Who is really in charge?

10th Jan 2017

Litigation and Disputes

Having obtained a County Court Judgment against a debtor, a creditor’s attention will inevitably then turn to how to enforce this so as to realise their award. Where the debtor is an owner of a property, a popular and simple method of enforcement is to seek a Charging Order over their interest in such property in order to secure the debt.

However, what if, having obtained an interim charging order against the debtor, you are then faced with a challenge from a joint owner claiming that they own all or the majority of the beneficial interest in the property sought to be charged?

This was an issue considered by Chief Master Marsh in the case of Erlam and Others v Rahman (a bankrupt) (1) and Farid (2) [2016] EWHC 111 (Ch).

Elizabeth Gibson, who specialises in contract claims, debt recovery and enforcement of judgments reports on the case.

The facts

The Claimants were a group of private individuals who challenged the election of the First Defendant as Mayor of the London Borough of Tower Hamlets. The First Defendant’s election was ultimately declared to be void, resulting in an order for him to pay the Claimants’ costs and to make an interim payment of £250,000. This sum was not paid, and the Claimants subsequently applied for interim charging orders over the First Defendant’s interests in three properties. A final charging order was granted over the Defendant’s interest in a property known as 3 Grace Street, and it was this property which was the subject of the hearing.

The property was registered in the First Defendant’s sole name, but an application was made by the Second Defendant to be added as a party to the proceedings for the purposes of determining the extent of her beneficial interest in it. In the course of her application the Second Defendant produced a declaration of trust made between the First Defendant and herself stating that she had a 74% interest in 3 Grace Street and said that this interest arose from her direct financial contributions to the purchase price. She claimed that she had made such contributions through loans and gifts from various family members. But did the court have to take the declaration at face value?

The Court’s findings

The court found that the property was purchased by the Defendants with the intention that it was to be let as a business proposition rather than to be occupied by them as their home. The first Defendant had advised his mortgage lender at the time of the purchase that it was an investment property and that it was acquired on a buy-to-let basis, and the Second Defendant was not mentioned in the mortgage application. Therefore the proper approach was to consider the actual contributions to the purchase. The burden of proof lied upon the Second Defendant to demonstrate on the balance of probabilities that she had made the contribution of £42,500 that she claimed to have made.

The court was unimpressed with the evidence in this respect. An adverse inference was drawn from the Second Defendant’s failure to call the First Defendant as a witness. The Second Defendant had claimed that she had paid £18,000 from her own money, yet at the relevant time she was only earning slightly in excess of £8,000. £13,000 was claimed to have come from unidentified persons who her parents had approached but whose identity they had refused to reveal to the second Defendant. The Judge found it “simply unbelievable that substantial gifts of that type would have been made…without her knowing where the money came from”. Furthermore, the relatives who allegedly loaned funds to the Second Defendant to enable her to contribute £11,500 to the purchase price gave evidence which was “hopelessly vague”.

The First Defendant’s bank statements for the period around the time of the purchase of the property had been heavily redacted so as to only show the date and balance columns and a limited selection in the details, withdrawn and paid in columns. The Second Defendant failed to provide any bank statements at all for the crucial period either side of the date of the purchase. There was therefore no way of linking the various sums claimed to have been paid to the various parties.

Chief Master Marsh found that it was appropriate to draw an adverse inference where there had been a failure to place before the court evidence which could have been obtained without any real difficulty without an adequate explanation. He found that the Defendant was unable to show on the balance of probabilities that she made any contribution to the purchase price of the property. He also found that the declaration of trust did not amount to a gift of a beneficial interest to her as its purported effect was that her interest was based on a contribution to the purchase price.

The court then went on to consider the Claimants’ alternative case, which was that the declaration of trust was a sham. In this regard Chief Master Marsh noted that the existence of this document had not been revealed to any third parties or to the world at large, including the mortgage lender, who believed that the property solely belonged to the First Defendant. Furthermore, the Defendants did not act between themselves as if the Second Defendant were the beneficial owner of the majority share of the property. Neither of them declared the income from the property to HMRC and there was no accounting between them of 74% of the net profit from the trust.

The court placed particular significance on the fact that the declaration of trust had not been registered, despite the Second Defendant having been advised by her solicitor to do so. It was further noted that the Defendants had “acted at all times as if the property was beneficially owned by [the First Defendant] as to 100% and represented to the outside world that the property was his. The declaration was prepared in order to be available, if needed, to preserve an interest for [the Second Defendant] in 3 Grace Street”.

Therefore, even if it had been found that the Second Defendant had contributed to the purchase price or had been gifted some of the beneficial interest in the property, Chief Master Marsh found that there was ample basis for concluding that the declaration was a sham.

What does this mean?

The courts are likely take a more sympathetic view where the property in question is a home rather than an investment property, as usually an express declaration of trust will be conclusive unless there is a reason to set it aside (e.g. if there is sufficient evidence that it is a sham). Furthermore, a creditor will struggle to argue that a non-debtor co-owner has no interest in the property where they are registered as co-owners. Any argument as to the extent of their beneficial ownership would centre on the individual circumstances of each case and the conduct of the parties.

From the point of view of someone seeking to establish an interest in a property this case demonstrates the importance documenting their interest, registering such an interest at the Land Registry and keeping clear documentary evidence of any contributions made to either the purchase of the property or subsequent expenditure on it. Our recommendation is that anyone jointly purchasing a property agrees and documents at an early stage their respective interests in that property, and should their intentions as to the extent of such interests change, updates their documents to reflect this.

If you have any queries or need further information please contact Elizabeth Gibson at eg@rogers-norton.co.uk or on 01603 675641