caroline Benfield - Insolvency Lawyer
Caroline Benfield Partner

Murphy v Gooch

The Court of Appeal case of Murphy v Gooch (2007) declared that a co-owner is entitled to credit for occupational rent from the other co-owner even where payments have been made by one of the co-owners to the mortgage. 

Background

The parties jointly purchased a property as a family home in 1991. The parties owned 25% of the property and 75% belonged to the Devon and Cornwall Counties Housing Association Limited.

The relationship broke down in 1993 following which Ms Murphy and their daughter vacated the property. Mr Gooch remained in sole occupation until 2006 when Ms Murphy made an application under section 14 of the Trusts of Land and Appointment of Trustees Act 1996 ("TLATA"). The application was for a declaration that she and Mr Gooch were entitled to the property as tenants in common in equal shares, an order for sale, and (in the event that Mr Gooch continued to occupy the property) payment by him of a sum fixed by the court to recompense her for her exclusion from the property.

Both parties accepted that Mr Gooch had made payments totalling £18,158 between 1994 and 1999 in respect of the following, rent (£8,870), interest instalments under the mortgage (£5,257) and endowment policy premiums (£4,032). The property was valued at £140,000, the mortgage redemption figure was £15,000 and the amount required to surrender the endowment policy was £4,577.

In his judgment on 8 august 2006, His Honour Judge MacKintoch held that Mr Gooch was primarily entitled to credit in respect of all three categories of payment and that in the circumstances was entitled to receive credit for half of all payments made, ie £9,079.

Therefore, Ms Murphy’s half share was valued at £3,209 after taking into account the value of the property on their 25% share, the surrender value of the endowment policy, the outstanding mortgage and Mr Gooch’s credit for half of all undisputed payments claimed. 

The appeal

Ms Murphy appealed against this decision on the basis that the set-off to which she was entitled in respect of occupational rent owed by Mr Gooch was limited to half the credit to which Mr Gooch was entitled to in respect of his rent and mortgage interest instalment payments. She contended that he should not receive any credits for these two categories of payment as she should be entitled to set-off the full amount of these credits against a credit payable to her for the equivalent sum in respect of his sole occupation of the property. She did not challenge his entitlement to a credit for half of the payments made in respect of the endowment policy premiums. 

Mr Gooch cross-appealed contending that he was not obliged to give any credit to Ms Murphy in respect of his occupation of the property and that the figures for credits allowed should be increased to reflect the fact that payments had been made prior to 1994 and after 1999 and had the first instance judge allowed these, the value of Ms Murphy’s interest should be reduced to nil.

Therefore there were three issues for the court to determine upon appeal:

  1. whether Ms Murphy was entitled to a credit for Mr Gooch’s sole occupation of the property;
  2. if so, whether Ms Murphy was barred from claiming such credit in the absence of proof of her exclusion from the property by Mr Gooch, a prerequisite in accordance with the doctrine of equitable accounting; and
  3. assuming not so barred, the size of Ms Murphy’s credit entitlement.

The judgment

Appeal point 1

It was held that Ms Murphy was entitled to a credit for occupational rent and the fact that she disavowed any intention to maintain a free-standing claim to the credit did not preclude her from using her entitlement to this credit as a form of set-off.

Appeal point 2

The court ordered that the issue of an occupational rent is no longer governed by the doctrine of equitable accounting, but by sections 12 to 15 of TLATA.

Having due regard to sections 12 to 14 of TLATA, it was ordered that credit for occupational rent on the basis that it was just to do so regardless of the absence of proof, was granted. It was clear that Ms Murphy left the property on the breakdown of her relationship with Mr Gooch and that upon leaving she would be regarded as constructively excluded from the property.

Appeal point 3

It was agreed that there was no basis for restricting Ms Murphy’s share to reflect half of all credits claimed by Mr Gooch. It was confirmed that Ms Murphy should be entitled to set-off her entitlement to occupational rent against the entirety of the credits claim by Mr Gooch in respect of rent and mortgage interest payments. The rationale for this being that these payments were in the nature of the costs, expenses and outgoings of his continued occupation of the property and that they were not payments of a capital nature or calculated to increase the capital value of the property. Mr Gooch was given credit for half of the value of his endowment policy payment. Consequently, Ms Murphy’s share was recalculated to £11,280. 

Implications for insolvency practitioners

This judgment demonstrates that absence of proof of Ouster does not, in itself, preclude a non-occupying party who claims an interest to also claiming entitlement to an occupational rent. However, it also emphasised the circumstances surrounding the departure of Ms Murphy and her forced exclusion from the property. This should be significant in cases where a non-bankrupt spouse has left the jointly owned property and is claiming a higher share of the proceeds of sale which could reduce realisations on the sale of a bankruptcy property. Following the emphasis placed in this case, it will now be desirable to fully investigate the circumstances surrounding the departure of a joint owner (where a relationship is alleged to have broken down) when assessing the potential payment of occupational rent.  

It also provides reliable authority for the proposition that it is only payments facilitating the continued occupation by the remaining co-owner, eg rent and mortgage interest payments which can be set-off against occupational rent and visa versa. It is only payments which add to the capital value of the property which can be claimed by the remaining co-owner, which is useful consolidation for insolvency practitioners.

It is also worth noting that in this case, Ms Murphy claimed for occupational rent which was not quantified with reference to a monthly notional rent but this did not appear to reflect the findings in her favour.

This case also represents the first application, following Stack v Dowden, of the court’s power to determine the payment of occupational rent by reference to sections 12 to 15 of TLATA rather than the old doctrine of equitable accounting.

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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