Here I am, my first post for the Atherton Bailey blog which will be replacing our printed newsletter.
For my debut I thought I’d look at the vexed question of what happens to the family home in bankruptcy. Home owners are often left confused by the process and a recent court ruling does little to clarify the position. If you have any thoughts on the issue, I’d love to hear them so why not add a comment at the bottom.
Divorce and bankruptcy frequently focus on the same problem – who owns what in the matrimonial home. In divorce, one party leaves the home or it is sold and the proceeds split. In bankruptcy, on the other hand, the parties’ usually jointly want to keep their home. But with many home-owners being unmarried and many instances where only one name is on the title deeds, complexity and uncertainty are common.
A recent Supreme Court judgment complicates things further. Jones v Kernott was not a bankruptcy case, but the court tried to lay down guidance on who owns what when it comes to the family home. Its conclusion in a nutshell: It all depends…
It is an undoubted truth that different insolvency practitioners acting as trustees in bankruptcy or in formulating IVA proposals take differing attitudes towards the individual’s interest in their home. Some IPs see it as their duty to maximise recovery for creditors, even if this means the family loses its home. Others seek to interpret the law as equitably as possible to minimise the individual’s contribution to his estate, thus avoiding the loss of the home.
The truth is there is no right answer. And in my opinion, the new ruling creates both greater uncertainty, but also greater flexibility for IPs in determining the amount to be realised.
The starting positions are fairly clear. Where the legal (ie registered) title is joint, the property is owned 50:50 in the absence of any contrary deed of trust. Where the legal title is in only one person’s name, they own 100 per cent of the home. But these are just starting points and the laws of trusts and equity then come into play.
Essentially, what the Supreme Court now says is that one has to look at the parties’ common intentions even if they are not fully documented.
In the case of a sole legal title, if it can be inferred the parties intended to share beneficial ownership, the law will uphold such rights. Further, if there is no objective evidence from which to infer intentions, the court will impute what it assesses would have been the parties’ common intention had they addressed the issues.
With jointly owned properties, adjustments to the 50:50 presumption will similarly be available if such intention can be inferred from the parties’ actions. Again, if fairness requires a different ratio of interest, the courts will be likely to accept it.
Jones v Kernott was a joint ownership case involving an unmarried couple with two children where the man left the home and bought his own property. Many years later he claimed a 50 per cent interest in the house which had substantially increased in value due to inflation. The Court awarded him about 10 per cent taking into account what it inferred the parties’ intentions were at the time he abandoned the relationship and home.
Interestingly, the Court gave short shrift to the complex measures often now adopted to determine shares based on capital contributions and adjusted by what is called ‘occupational rent’ – this is further adjusted if there is a failure to pay a share of the mortgage. Occupational rent is a theoretical calculation that accounts for the departed party not having the benefit of living in the property. The court said this ‘would involve a quite disproportionate effort both to discover the requisite figures (even supposing they could be discovered) and to make the requisite calculations, let alone to determine what the ground rules should be’.
For insolvency practitioners who wish to promote fairness and equity in the often tragic personal consequences of financial failure – bankruptcy, family home loss and the rest – there is clearly now more scope for negotiation.
