Clarke v Harlowe

This is a preliminary ruling in an application under the Trusts of Land and Appointment of Trustees Act 1996. For the purpose of the ruling the facts are not in dispute.

Margot Clarke and Christopher Harlowe met in 1977. They had a relationship which lasted for about 25 years and terminated in early 2003. There were no children of the relationship.

Christopher Harlowe is a successful commercial solicitor. He has been and is a partner in a number of large commercial firms including Hammonds and DLA. He has therefore enjoyed substantial earnings. Margot Clarke has had a variety of jobs throughout the relationship – some have been full time and some have been part time. There has never been any question but that Christopher Harlowe was the main breadwinner.

In 1988 they jointly acquired 14 New Road, Weybridge, Surrey. It is common ground that it was vested in them as beneficial joint tenants. In 1993 Church House, 3 Church Street Aberford was acquired in the sole name of Christopher Harlowe. Margot Clarke says that she thought it was in joint names and only learned that it was not when she read Christopher Harlowe’s witness statement.

This case is concerned with Bank House, Tamworth in Arden Solihull (“Bank House”). Bank House was acquired in early 2001. The purchase price was £396,500. There was a mortgage of £124,970 provided by Mercantile Asset Management Ltd. The conveyancing was carried out by Mr Clifton an employee of DLA the firm in which Christopher Harlowe was a partner (at least for part of the time). On 2^nd January 2001 Mr Clifton asked Christopher Harlowe if he wanted to hold the property as joint tenants or tenants in common. On 10^th January 2001 Christopher Harlowe wrote back stating :

The transfer of Bank House was executed on 19^th January 2001. It was signed by both Margot Clarke and Christopher Harlowe. It was on the standard TR1 form. In clause 11 there was a cross against the entry which read:

Following the acquisition all of the mortgage instalments were paid by Christopher Harlowe.

Bank House was not in a good state of repair when it was acquired by the parties. Indeed I was told that they did not move in till June 2001. It is common ground that substantial works of refurbishment were carried out by the parties. It is common ground that all of the works of refurbishment were paid for by Christopher Harlowe. It is also common ground that the supervision of the works was carried out by Margot Clarke. The precise sum spent on the works is not agreed at this stage. At page 35 of the trial bundle is a list of the works prepared by Christopher Harlowe. He estimates that the total cost was £90,230.44. The most expensive items were a new kitchen at a cost of over £36,000 and a new bathroom. The work included rewiring, a new damp proof course and substantial plumbing.

The work was carried out between 2001 and 2002. At the time of the acquisition of Bank House it was envisaged that substantial work would be carried out and would be paid for by Christopher Harlowe. In the course of the hearing before me it was accepted by Mr Lyon on behalf Christopher Harlowe that there was no evidence from which I could infer that the parties had agreed to alter their beneficial interest as a result of carrying out the work.

The relationship broke down in early 2003. Initially the parties lived separate lives under the same roof. However in December 2003 Margot Clarke moved out. In April 2004 Bank House was placed on the market. The sale was completed on 18^th August 2004.

The completion statement reveals that the sale price was £700,000 and that the outstanding mortgage was £87,809.19. After allowing for solicitors costs and a small sum received for chattels the net proceeds of sale amounted to £611,495.63. As the parties cannot agree on the distribution of this large sum it is held by the solicitors pending the decision of the court.

Margot Clarke contends that she is entitled to one half the net proceeds of sale. Christopher Harlowe does not accept this. At one stage he sought to argue that there was some form of resulting or constructive trust and that the distribution should reflect the contributions made by himself and Margot Clarke. He no longer pursues that argument. He accepts that the express declaration of trust in the Transfer governs the share to which he is entitled.

However he relies on the principle of equitable accounting. He contends that in making the distribution of the net proceeds of sale the court should take account of the fact that he had spent £90,000 on making improvements to the property and that he should be entitled to a credit of half that sum in making the final distribution.

Margot Clarke does not accept the figures or that the effect was to increase the value of the property by the £90,000. She has a more fundamental point. She makes the point that the moneys were spent at a time when the relationship was continuing. In those circumstances she says there is no room for the principles of equitable accounting to come into play. They only come into play in relations to expenditure or improvements carried out after the date of the separation. It is that point of principle on which I have been asked to rule.

Representation

Margot Clarke has been represented in these proceedings by Mr Bruce Walker; Christopher Harlowe by Mr Stephen Lyon. Both Counsel produced helpful skeleton arguments. The submissions on the point were concise and extremely helpful. I am most grateful to them

Mr Walker’s submissions.

