Homing in on the recession
Date: 04 September 2009
Authors: Thomas Duggins
Issue: Vol 159, Issue 7383
Categories: Features, Family
The former matrimonial home is often a couple’s most valuable asset and will form the core of negotiations surrounding the division of marital capital. After the boom years, the recent turmoil in the housing market presents new obstacles when dealing with the matrimonial home in settlement negotiations.
Valuation
The value of the former matrimonial home must be established before negotiations can begin on whether it is to be retained by one party or sold and the proceeds divided. Even if the property is to be retained by one spouse, the courts require an appraisal of value so that an assessment can be made as to the fairness of the financial settlement (H v H [2008] EWHC 935 (Fam), [2008] All ER (D) 415 (Apr)).
Form E requires the parties to provide a valuation obtained in the last six months, or their own “realistic estimate of the current market value”. It is sensible to invite three local agents to view the property and provide a market appraisal at this stage, rather than speculate on the value.
The volatility of the housing market means that it is not uncommon for the agents to reach quite different conclusions as to the value of the property and a judgement will have to be made as to which is the most realistic for the purpose of Form E.
Once market appraisals have been provided, there is no guarantee that your client’s spouse will agree the value that is attributed to the property in Form E. This is often the case where it has been agreed in advance that your client will retain the property as it will be in the other’s interest to increase the value and show that your client is retaining a greater share of the matrimonial capital.
If directions are given for an expert to value the matrimonial home at the First Appointment, there should also be provision for the parties to put questions to the expert well in advance of the financial dispute resolution (FDR). It is not uncommon for the expert to reassess their appraisal of value when presented with evidence of similar properties achieving vastly different prices. Disputes over value should be settled in advance of the FDR, otherwise negotiations on the day will flounder.
Ultimately, a property is worth what someone is willing to pay for it and the best way to determine its value is to put it on the market and secure a sale. The proceeds of sale can then be retained, pending an agreement being reached over their division. This may mean that the resident spouse has to rent a property until the conclusion of proceedings. Agreement should be reached well in advance of completion as to who is to pay the rent, the maximum amount of rent that should be paid and the duration of the tenancy. This is important if one spouse is to pay rent on top of maintenance pending suit, which can be a heavy financial commitment.
In the case of B v B [2007] EWHC 2472 (Fam), [2007] All ER (D) 404 (Oct) the parties agreed to an equal division of the equity in the former matrimonial home, they relied on an agreed independent valuation to determine the amount that the wife should receive, on the basis that the husband would retain the property.
The property was valued at £1.25m. Once transferred into his sole name the husband renovated the property and sold it for £1.65m. The wife applied for leave to appeal the lump sum order on the basis that (i) there had been an error in the valuation (ii) the husband had misrepresented his intentions in relation to the property and (iii) a supervening event had occurred in the form of a unforeseen increase in value (Barder v Caluori [1988] AC 20, [1987] 2 All ER 440).
Sir Mark Potter held that that there was no evidence of misrepresentation and that the increase in the value of the property was foreseeable, particularly in a rising market. The wife’s application for leave to appeal was not granted. In the current climate, a property selling for less than anticipated is also likely to be regarded as foreseeable.
Court orders
The court has the power to order: (i) that one party transfer their interest in the matrimonial home to the other party (Matrimonial Causes Act (MCA 1973 s 24(1)(a)); and (ii) that the matrimonial home be sold (MCA 1973 s 24A) and the payment of a lump sum to each spouse (MCA 1973 s 23(1)(c)). It is worth noting that the MCA does not provide for the court to order the sale of the matrimonial home without there being an order in relation to the parties capital under s 23 or 24. The parties’ financial needs (MCA 1973 s 25(2)(b)) take precedence over other considerations in most cases. In particular, the courts will seek to provide a property for the spouse with care of the children. Where achievable, the courts prefer the resident parent to be rehoused in a mortgage free property, or certainly in a property with a mortgage which the spouse can comfortably afford.
The drop in value of house prices means that there are now more cases in which the equity in the former matrimonial home is insufficient to buy a new property for each party. Although the matrimonial home offers secure accommodation for the resident parent and children, the courts can be reluctant to order an unencumbered transfer where the matrimonial home represents virtually all of the parties’ capital. As a result, Mesher and Martin orders are becoming more frequently used to ensure a more fair outcome is achieved. The implications of these types of order should be explained to the client in advance of the FDR so that they have time to consider them properly, rather than on the day.
