Constructive trust – Jones v Kernott  UKSC 53
The Supreme Court handed down its judgment on 9 November 2011 in the case of Jones v Kernott  UKSC 53, which concerns the property rights of cohabitants, some years after one party left, in respect of the division of a property purchased jointly by them. The Court of Appeal had previously determined the equitable interests were still owned 50:50 despite the fact that Mr Kernott left the property in 1993.
Ms Jones and Mr Kernott bought 39, Badger Hall Avenue in 1985 as beneficial joint tenants. They had been in a relationship since 1980, cohabiting since 1984 in Ms Jones’s caravan, when their first child was born. The purchase of Badger Hall Avenue for £30,000 was funded by £6,000 from Ms Jones, the balance coming from an interest only mortgage with endowment policy. The following year a loan was taken out of £2,000 to fund an extension which was built by Mr Kernott and paid for principally by him. The extension enhanced the value of the house to about £44,000. The couple’s second child was also born that year. Household bills were shared as were the mortgage payments.
In October 1993 Mr Kernott left when their relationship ended. From this point Ms Jones made all mortgage and endowment policy payments and funded all other maintenance of the property. She supported their children with little or no contribution from Mr Kernott and did not apply for child support payments.
Ms Jones and Mr Kernott had a life insurance policy which was cashed some time after the relationship ended. The proceeds were divided. Among other things this was to allow Mr Kernott to buy a property. In May 1996, he bought 114 Stanley Road in his sole name, made all the mortgage payments for it and maintained the property at his own expense.
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On 19th May 2008 Mr Kernott served a notice of severance with regard to Badger Hall Avenue. The value agreed at trial was £245,000. The outstanding mortgage was £26,669 which left equity of £218,000. The value of the endowment policy was £25,209. Stanley Road was valued at £205,000, with an outstanding mortgage of £38,000. This left equity of £167,000.
His Honour Judge Dedman in the County Court applied the cases of Stack v Dowden  UK HL 17 and Oxley v Hiscock  EWCA Civ 546. He awarded Ms Jones a 90% interest in Badger Hall Avenue on the basis that this was “fair and just”. Mr Kernott appealed.
Was the Trial Judge right to decide what the parties intended?
The parties had initially pooled their resources but this had ceased in 1993. From that point their finances were even more separate than the couple in Stack v Dowden. As a consequence the trial Judge inferred that that they no longer intended equal beneficial ownership. The change of intention was easily imputed from the parties conduct.
What different intention is to be imputed?
It was submitted for Ms Jones that the correct inference would be that they did not intend Mr Kernott to have any interest once he left the property. This was not correct according to both the judges. Before leaving in 1993, Mr Kernott had made substantial contributions. His departure did not justify the argument that he had given up any stake in the property. Taking his capital contribution and the extension into account his share must represent not much less than 50% of the property’s value. As the parties did not communicate their intentions at the time and there was no way of discerning them, it must be taken that they must have intended whatever was fair and reasonable.
Was the Trial Judge’s decision unfair or unjust?
Ms Jones initial contribution represented about 20% of the purchase price. Mr Kernott’s improvements represented about 30% of the value. The mortgage and endowment payments were about 4:1 in Ms Jones’s favour. This did not justify the 90:10 split until the very substantial capital gain on both properties was taken into account. The Chancery Judge held that it would not be reasonable for Mr Kernott to have “a significant part of the increased value of Badger Hall Avenue, in addition to the whole of the capital gain from Stanley Road. Therefore it would not be reasonable for him to retain more than a small interest in Badger Hall Avenue”. The 10% assessed by the Trial Judge was held to be fair.
The appeal was dismissed.
The Court of Appeal
First of all a second appeal was allowed in this case.
The principles that Judge Dedman was required to apply are those adopted by the majority of the House of Lords in Stack v Dowden  UK HL 17.
The question was not whether or not a joint intention could properly be inferred from the parties conduct since separation. The conveyance to the parties was into their joint names and created joint beneficial interests. When they separated they had equal interests so there had to be something, other than mere effluxion of time, to displace those interests. The 50:50 split could be varied but had not been. The parties conduct did not confer any intention to vary the beneficial interests to a 90:10 split and therefore the Chancery Judge’s decision was overruled and the appeal was allowed.
Lord Rimer said:
“I am conscious that Ms Jones may perhaps question the fairness of an outcome which leaves her with the same 50% share she had in 1993. But its fairness can only be assessed by reference to the principles governing such disputes as these. The decision in Stack requires claimants such as Ms Jones to surmount a high evidential hurdle in making good their case, which she failed to do.”
As Lord Justice Wall concluded:
“I described this case as a cautionary tale. So, in my judgment, it is. The purchase of residential accommodation is perhaps the single most important financial transaction which any individual transacts in a lifetime. It is therefore of the utmost importance, as it seems to me, that those who engage in these transactions, and those who advise them, should take the greatest care over such transactions, and must – particularly if they are unmarried or if their clients are unmarried – address their minds to the size and fate of the respective beneficial interests on acquisition, separation and thereafter. It is simply impossible for a court to analyse personal transactions over years between cohabitants, and the costs of so doing are likely to be disproportionate in any event. Cohabiting partners must, it seems to me, contemplate and address the unthinkable, namely that their relationship will break down and that they will fall out over what they do and do not own.”
Lord Justice Jacob dissented because he believed that the Judges below had applied the correct legal tests and the trial judge is the arbiter of the facts. Since he did not apply the tests to the facts perversely there was no reason to overrule the outcome. He did not believe it was necessary or appropriate for the Court of Appeal to consider this matter afresh.
The Supreme Court
Lady Hale said that when Mr Kernott moved out of the property, and the couple subsequently cashed in their joint life insurance policies to enable him to buy his own home, this changed their original decision to own the Badger Hall Avenue property in equal shares. At that point Mr Kernott then had the benefit of the increase in value of his own home going forward and so the fact that Ms Jones continued to pay all the mortgage payments and other expenses on Badger Hall Avenue meant she acquired a greater share in its value.
The Supreme Court thought that the split of 90:10 originally imposed by the County Court Judge was fair. In so doing the Court confirmed that where an unmarried couple did not say how they wished to own a jointly acquired property, and there was no evidence of any decision to change the way in which it was owned, then a Court was entitled to impose their own interpretation based on fairness.
The result of this decision is of course that what amounts to fair will be up to individual judges. It makes the adviser’s job impossible and will involve more litigation in future where the parties cannot reach agreement.
Even the judgment delivered in the Supreme Court questioned why the Government had chosen not to legislate for such matters when there has been many calls for reform, including a recommendation to do so from the Law Commission. This is of especial practical concern because about 2 million couples cohabit rather than marry and over 50% of all newly born children are born to unmarried parents.
The level of evidence required is high to overturn the fact that beneficial ownership will follow legal ownership in all but the most exceptional cases. In cases where the parties did not have a common intention as to how the beneficial ownership is to be determined then courts must infer or impute such an intention or change an intention based on what is fair and arising from their conduct.
As practitioners we know that advice to cohabitants when purchasing a property is always to buy as beneficial tenants in common with a declaration of trust as to how the financial interests will be dealt with on a break down of their relationship but equally we know that this advice often falls on deaf ears.
In the absence of any legislation to address the cohabitants’ plight the outcome of cases like Jones v Kernott needs to be publicised which fortunately the Law Society has been trying to do with some success. Practitioners in turn need to remember the correct principles of law as set out in Baroness Hale’s judgement in Stack v Dowden.
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