Mr Walker first took me to a number of citations – some of which are of the highest authority – as to the effect of an express declaration of trust: (Footnote: ¹) It is not necessary for me to set them all out. It is sufficient if I quote a selection:

It is to be noted that in Bernard v Josephs (Footnote: ⁴) following a discussion after the citation of Lord Upjohn’s speech in Pettit to which I have referred Griffiths LJ said this:

Mr Walker recognised that equitable accounting might be possible in this sort of case in respect of periods after the separation of the parties. However he submitted that there was no authority to suggest that those principles applied to events that took place before the separation.

He drew my attention to the current edition of Snell (Footnote: ⁵) where there is a reference to

There is a similar passage in Lewin on Trusts (Footnote: ⁶) where there is a reference to the payment of mortgage instalments by one party after the other has left the property.

Mr Walker submitted that there was a substantial body of case law in respect of equitable accounting. In all of the cases the period for which equitable accounting was allowed was after the separation of the parties. (Footnote: ⁷) I shall not set out all the quotations relied on. I will content myself with 3:

Mr Walker submits that this represents a sound consistent line of authority that there is to be no equitable accounting in respect of the period prior to the separation. He invites me to follow that authority and to rule that there should be no equitable accounting in respect of Christopher Harlowe’s payments for the improvements to Bank House.

Mr Lyon’s submissions

Mr Lyon drew my attention to the passage on equitable accounting in Snell’s Equity. He made the point that the discussion was quite general and could apply just as much to disputes between fiduciaries as in the context of jointly owned property.

Whilst he accepted that many of the cases had been involved with “post separation” equitable accounting he made the point that there was no express authority to the effect that equitable accounting could not take place in respect of the period prior to the separation.

He drew my attention to a passage from the judgment of Millett J (as he then was) in Re Pavlou (Footnote: ¹¹)

He makes the point that in the second paragraph of the passage cited Millett J – a particular expert in this branch of the law – does not distinguish between improvements made post and pre-separation. He relies on the guiding principle for courts of equity is to have regard for any increase in value which has been brought about by means of expenditure by one of the co-owners. He submits that that principle applies to this situation.

He referred me to the passage in the judgment of Kerr LJ in Bernard v Joseph that I have already cited. He drew my attention to the use of the word “also”. To understand the point I set out the passage again:

He submitted that the use of the word “also” was deliberate and clearly implied that in Kerr LJ’s view it was possible to have equitable accounting for the period prior to the separation.

He postulated a case where a joint owner spent £10,000 on the day before the separation and another where he spent £10,000 on the day after the separation. He said it was both unfair and inequitable that only one of these joint owners should be entitled to benefit from equitable accounting.

Discussion

I agree with Mr Walker that the starting point for the discussion is the express declaration of trust in the transfer. It is clear from the cases cited by Mr Walker that that declaration is conclusive as to the beneficial interests in Bank House in the absence of fraud or mistake. There is no suggestion of mistake or fraud here. Hence the declaration is conclusive as between Margot Clarke and Christopher Harlowe and they are not permitted to go behind it.

It is also clear from the passage from the judgment of Griffiths LJ in Bernard v Joseph cited above that it is possible for the parties to agree to vary their beneficial interest after the acquisition of the house. If that agreement is informal or oral it may be possible to enforce it by a party who has acted on the agreement to his or her detriment. However such cases are described by Griffiths LJ as exceptional. Furthermore the fact that that one party has spent time and money on improving the property will not normally be sufficient to draw the inference that the parties had agreed to vary their interests. In this case it is conceded that this is not an exceptional case and that there is no reason for the court to infer an agreement to vary the beneficial interests in Bank House.

There are a wide variety of situations in which a property may be bought in joint names with an express declaration of trust in relation to the beneficial interest. These vary from the common situation where a man and a woman form a relationship and decide to live together to the commercial type situation where for example two people buy a house intending to do it up and resell it at a profit.

In the commercial type of situation there may be an express agreement between the parties that each will contribute equally to the outgoings, any mortgage instalments and to the cost of any improvements. It may be that one of the parties is unable to honour this agreement with the result that he or she pays less than his or her fair share of the outgoings or the cost of the improvements. Notwithstanding this failure the property may still be developed and resold during the course of the relationship between the parties. On such a resale the division of the proceeds will of course have to be in accordance with the express declaration of trust. However I do not see why a court of equity should not take account of the failure by one of the parties to honour their agreement as to the contributions to the outgoings and the improvements by means of equitable accounting. I equally do not see that such equitable accounting is prohibited simply because the relationship is not at an end.

