Capehorn v Harris

This is an appeal from the judgment of District Judge Langley in the Central London County Court. The case concerns the division of assets of the appellant, Mrs Capehorn, and her former partner, Mr Harris. Mrs Capehorn appeals and Mr Harris cross appeals.

They formed a relationship in 1982 and moved in together in 1983. Mr Harris is a good deal older than Mrs Capehorn. He ran a frozen food business in which Mrs Capehorn worked. Their relationship was unstable, with periods of them living together and periods living apart. Mr Harris was the dominant party in the business. However Mrs Capehorn kept a separate and personal bank account and acquired properties in her own name.

In 1991 Mr Harris was declared bankrupt. He was only discharged from bankruptcy in 1994. The frozen food business was continued by Mrs Capehorn as a sole trader. She employed Mr Harris in what was now her business. He had the main business contacts and continued to be the dominant force in running the business. Mrs Capehorn invested money in the business.

In 1993 Mrs Capehorn purchased a property called Sunnyside Farm from her mother. This had been Mrs Capehorn's family home. The purchase was funded as to the deposit with money which the judge found came from Mrs Capehorn's business and with a mortgage which the judge found was arranged by Mrs Capehorn personally and in her personal name for which she had sole responsibility.

The judge found that at the time of the purchase of Sunnyside Farm Mr Harris had no beneficial interest in it (see paragraph 148): that is to say, there was no agreement made between him and Mrs Capehorn that he should have any share of the beneficial interest in it.

The judge found that there were some discussions between them about ownership of Sunnyside Farm in 2001 or 2002 after they separated for the last time, but no agreement was reached: paragraph 135.

The judge also found that they discussed their finances in 2002 when Mrs Capehorn purchased another property, 19 Beaumont Road. This was purchased by Mrs Capehorn in her sole name using a mortgage arranged by her and secured against Sunnyside Farm as well. The judge found that again no agreement was reached that Mr Harris should have any beneficial interest in Sunnyside Farm: paragraph 136.

As regards 19 Beaumont Road itself, the judge made it clear that there was never any agreement that Mr Harris should have any beneficial interest in that property: paragraph 154.

In 2004 Mr Harris set up the second respondent, LMC Trade Sales Ltd ("the company"). He owns the shares in it. There has never been any suggestion that there was any agreement that Mrs Capehorn owned any part of the beneficial interest in those shares. The judge made no finding that any such agreement had been made. The primary case of both Mrs Capehorn and Mr Harris on this appeal is that Mr Harris is the full owner of the shares in the company both in law and in equity.

In the course of 2007 Mr Harris and Mrs Capehorn again discussed their finances and what should happen to the business in Mrs Capehorn's name. In general terms, Mrs Capehorn's case was that a fair division of assets should take place. But her evidence was that there was never any agreement that Mr Harris should have any beneficial interest in either Sunnyside Farm or 19 Beaumont Road.

Generally, the judge found that Mrs Capehorn's evidence was consistent and in accordance with her witness statement (i.e. that her evidence was credible and should be accepted, by contrast with Mr Harris's evidence): paragraph 122. The judge made no finding that any part of Mrs Capehorn's evidence should be disbelieved or rejected.

Mrs Capehorn's evidence was that it was agreed in 2007 that she should transfer the frozen foods business which she owned to the company, in return for a payment by Mr Harris of £750 per week funded out of the business. The judge accepted her evidence that this was the agreement made: paragraph 155. Mrs Capehorn's case was that this secured the fair division of assets which she accepted should be achieved.

Mr Harris remained in occupation of Sunnyside Farm and ran the company's business there, using cold storage facilities which had previously been established at the farm. For some years he paid the £750 a week as agreed. At trial he maintained a case that there had been an agreement that part of that amount would be used to fund the mortgage for Sunnyside Farm, but the judge rejected his evidence about that.

Eventually relations deteriorated between Mr Harris and Mrs Capehorn. He asserted he had rights against her, in particular in respect of Sunnyside Farm. She was obliged to commence proceedings against him and the company to establish the true legal position.

The case came on for trial before District Judge Langley. Her judgment is dated 26th June 2014. She had to decide the parties' rights in respect of three assets - Sunnyside Farm, 19 Beaumont Road and the frozen foods business - and in relation to the agreement made in 2007 regarding the transfer of Mrs Capehorn's business to the company.

The legal framework was common ground between the parties at trial and again before us on appeal. In relation to assets acquired by unmarried co-habitees or partners, where an asset is owned in law by one person but another claims to share a beneficial interest in it a two-stage analysis is called for to determine whether a common intention constructive trust arises. First, the person claiming the beneficial interest must show that there was an agreement that he should have a beneficial interest in the property owned by his partner even if there was no agreement as to the precise extent of that interest. Secondly, if such an agreement can be shown to have been made, then absent agreement on the extent of the interest, the court may impute an intention that the person was to have a fair beneficial share in the asset and may assess the quantum of the fair share in the light of all the circumstances: see Oxley v Hiscock [2005] Fam 211; Stack v Dowden [2007] AC 432; Jones v Kernott [2011] UKSC 53.

There is an important difference between the approach applicable at each stage. At the first stage, an actual agreement has to be found to have been made, which may be inferred from conduct in an appropriate case. At the second stage, the court is entitled to impute an intention that each person is entitled to the share which the court considers fair having regard to the whole course of dealing between them in relation to the property. A court is not entitled to impute an intention to the parties at the first stage in the analysis.

