Divorce, joint tenancy and how to prepare for the unexpected
January 18, 2012 338 comments
A new case has come to light that is important for anyone going through family separation who owns a property jointly with their partner– as well as the practitioners advising them. What follows is a more complicated post than usual and I’ve done my best to simplify it.
For all those unacquainted with Section 36 Law of Property Act 1925 may I first suggest reading my initial post on this subject three years ago, which looked at severance of joint tenancy and will help you to better understand the case I am about to cover.
I explained how in English law, property is jointly owned in one of two ways: as “tenants in common” or “joint tenants”. These are tricky concepts to understand and law students have to spend long hours trying to do so! In the interest of straightforwardness, it relates ultimately to the difference it makes to the survivor when the first party dies.
If the property is owned as “joint tenants” on the death of one party, the survivor automatically inherits the deceased’s share. If the property is owned as “tenants in common” the deceased’s share will pass to their estate and will be inherited by the beneficiaries of the estate, not the surviving co-owner. So this technical difference, which most people don’t have a clue exists in law, could mean the survivor will lose out on a lot of money and also being obliged to sell the property to pay out any beneficiaries. Sometimes it is inheritance tax efficient for spouses to buy property jointly as tenants in common, but at the same time they will each make a will and if so advised, leave their share to their surviving spouse in any event. You can get further advice from a specialist in that area, which I am not.
Where parties are separating (whether married or not), and they own the property as joint tenants, practitioners know this subject should be reconsidered. Either party may sever the joint tenancy if they wish, by serving a notice on the other that is registered with the Land Registry. Thereafter they will continue together to own the property as “tenants in common”. The decision to sever usually occurs because the person concerned no longer wishes the other to automatically inherit their share of the property, on the off-chance they may die before the property dispute has been resolved either by the court or between themselves.
Severance does not affect any final division of shares in the property that may ultimately be agreed or ordered by the court. It is a “just in case” proviso because, a death during a divorce or cohabitation dispute is very rare. But it happens.
The recent case of Davis v Smith (2011) EWCA Civ 1603 was heard before the Master of the Rolls and Lord Justices Kay and Sullivan. It concerns a situation in which the divorce process was on-going, and whether a joint tenancy was severed – even though a notice of severance was never served. Despite the fact that it arose out of a divorce, this type of case is not decided by the family courts. Like Kernott v Jones, it is strictly a property matter and therefore a case for the Chancery Court with all the attendant costs.
On the surface the judgment appears quite dry, one that is easy to pass over, although it actually deals with chilling circumstances. In giving his judgement Lord Neuberger detailed the facts of the case, which like Kernott v Jones relates to two ordinary, everyday folk; this couple lived in a former council-owned property in Suffolk until divorce proceedings began and the husband left home. He then refers to the “untimely” death of Mrs Smith, who “apparently…fell down the stairs”.
Before the death of Mrs Smith, the parties had been in negotiations through solicitors. Both of them intended to serve notice of severance, but neither did so. So if the joint tenancy had not been severed, Mr Smith would have inherited the entirety of his late wife’s interest in the house despite their separation and the divorce proceedings. He argued it had not. The executors of Mrs Smith’s estate argued that it had.
The law relating to severance is set out in the leading case of Burgess v Rawnsley (1975 Ch. 429), where Lord Denning, Master of the Rolls, giving judgment referred back over a century to another case called Williams v Hensman (1861) 70 ER 862. In addition to the service of a notice under Section 36 (2) Land Property Act 1925, severance of a joint tenancy can also be effected in three other ways:
1. A certain type of act by either party
2. By mutual agreement
3. A course of dealing.
Thus in accordance with the law, and with reference to the comment of Lord Denning that “the thing to remember today is that equity leans against joint tenants and favours tenants in common” Lord Neuberger, the present Master of the Rolls, went on to carefully examine all the facts and ultimately reached the conclusion that the joint tenancy had been severed, through their course of dealings, and upholding the decision of the lower court. Mrs Smith’s interest did not pass to her estranged husband but instead passed to her estate.
It was a close run thing, since as Lord Neuberger remarked: “Neither the proposal nor the agreement to put the house on the market nor even the acceptance of a subject to contract offer could have severed the joint tenancy on their own. Even a sale could have been said to have been entirely consistent on the face of it at least with the joint tenancy continuing and applying to the proceeds of sale…what passed between the parties…went further than that”.
Lord Neuberger made reference to the detail of correspondence and the content of a meeting, as well as the advice both parties were receiving through their solicitors, and the “inevitable” application of a 50/50 split of assets on the facts of this particular case. The judge also made reference to the unequal distribution of the net proceeds of a policy in favour of the wife given the inevitability of the split in relation to the net proceeds of sale of the house. He added it was appropriate only for the course of dealings between the parties to be considered, and not “what went on in a party’s mind”. Given all those circumstances, he considered the joint tenancy to have been severed.
To what extent might this affect a case in which readers are involved? To be certain of your situation if so advised, you should sever the tenancy by notice and in any event, you should make a will. Making a will is not easy either, and I suggest taking good legal advice beforehand. Please don’t think you can simply do it yourself.
To leave it all open to argument on the basis that “it will never happen to me” is to risk an unnecessarily high tax bill, a nasty fight in potentially tragic and unforeseen circumstances and, at the very least, a substantial bill of costs which may significantly deplete an estate.
I would also refer any concerned readers to a point made in my original post. Even if it is too late, if a death has occurred and the joint tenancy is ultimately found to have been severed, an application can still be made in appropriate circumstances under the Inheritance (Provision for Family and Dependents) Act 1975.
But with it the conundrum can start all over again.
January 18, 2012