If the parties agree to the sale of the matrimonial home and the division of the proceeds of sale at the FDR, yet the value of the property is uncertain, an option can be that one party take a set amount from the proceeds of sale (usually defined by the amount they need to buy a new property) and any equity above this amount is divided on an equal basis, or transferred to the other party. This method of dealing with the matrimonial home of course relies upon their being sufficient equity to buy a new property in the first place. Your client must be warned of the dangers of the property selling for less than anticipated and there being insufficient for them to buy a new property. If the value can not be agreed upon, it is often safer to record that each party will receive a set percentage of the net proceeds of sale.
Mortgages
No assumptions should be made about an individual’s ability to get a mortgage in the current climate. Figures released by the Council of Mortgage Lenders in July 2009 show that the number of house purchase loans were down 28% in May 2009 compared to May 2008, and the number of remortgage loans down 63% over the same period.
Enquiries should be made to the mortgage provider prior to the FDR as to whether they will allow the mortgage over the former matrimonial home to be transferred into the sole name of one party. A range of scenarios should be presented to the mortgage provider, based on the transferee receiving differing amounts of capital (which could be used to reduce the mortgage) and differing levels of spousal maintenance. This allows the parties to make decisions as to whether the property should be sold or retained by one party during negotiations concerning the overall division of capital and the appropriate level of maintenance.
Enquiries as to the parties’ respective mortgage capacities should also be made prior to the FDR. Some mortgage providers do not consider spousal maintenance as equal to earned income and may discount a percentage before applying the usual multipliers. Enquiries should be made with the mortgage provider before the FDR as to whether a discount will be applied and at what level.
Negative equity
Recent figures released by Lloyds Banking Group revealed that one fifth of its mortgage customers were in negative equity. Increasingly, parties are faced with the division of debt as opposed to capital. There are few reported cases on how the courts approach the problem, one must assume as people have not had sufficient funds to litigate on the matter. In such circumstances, the parties may agree to transfer the property into the sole name of one spouse, who may accept this arrangement in the hope that the property will increase in value over time. This of course depends on the mortgage provider accepting the arrangement.
Alternatively, the parties may decide to “cut their losses” and sell up, despite the shortfall between the equity in the property and the amount due under the mortgage. If they default on mortgage repayments the mortgage provider may repossess the property, regardless of the fact that it is in negative equity.
In Bristol and West plc v Bartlett and Another [2002] EWCA Civ 1181, [2002] 2 All ER (Comm) 1105 the mortgagors argued that the sale of the property discharged their liability arising under the mortgage covenant and that they were only under an “implied obligation” to discharge the outstanding sum under a simple contract. The Court of Appeal dismissed the mortgagors’ claims and held that they were still liable for the outstanding sums under the mortgage covenant. The distinction is of importance, as under a simple contract the creditor has six years to issue proceedings before they are statute barred: Limitation Act 1980 (LA 1980) s 5, whereas the limitation period for money secured by a mortgage or charge over a property is 12 years (LA 1980, s 20).
Most couples will not have sufficient capital to discharge the outstanding sums due under the mortgage once the matrimonial home has been sold. In such circumstances, they may try to reach an agreement with the mortgage provider for the repayment of the sum due, in instalments if appropriate. If the parties have other debts, they should seek the advice of an insolvency practitioner, who may be able to advise them on alternatives to bankruptcy, for instance an individual voluntary arrangement.
If agreement can’t be reached on the repayment of any shortfall between the amount due under the mortgage and the equity in the matrimonial home, the bank may decide to enforce the shortfall by way of court proceedings, or petitioning for bankruptcy. If declared bankrupt, all the parties assets will vest in the trustees in bankruptcy, save for those required for basic domestic needs and tools of the trade. Again, it is important that the parties seek the advice of an insolvency specialist in such circumstances.
Bankruptcy
In the case of Hill v Haines [2008] 1 FLR 1192, the husband was ordered to transfer his interest in the former matrimonial home to the wife at the conclusion of her claim for ancillary relief. The transfer was subsequently executed by a District Judge on the application of the wife. The husband petitioned for bankruptcy soon after Decree Absolute was pronounced and the trustees in bankruptcy sought the husband’s half interest in the former matrimonial home, on the basis that it was a transaction at an undervalue. The Court of Appeal found that a property adjustment order (MCA 1973 s 24(1)(a)) was not a transaction at an undervalue and the trustees could not claim back the husband’s half share in the matrimonial home.
The trustees in bankruptcy have been refused leave to appeal to the House of Lords.
While most couples struggle adjusting to the drop in standard of living that inevitably follows the division of marital assets in two, many now find themselves in a situation where there is barely sufficient capital to provide for one spouse alone. Although the property market is showing slow signs of recovery, most families’ net wealth is at an all time low. The courts and family practitioners must use innovative thinking in order to ensure both parties are able to house themselves at the conclusion of ancillary relief proceedings.
Thomas Duggins is an assistant solicitor at Charles Russell LLP
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