It is to be noted that in the example I have given the considerations leading to equitable accounting involve a breach or failure by the accounting party to honour the arrangements or agreements between the parties as to the payments for the outgoings or the improvements to the property.

It seems to me that this failure or breach is at the heart of the matter. Before there can be a duty to account by one party to the other there must be a breach of or failure to comply with some obligation owed by that party to the other. There may be a debate in individual cases as to the nature of the obligation necessary to give rise to a duty to account but there must still be an obligation.

In my view this applies just as much in an ordinary cohabitation case as in any other. Guidance can in my view be obtained from the passage in the judgment of Kerr LJ from Bernard v Joseph referred by both Mr Walker and Mr Lyon:

In the ordinary case of cohabitation the common purpose of the implied trust subsists whilst the relationship subsists. During that period whilst the ordinary arrangements for the discharge of the outgoings subsist there is no breach or failure by any one of the parties to honour any obligation owed to the other. Thus in the usual case there is no room or reason for equitable accounting. It is common ground, for example, that Christopher Harlowe paid all the mortgage instalments in respect of Bank House prior to the separation. It is not suggested (and could not be suggested) that Margot Clarke was under any obligation to reimburse him any part of those payments at the time. It thus could not be suggested that there was any basis for equitable accounting in respect of the mortgage instalments prior to the separation.

After the relationship ends and the parties separate the common purpose of the implied trust has generally come to an end. At that stage there are no common arrangements between the parties with the result that each ought to discharge his or her proportionate share of the outgoings. There is thus at that time an obligation on each of the parties. If one party fails to honour its obligation an appropriate account can be taken on the sale of the property. As is clear from the authorities the account can include an obligation to pay an occupation rent.

These considerations lead me to conclude that in the ordinary case there are sound reasons for holding that equitable accounting commences at the date of the separation. In general payment for outgoings or improvements prior to the date of separation is in accordance with the arrangements between the parties and the common purpose of the implied trust. There is no breach or failure to honour those arrangements and thus no room for equitable accounting. There may however be exceptional cases where it can clearly be shown that one or other of the parties is in breach of the arrangements to pay for specified improvements or outgoings. In such a case I do not see why there should not be equitable accounting even though the parties are not separated.

This view is consistent with all of the cases cited by Mr Walker. In none of them was it suggested that there was anything exceptional or any breach of an existing arrangements as to paying for the outgoings. In my view it follows that in all those cases equitable accounting takes effect from the date of the separation.

It is necessary to comment briefly on the passage in the decision of Millett J Re Pavlou cited by Mr Lyon. The passage has to be understood in the light of the facts of the case. In summary the parties married in 1954. In 1973 they acquired the property in joint names. There was an express declaration of trust that the property was held as beneficial joint tenants. In 1983 the parties separated. In 1985 the wife carried out improvements. In 1987 the husband was adjudged bankrupt. In 1989 the wife carried out further improvements. The question arose as to whether equitable accounting could take place in relation to the improvements.

It is to be noted that all of the improvements took place after the date of the separation. Thus the decision is not inconsistent with the view that the equitable accounting takes effect after the date of the separation. As pointed out by Mr Walker Millett J was not addressing the questions with which I am concerned. In those circumstances it would not in my view be right to treat the decision as being authority for the proposition that equitable accounting takes place in respect of any improvements carried out at the expense of one of the parties irrespective of other considerations such as an obligation to contribute to their cost.

Conclusions

All of the improvements to Bank House were carried out between 2001 and 2002. It was clearly understood between Margot Clarke and Christopher Harlowe that they would be paid for by Christopher Harlowe. There is no suggestion in any of the evidence that it was ever agreed that Margot Clarke would make any financial contribution to the cost of the improvements. Accordingly this is not a case where she has failed to honour any existing arrangements as to the payment for the improvements. Thus there was no breach at the time of any obligation by Margot Clarke to contribute to the cost of the improvements. In those circumstances there is no reason why a court of equity should now compel her to contribute to the cost of the improvements and there is no room for any equitable accounting.

In all the circumstances I agree with Mr Walker that this is not a case where there should be any equitable accounting in respect of the costs of the improvements to Bank House.