A house divided

Saturday, 01 November 2014
Christopher Butler and Harriet Errington examine the English and Welsh courts’ treatment of the matrimonial home on divorce

The matrimonial home is often the most valuable asset owned by a family. It is afforded special treatment by the courts when it comes to redistributing the equity between spouses on divorce. As Lord Nicholls stated in his judgment in Miller v Miller; McFarlane v McFarlane [2006] UKHL 24, the parties’ home is in a different category to other classes of marital assets: ‘The parties’ matrimonial home, even if this was brought into the marriage at the outset by one of the parties, usually has a central place in any marriage. So it should not normally be treated as matrimonial property… in principle the entitlement of each party to a share of the matrimonial property is the same, however long or short the marriage may have been.’

Ownership of property

Despite the matrimonial home occupying such a special place in family law, the way in which it is held is relevant to the way in which the courts deal with it.

The court’s overriding concern is to ensure that each party has a suitable home following the breakdown of their relationship

The matrimonial home may be held in one of a number of different ways: solely by a spouse, jointly as tenants in common or as joint tenants. It can also be held by a company or through a trust structure. The way in which property is held determines the court’s ability to deal with it in the context of a dispute between spouses or partners, and the amount available for distribution between the parties.

For the purposes of cohabitation disputes between unmarried couples, the way in which the property is held is an important consideration. For the purposes of divorce proceedings, however, it is generally of limited relevance whether the property is held in the sole name of one of the parties or in joint names, as long as it is available for distribution by the court.

Courts in financial relief proceedings on divorce have the power to deal with property to which the parties are ‘entitled, either in possession or reversion’. 1 Given the court’s approach to the family home in the context of divorce proceedings, it is not surprising that the party with control over the family home may seek to circumvent the court’s power to deal with the property by utilising other methods of holding the matrimonial home. An example is the recent case of Prest v Petrodel [2013] UKSC 34, in which the court found that, as the matrimonial home was held on trust for the husband, it thus was owned beneficially by him and therefore open to redistribution to the wife by the court.

As can be seen from Prest, the court has the ability to interfere in cases in which property has been put into a trust made in contemplation of divorce proceedings so as to frustrate the other party’s claims. Property held in this way may be made subject to the court’s exercise of its jurisdiction in divorce proceedings.

The wide powers that the family court has to interfere in this way were summarised by Munby J in the case of Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam) in respect of property that is the subject of a sham trust. Munby J said, in summary, that the court’s discretion to deal with property is ‘unfettered and, in theory, unlimited’. The court has the power to vary the terms of the trust ‘so it is within the court’s powers to vary (at one end of the scale) by wholly excluding a beneficiary from a settlement, to (at the other end) transferring some asset or other to a non-beneficiary free from all trusts’. This ability of the family court to reduce or even extinguish the interest of a party under a settlement may be regarded by specialist trust practitioners as difficult to reconcile with their appreciation of the established principles of trust law.

Other arrangements for the ownership of property may be dealt with differently. In the case of Prest, the husband held much of his wealth through certain companies in the Petrodel Group registered in various countries overseas. The question for the court was whether it could order the transfer of properties held in the Petrodel Group companies.

The Supreme Court considered the situations in which the corporate veil could be pierced to allow the family court to access company properties to satisfy a spouse’s claim. Lord Sumption, who gave the leading judgment in the case, found that the court may be entitled to pierce the corporate veil to the extent that it is necessary to deprive the controller of the advantage which they would otherwise have gained from the interposition of the separate corporate personality. This would be of limited application and did not apply to Prest.

The judge at first instance made the finding that the company’s property was ‘effectively’ the husband’s property. This is an example of what Lord Sumption described as the ‘concealment principle’: using a company to conceal the identity of the real owner.

Following that finding of ‘concealment’, the Supreme Court determined that it had the jurisdiction to deal with the properties through the principle of resulting trust. The Court decided that the husband was beneficially entitled to the properties through resulting trust principles; therefore the Court had access to the properties owned by the Petrodel Group companies, including the matrimonial home, in order to satisfy the wife’s claim. Thus, the Court had the power to order the Petrodel Group companies to convey the properties to the wife.

The effect of Prest is that the Court can look behind the facade to establish that there is a legitimate legal relationship between the husband and the company.

