High Court reconfirms trustees' right to charge occupation rent notwithstanding Stack -v- Dowden (case of French -v- Barcham)

The appeal judgment in French -v- Barcham [2008] EWHC 1505 (Ch) considered the extent to which a beneficial tenant in common who continues to reside in the property following the bankruptcy of the other beneficial tenant in common ought to compensate the bankrupt's estate for that continued occupation. The judgment will be a comfort to trustees under fire from spouses and others as a result of Stack -v- Dowden.

facts

Mr and Mrs Barcham purchased the property in 1992 and were registered as joint proprietors with title absolute, subject to a charge to Barclays Bank. They both occupied the property.

Mr Barcham was declared bankrupt on his own petition on 10 June 1994. His trustees were appointed with effect from 18 August 2004.

An application for possession and sale was issued by one of Mr Barcham's trustees, Mr French, on 14 December 2006 against Mr and Mrs Barcham.

There was no dispute over the trustees' entitlement to possession and sale of the property nor that the beneficial shares in the property were held as to 50% for the trustees and 50% for Mrs Barcham.

the dispute

The dispute centred on two issues:

1. the deductions to be made from the trustees' half share of the net proceeds to compensate Mrs Barcham for payments she had made towards the mortgage and for the upkeep of the property; and
2. whether any deductions should be made from Mrs Barcham's share as both she and Mr Barcham had remained in joint occupation of the whole property since the date of the bankruptcy

Collectively, the application of such adjustments is known as 'equitable accounting'.

decision of District Judge Chandler, Southend County Court

The District Judge held that Mrs Barcham was entitled to credit for half of the payments made by her in respect of the mortgage and on the property itself since the date of the bankruptcy. This credit was to be subject to a set off in respect of a charge for use and occupation (known as an occupation rent). He also decided that a trustee in bankruptcy was not a beneficiary who was entitled to occupy land under Section 12 Trusts of Land and Appointment of Trustees Act 1996 (TLATA) and therefore was not entitled to set off against the claim for payments that had been made by Mrs Barcham a sum for her occupation of the property pursuant to s.13(6) of TLATA.

The District Judge ordered the sale proceeds should be divided equally subject to Mrs Barcham receiving credit for half of the mortgage instalments and insurance premiums paid in respect of the property since the date of the bankruptcy order (with liberty to appeal the amounts) and half of the cost of the works she had carried out on the property. There was no set-off against Mrs Barcham for her occupation of the property.

grounds of appeal

1. Whether the District Judge was correct in concluding that Stack -v- Dowden provides an exhaustive code when compensation by a beneficiary in occupation of a property under a trust of land is payable to another beneficiary under the same trust who is not in occupation; and
2. Whether the District Judge was correct to accept Mrs Barcham's evidence that she had made all the payments for which she was seeking a 50% uplift

Ultimately the appeal was only pursued in respect of the first of these two issues.

decision of Blackburne J, Chancery Division

Blackburne J (accepting submissions from Stephen Davies QC for the appellant trustee) held that ss.12-15 TLATA did not provide an exhaustive regime for compensation for exclusion of a beneficiary from occupation of a property held subject to a trust of land. For compensation to be awarded under s.13(6), the beneficiary must have the right to occupy the land. The exclusion or restriction of that right triggers the award of compensation. Therefore, s.13 cannot operate where there is no such right of occupation.

However, he found that this does not mean that Mrs Barcham was free from liability for an occupation rent or equitable compensation. He observed that the party who is not in occupation should not be denied compensation if the Court's equitable jurisdiction (such as the 'equitable accounting' doctrine) would provide compensation.

Stack -v- Dowden was distinguished as that case considered the criteria when both parties have a right of occupation and the beneficiary claiming compensation has been excluded from the property that he would otherwise be entitled to occupy. In this case, the beneficiaries claiming compensation were the trustees in bankruptcy. They had not been excluded from occupying the property because they had no right or reason to occupy.

Blackburne J concluded that:

1. the District Judge was wrong to find that his application for occupation rent should fail just because the trustee had no right under s.13(6) of TLATA; and
2. as the trustee had no right of occupation, he could not have been ousted or excluded from the property

Blackburne J then considered the common law position and especially the cases of Re Gorman, Re Pavlou and Byford.

Re Gorman: that case did not consider occupation rent as the wife in that case conceded that her husband's trustee was entitled to claim an occupation rent after the making of the receiving order in bankruptcy.

Re Pavlou; that case considered when payment of occupation rent or equitable accounting should commence.

After consideration of Re Pavlou, Blackburne J stated that when it would be unreasonable to expect a co-owner who is not in occupation to take occupation (such as a divorced spouse or trustee in bankruptcy), then it would normally be fair to charge a notional occupation rent to the occupying co-owner. Normally, the co-owner remaining in occupation will have to account for occupation rent to the trustee of the beneficial interest to which the bankrupt co-owner was formally entitled.

However, if the co-owner was led by the trustee to understand that no occupation rent would be charged, or was unaware of or had no reasonable means of discovering the bankruptcy, it might not be just to provide for an occupation rent.

Re Byford was broadly similar on the facts to the present case and an occupation rent was ordered to be paid. Mr Justice Blackburne considered that that decision was entirely correct in principle and did not agree with the respondent's argument here that one should consider whether the occupation of one is causative of the exclusion of the other.

Blackburne J also considered Murphy -v- Gooch but, in that case, both parties were in occupation and so, again, this did not assist here.

order made

Blackburne J ordered that on sale of the property, Mrs Barcham's share was to be reduced by a sum equal to half the property's letting value since Mr Barcham's bankruptcy. Here, the trustee did not claim occupation rent in excess of half of the mortgage and insurance payments credited to Mrs Barcham so her share was reduced to that extent only, with the one effectively cancelling out the other.

implications for insolvency practitioners

There is no automatic right for a trustee in bankruptcy to receive occupation rent as it will depend upon the circumstances. The mere fact that a co-owner is in occupation does not entitle the non occupying co-owner to claim compensation from the occupier. However, if it is manifestly unreasonable to expect the co-owner to take occupation (as where a trustee in bankruptcy succeeds to the beneficial interest), it will normally be fair and equitable to charge the occupier an occupation rent.

This case also reinforces how important it is that the trustee ensures that no hint or suggestion is given that occupation rent will not be charged and to ensure that all co-owners are aware of the bankruptcy order on appointment, whether or not they also occupy the property.

Moreover, practitioners should keep an open mind to the prospect of claiming a notional occupation rent in excess of one half of any mortgage and insurance payments, for instance if the mortgage is small or has not been fully serviced by the non-bankrupt spouse.  In those circumstances, there is no reason in principle to concede that the occupation rent should be limited, so it would arguably be a breach of duty on the part of the trustee to concede this point if the non-bankrupt spouse is making no concession in return.

Overall, this case provides further support for our submission that trustees should be wary of 'rules of thumb' (eg the 50:50 principle criticised by the court) and of overly legalistic applications of what are essentially equitable, and therefore evidence-specific, considerations.

If you would like more information about this topic please contact Rachel Dannan, Dan Geddes or Mike Pavitt of Blake Lapthorn’s Insolvency and Business Recovery team.

Stack -v- Dowden [2007] 2 AC 432

Re Gorman (A Bankrupt) [1990] 1 WLR 616 DC

Re Pavlou (A Bankrupt) [1993] 1 WLR 1046 Ch D

Re Byford (Deceased) [2003] EWHC 1267 (Ch).

Murphy -v- Gooch [2007] EWCA Civ 603