What is Equitable Accounting?
"Equitable accounting is a way of giving a party who has spent money on a property the benefit of that expenditure. It can include factors such as improvements and mortgage payments. It does not affect the beneficial interests of the parties (if any) in the property but it does affect the amount ultimately payable from the net proceeds of sale. For more information on calculating the beneficial interest, please see our earlier article entitled Proving Ownership of the Matrimonial Home.
Please note that the equitable accounting process can be applied to a solely owned property just as it can be applied to a matrimonial home. Equally, it can be applied between parties that are married, divorced, co-habiting or are in business together."
Case Study
Mr. and Mrs. X bought their family home 20 years ago with joint money. Mrs. X was made bankrupt two years ago. Mr. and Mrs. X have agreed to sell their house. Mrs. X moved out of the home six years ago. Mrs. X wanted to live in the house again but Mr. X refused to allow her back. The house is valued at £175,000. The mortgage is £80,000. The net sale proceeds are estimated to be £90,000.
Beneficial Interest - Mr. X and Mrs. X's Trustee in Bankruptcy are each entitled to 50% of the beneficial interest in the house.
Division of Sale Proceeds - these particular circumstances make it unlikely that Mr. X and Mrs. X's Trustee in Bankruptcy are both entitled to 50% of the net sale proceeds. Mr. X thinks that he should be entitled to more than 50% of the net sale proceeds for the following reasons:-
Mr. X has had the house redecorated and paid for a conservatory. The conservatory added £30,000 to the value of the house although it only cost Mr. X £10,000 to build. The redecoration has made the house more appealing to prospective purchasers but has not added any value to the house. Mr. X can only claim credit for the improvements that actually enhanced the value of the property. This means that he could claim credit for the conservatory but not the redecoration. The amount that he can claim is £5,000 which is the lesser of half of the cost of the conservatory (£5,000) or half the increase in value of the house (£15,000).
Mr. X has made all the mortgage repayments since Mrs. X left the home. The mortgage repayments are £600 per month of which £350 is the interest element and £250 is the capital element. Over six years, the mortgage has reduced by £18,000 because of the payments that Mr. X has made. Since the capital element increases the net sale proceeds by reducing the amount of the mortgage, Mr. X could be entitled to be credited for one half of the capital element of the mortgage repayments from the date that he first started paying them on his own (i.e. £9,000).
The interest element of the mortgage repayments do not increase the net sale proceeds and there is some confusion in case law about whether or not Mr. X could be credited with those repayments. More on this below.
The Trustee in Bankruptcy also thinks that he may be entitled to a greater than 50% share in the net sale proceeds of the home for the following reason:-
Mrs. X has not been living in the home for six years. Because Mr. X refused to allow Mrs. X back into the house, the Trustee in Bankruptcy can claim an "occupation rent" from Mr. X from the date that Mrs. X left the home six years ago. If Mr. X had wanted Mrs. X to come back and live in the house but she had refused, the Trustee in Bankruptcy would only have been entitled to claim the occupation rent from the date that Mrs. X went bankrupt.
In practice, the credit that Mr. X can try and claim for the interest only element of the remortgage is likely to be offset by the occupation rent that the Trustee in Bankruptcy can claim because Mrs. X has not been living in the house unless there is a big disparity in the interest and possible rental cost for that type of property.
Evidence
In order to claim a greater proportion of the net sale proceeds because of the money he spent on the conservatory and the mortgage repayments he made, Mr. X must provide documentary evidence proving his claim.
In the case of the conservatory, this may take the form of invoices from builders together with bank statements showing that the payments came from Mr. X's account. For the mortgage repayments, again, this may take the form of bank statements showing that the payments came from Mr. X's account.
Outcome
On the basis of the above facts, it is likely that Mr. X would get more than 50% of the net sale proceeds (i.e. £45,000). He is likely to be entitled to be credited for the conservatory (£5,000) and the capital mortgage repayments (£9,000). The occupation rent due to the Trustee in Bankruptcy would be cancelled out by the interest only repayments that Mr. X made. Mr. X would, therefore, receive £59,000 and the Trustee in Bankruptcy would receive £31,000.
| Mr. X | Trustee in Bankruptcy | |
| Net Sale Proceeds (1) | £45,000 | £45,000 |
| + | - | |
| Conservatory (2) | £5,000 | £5,000 | + | - |
| Capital mortgage repayments (3) | £9,000 | £9,000 |
| + | - | |
| Interest mortgage repayments (4) | £25,200 | £25,200 |
| + | - | |
| Occupation rent (5) | £25,200 | £25,100 |
| + | - | |
| TOTAL | £59,000 | £31,000 |
Table Notes*
1 Half of value of property less mortgage and sale costs
2 Half of cost of conservatory
3 Half of capital mortgage repayments of £250 per month over six years
4 Half of interest mortgage repayments of £350 per month over six years
5 Based on a fair market rent of £350 per month over six years
This is a general and simplistic overview of a complex area. Each case depends on its own facts. If you require more detailed advice in this area, please contact Rachel Youngs of stevensdrake on 01293 596960 or Gavin Pickering on 01293 596976.
Published - October 2010
This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.