Lord Sumption, in his judgment, emphasised the importance of the matrimonial home, and reinforced the notion that the matrimonial home is within a different class of asset to other assets within a marriage: ‘Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that, in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company.’

In cases where the house in which the family lives is held by a company, that structure will undoubtedly be of concern following the judgment in Prest, as it will be very difficult to rebut the presumption that the matrimonial home is held on resulting trust for the husband. The position will be clearer in cases where the company in question is not a property investment company and no rent is being paid by the parties in consideration for their occupation of the family home, as in Prest, in which the sole function of the principal operating company, Petrodel Resources Ltd, was to hold title to the matrimonial home.

It follows that one practical implication of the judgment in Prest may be that banks will become increasingly concerned about lending to companies and trusts using structures that were condemned by the Court in Prest, i.e. ones that deliberately seek to mask the true ownership of the property. In these circumstances, banks may well be left with few assets against which to enforce security. Once this becomes clear to the financial lenders, it remains to be seen how it will affect their willingness to lend. Trustees need to be on their guard now, as the matrimonial home is often within what are effectively ‘wrapper trusts’ and there may be no other assets that the trustee can utilise to fund the resultant litigation.

The position of creditors generally may be seen to be more precarious following the judgment in Prest. In effect, the needs of a spouse in matrimonial proceedings may be given priority over those of any other creditors, in that the spouse will be able to avoid any insolvency proceedings through the imposition of a resulting trust, which will allow him or her to escape the priority ranking that comes into play in the liquidation. This point was alluded to at paragraph 37 by Lord Sumption in his comments that the family courts were not able to behave as if ‘on a desert island in which general legal concepts are suspended or mean something different’.

The court’s powers on divorce

Provided the court is satisfied that it has jurisdiction in respect of the property, the next consideration will be how best to deal with it. On divorce, the court has the power to make one of the following orders in relation to the home:

  • an order for immediate sale and division of the sale proceeds;
  • an order for a transfer of the home into the sole name of one spouse; or
  • postponement of the sale of the home, which may be made with a deferred charge (for example, the wife may keep the property subject to a chargeback to the husband that will only be realised on events such as the children of the marriage finishing secondary or tertiary education).

The court’s overriding concern is to ensure that each party has a suitable home following the breakdown of their relationship, and, if there are children of the marriage, to meet the needs of the children and especially the party with whom the children spend the most time. In doing so, the court will have regard to a number of factors, such as the parties’ standard of living during the marriage, the duration of the marriage and each party’s contribution to the assets (including the family home), where possible.

Cases in which the parties’ assets are surplus to their needs will be treated differently to ‘needs-based’ cases, in which the courts often do not have the ability to take account of unequal contributions. In such cases, a departure from equality where the wealth was acquired prior to the marriage may be justified. It is often a balancing act between ensuring the children and spouse with care of the children are looked after, and ensuring that the other spouse (who may have significant contact with the children) is also suitably rehoused.

Cohabitation

If a couple have cohabited with one another prior to getting married, in cases where the marriage followed the cohabitation seamlessly, the courts will treat the marriage as being longer. Thus, a five-year marriage preceded by five years of cohabitation will be treated by the courts as a ten-year marriage. This may have knock-on effects as to the division of the marital home, even if it was originally purchased in the sole name of one of the parties, as the duration of the marriage is one of the factors taken into account by the court.

Protective measures

It follows that parties entering into marriage or cohabitation will be advised to protect their unequal contributions into their property. Various measures of protection exist for married and unmarried couples. If an unmarried couple chooses to purchase a property in joint names, they would be well advised to enter into a declaration of trust at the outset, recording their contributions to the property, including in what proportions they intend to divide the property on separation.

They can also enter into living together or cohabitation agreements in order to protect their positions and record what will happen in the wider sense in the event of a breakdown in their relationship. Couples intending to marry may enter into prenuptial agreements, failing which postnuptial agreements are an effective way of ensuring that their respective separate property is protected.

This drive to make family law decisions comply with common law has been building up a head of steam over the past few years. The question for family (and indeed trust) practitioners is whether this will be the apogee or whether there is more to come.

  • 1. Section 24(1)(a) Matrimonial Causes Act 1973
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Christopher Butler TEP and Harriet Errington

Christopher Butler TEP is a Consultant and Harriet Errington is a Solicitor in the family team at Boodle Hatfield

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