Private ClientFILE March 2009
In-House News: Love in a Cold Climate
“No, not a reference to February’s Arctic weather conditions but to the difficulties facing many unhappy couples in the current economic climate”
explains Anna North, Family Solicitor at Brethertons.
“The “credit crunch” is friend to no one but if your relationship is foundering the future may seem even more uncertain and frightening.
Couples contemplating separation are naturally concerned about future housing arrangements for themselves and their children. In a falling housing market it is more difficult to sell a property and reasonably buy on. Anxious lenders make it difficult to raise finance. “Breadwinners” are inevitably anxious about continued employment and the ability to support two homes in the event of separation.
But is separation the only answer for a couple with a difficult relationship? Some couples, perhaps with independent help, have found that they are able to work through their problems together and rebuild their relationship. In January of this year there was a marked increase in the number of couples turning to Relate (relationship counsellors) for help in this respect.
Some couples, though, sadly conclude that their relationship is at an end and decide to separate.
A couple should have the freedom to make their own plans to separate; to organise their income and assets between them; to make arrangements for their children. A couple should also have access to expert advice and assistance when making some of the most important decisions they may ever have to make for their family.
A couple will be keen to preserve much needed resources for the benefit of the family and keep professional costs to a minimum. They will be anxious to prevent hostility from creeping into their relationship, particularly if they are parents. They will want to ensure that they can make their own decisions about their children’s future and not have someone else’s solution imposed upon them.
This may sound idealistic but such expectations of a couple who are planning to separate can be safeguarded by two alternative methods;
Mediation - A mediator is a neutral and impartial trained professional. Through a series of meetings a mediator will help a couple to explore as many different arrangements as possible (both financial and for children) so that the couple can determine the best possible arrangement for their family. The couple may then independently take legal advice with regard to their proposed arrangement and the formal recording of it.
Collaborative Law - The couple will each appoint a collaborative lawyer. The couple and their collaborative lawyers agree that they will not have recourse to the court to make financial arrangements or arrangements for children. The couple and their lawyers come together in a series of meetings (four-way meetings) to discuss and agree arrangements for the future. The couple has immediate access to legal advice during the course of their discussions. An agreed settlement can be formally recorded and, where appropriate, ratified by the court on a consensual basis.
Whether a couple engages in mediation or collaborative law they retain responsibility for making decisions that effect their future. They also have the ability to arrive at more creative solutions that a court is willing to endorse but otherwise may not have been able to order.
The emphasis, in these very difficult times, is on the family, the best arrangements that can be achieved for that family with the minimum of cost in both monetary and emotional terms.”
Boundary Dispute Highlights Need for Clarity
A recent boundary dispute has illustrated the desirability of ensuring that when a property is sold, the description of it in the conveyance is as clear as possible.
The dispute was over a farmhouse and adjacent fields, which were at one time under common ownership. In 1988 they were sold separately, the farmhouse being sold first and then the fields. The original owner had built a fence between the farmhouse and the fields. Regrettably, the plan, which was marked ‘for information only’, showed the fence as lying within the boundary of the property attaching to the farmhouse. The written description of the property conveyed with the farmhouse was inadequate, but the vendor (who at that time still owned the fields) had covenanted to maintain the fence. This made no sense if the fence were no longer on the vendor’s property.
The subsequent owner of the fields sought to have a declaration made by the court that her land included the land on which the fence stood and to have the copies of the plans filed at the Land Registry altered to show the fence as part of her property, not the farmhouse land. The Court of Appeal agreed that the fence stood on her land and that the boundary shown in the plan should be altered to show her ownership of the disputed land.
The plan of a property is normally only indicative and the extent of the true title is contained in the description of the property. It is therefore very important that conveyances contain accurate and comprehensive descriptions of the property being conveyed and also that documents of title are examined and compared with the filed plan to ensure that any anomalies can be resolved.
Covenant Prohibits Lawful Use
Covenants containing restrictions on the use or development of land can cause problems between neighbours.
Recently, a couple obtained planning permission to build a bungalow on a corner of their land.
Their property was subject to a covenant on development, which prevented them from building a residential property on it without the agreement of their neighbour. This was asked for and denied. The neighbour was of the view that the occupants of the bungalow would have use of the surrounding garden land and this might interfere with her privacy. She was unmoved by the argument that the owners of the existing property could use the land themselves without a bungalow being built and this would have the same effect on her privacy but would not breach the restrictive covenant.
The couple applied to the Lands Tribunal to have the covenant lifted. It refused permission and so they appealed to the Court of Appeal.
The Court upheld the decision of the Lands Tribunal. In its view, the value of the covenant to the neighbour was that her privacy was protected not only by prevention of the building, but also because of the potential use of the surrounding land as a garden. It was not in point that the benefit to her derived from the covenant restricting construction of the building rather than restriction of use of the land in question as a garden.
Brethertons’ view:
“In this case, the covenant prohibited what was, in effect, a lawful use of the land as a garden. The prohibition was for occupiers of the proposed bungalow, not the couple who owned the land. Their use was not restricted, but the protection operated by prohibiting the construction of the bungalow.”
Right of Way – Law, Not Intention, Determines Outcome
Where an easement (the ability to use someone else’s land in some way) is granted, it is usual for its terms to state any restrictions which may apply to its use.