Unfortunately in this case in the critical part of her judgment, at paragraphs 152 and 153, the judge erroneously elided these two stages. At paragraph 152 she dealt with Sunnyside Farm and at paragraph 153 with the business. I deal with them in that order.

As regards Sunnyside Farm, the judge made clear findings that when it was acquired in 1993 there was no agreement that Mr Harris would have any beneficial interest in it and also that at various stages in the period down to 2007 there had been discussions between Mr Harris and Mrs Capehorn about it with, again, no agreement being made that he should have any beneficial interest in it. The judge had also found Mrs Capehorn to be a credible witness. Mrs Capehorn's evidence was that no agreement was ever made that Mr Harris should have a beneficial interest in Sunnyside Farm. The judge made no finding of any agreement between them in 2007 that Mr Harris should have a beneficial interest in Sunnyside.

Yet despite all this, at paragraph 152 the judge asked herself the question:

In my judgment, the judge erred in this paragraph of the judgment. She imputed an intention to the parties for the first stage of the two-stage analysis rather than identifying an actual agreement made by them that Mr Harris should have any beneficial interest in Sunnyside Farm. No actual agreement to that effect was ever made by Mrs Capehorn and Mr Harris, as the judge's findings elsewhere in the judgment made clear.

Mr Burroughs, for Mr Harris, submits that we should read paragraph 152 as incorporating an implied finding by the judge that at some unspecified time before 2007 they had made an agreement to be inferred from their conduct that Mr Harris should have a beneficial interest in Sunnyside Farm. Mr Burroughs suggested that we should read the word "impute" in this sense.

I disagree. I think it is clear that the judge used the word "impute" in its ordinary sense, thus demonstrating the error she has fallen into. Against the factual background found by the judge of express discussions between the parties about their financial affairs in the period down to 2007 with no agreement being made between them, it is impossible in the circumstances of this case to infer that nonetheless (unbeknown to themselves) the parties did in fact make an agreement by their conduct. It is clear on the judge's own findings, and on her assessment of Mrs Capehorn as a witness, that there never was an agreement that Mr Harris should have a beneficial interest in Sunnyside Farm. Therefore the judge should have found that his claim to have such an interest must fail.

The fact that the judge fell into error in paragraph 152, and used the word "impute" to mean what it says, is underlined by the position in relation to the business and the company addressed in paragraph 153. Again, the judge imputed an intention to the parties that Mr Harris should have a 65% interest in the business and that "accordingly he held the two issued shares [in the company] on trust for himself and Mrs Capehorn in shares as to 65% for himself and 35% for Mrs Capehorn." Again, the judge identified no actual agreement, express or inferred, to justify this conclusion. Before us, the parties were rightly in agreement that this was erroneous, at least so far as the shares were concerned, because there never had been an actual agreement that Mrs Capehorn would have any beneficial interest in them.

On the basis of her findings regarding the beneficial interest in respect of both Sunnyside Farm and the company the judge then embarked on an elaborate computation of how to attribute the payments by Mr Harris of £750 a week (and lesser sums paid in later periods) between Mr Harris and Mrs Capehorn, resulting in the conclusion that Mrs Capehorn had been paid an excessive amount. The judge ordered that she should repay a very substantial sum to Mr Harris and the company. This was so even though they had never made any claim that any money payment should be made by Mrs Capehorn to them. Both by reason of her errors regarding the constructive trusts which the judge thought arose and by reason of the absence of any claim for a money payment to be made by Mrs Capehorn, the making of this order was a further error by the judge.

On the judge's findings of fact the position was very much more straightforward. Mrs Capehorn is the sole legal and beneficial owner of Sunnyside Farm and 19 Beaumont Road, and Mr Harris has no valid claim to a beneficial interest in either of them. Mr Harris is the sole legal and beneficial owner of the shares in the company, and Mrs Capehorn has no beneficial interest in them. The business was sold by Mrs Capehorn to the company in 2007 in return for a payment by Mr Harris of £750 per week. The company is now the sole owner of the business and Mrs Capehorn has no beneficial interest in either the business or the company.

Mr Sefi, for Mrs Capehorn, submitted that there was an implied term in the agreement for the sale of the business to the company that after some (unspecified) period of time the payment of £750 per week should be increased to the market rental sum appropriate for a property like Sunnyside Farm. In my view, this submission must be rejected. The parties made an express agreement, as the judge found, that the consideration for the transfer of the business to the company should be £750 per week, and there is no basis whatever for implication of a term that the sum to be paid should ever increase above that.

On the footing that we reached this point in the analysis, Mr Sefi and Mr Burroughs agreed that in the context in which the parties made the agreement found by the judge the payment of £750 per week was agreed to last while Mr Harris (including for these purposes the company) was in occupation of Sunnyside Farm or until the interest only mortgage in respect of the property expires in 2019, whichever is the sooner. This is because the very strong probability is that Sunnyside Farm will have to be sold by Mrs Capehorn in 2019 in order to repay the mortgage, as the parties contemplated.

Accordingly, I would allow Mrs Capehorn's appeal and dismiss Mr Harris's cross appeal. The parties should seek to agree an order which reflects the decision of this court.

I agree.

I also agree.