Recently, a case came to court where a property was conveyed with a right of way over a pathway over the adjacent property such that access could be obtained to the road from the rear of the property.
The right of way stated that the occupiers of the property had the right of use of the pathway at all times for the purpose of access to or egress from the property for ‘all reasonable use necessary for the proper enjoyment of the property’. Unfortunately for their neighbour, this involved access early in the morning and late at night by visitors. The neighbours took the view that this use was more than was needed ‘for the proper enjoyment of the property’ and sought a ruling to restrict the use of the path.
The judge agreed, ruling that the original purpose of the right of way was to allow access to the rear of the property when access to the front was impracticable. In reaching this decision, he considered two documents which purported to come from the local council (which had sold both properties under the ‘right to buy’ legislation). These stated that the right of way was restricted in various ways. One of these documents, however, was written after the properties had been sold.
On appeal to the Court of Appeal, the decision was reversed. The understanding of the parties at the time of the grant of the right of way was not in point, what mattered was the law which applied. The legal documentation clearly stated that the grant of the right of way applied at all times for the reasonable use of the property. If there had been the intention to limit the right, it should have been contained in the deeds.
Brethertons’ view:
“There is no substitute for including any necessary clauses in the original documentation. This involves the vendor and the purchaser thinking through the possible issues and ensuring that any necessary rights or limitations of rights are dealt with at the time.”
Business Assets and IHT
Business Property Relief (BPR) is a very advantageous relief for Inheritance Tax (IHT) purposes because where BPR applies, the assets concerned are transferred as if they are of zero value, thus attracting 100 per cent relief from IHT.
Needless to say, there are quite strict rules regarding what is and what is not ‘qualifying business property’ for BPR. Also, there is a rule which stipulates that for BPR to apply, the business concerned (but not necessarily the assets transferred) must have been owned for at least two years.
In a case heard by the Special Commissioners of Taxes, who hear cases involving difficult or complex applications of tax law, the question was raised as to whether BPR could be claimed where there was a reduction in value of the relevant business property, without the business itself or an interest in the business being transferred. In the case in question, a transfer was made in favour of a family trust of farmland and two cottages that were owned by the business but not used for business purposes. The Special Commissioners could see no reason why BPR should be denied in the circumstances.
In another case, the question was whether the sub-letting of fields was a business for the purposes of BPR. The Special Commissioners decided in this instance that the arrangement did not qualify because the business was primarily concerned with the holding of investments, which is not a ‘qualifying business purpose’.
These cases show the importance of considering carefully the detailed provisions of tax law when considering the transfer of business assets. The rules for qualifying for BPR are complex, but not particularly onerous. We can advise on all aspects of IHT planning and preservation of family wealth.
No Will, But Not Intestate
To die intestate means to die without leaving a will and an intestate estate is distributed according to the intestacy rules. These are more complex than many people realise, but they do operate overall to leave the estate to surviving family members.
Generally, where no will can be produced, the estate will be dealt with as an intestate estate – but not always. In a recent case, the widow and daughter of a man claimed that he had died intestate. However, two neighbours who had helped the daughter go through her late father’s papers recalled seeing a copy of a will, which gave bequests in favour of charities. The neighbours stood to receive no benefit from the estate. The man’s solicitor also recalled drawing up the will.
The court concluded that it was improbable that both the neighbours and the solicitor would independently make the same allegation when they had no personal interest in the outcome. In the circumstances, the court ruled that the deceased had made a will which was in favour of the charities.
This case was unusual in that it is not common for a will to be imputed when none can be produced. It was also unusual for there not to be a copy of the will held independently by the solicitor, a relative or in a bank deposit box.
When preparing your will, it is sensible to ensure that a copy is held so that if the original is lost or destroyed, the estate can be administered efficiently in accordance with your wishes and without unnecessary costs.
Early Alzheimer’s Sufferer Competent
Wills are frequently challenged on the basis that the person making the will (the ‘testator’ or ‘testatrix’ in legal terminology) was not competent to execute it or on the basis that they were under the undue influence of someone else when it was written.
It is unusual for a case to be brought on both bases, but a recent case saw a will challenged on the grounds that the testatrix, who was the grandmother of the claimants, was under the undue influence of another family member and was not mentally competent when her final will was executed.
The facts were that the grandmother had made an earlier will whereby the property in which she lived was left in equal shares to her granddaughters and the rest of her estate was divided equally between their aunt and another person. The testatrix was later diagnosed with Alzheimer’s disease. The aunt exchanged correspondence with the testatrix over the terms of the will (of which she was aware) and subsequently she and the testatrix visited the family solicitor who drew up a new will which gave the bulk of the estate to the aunt.
On becoming aware of the new will, after the aunt was granted probate of the estate in September 2003, the granddaughters challenged it.
The court found that although the grandmother suffered short-term memory loss, this could not be considered to constitute lack of testamentary capacity. The questions then remaining were whether the will was executed with her knowledge and approval and whether undue influence was applied. The evidence was that she had thought about her will for some months, discussed it with her sister and visited her solicitor twice. She had also examined a draft of the will and confirmed it was as she wished. The challenge to the will therefore failed.
Brethertons’ view:
“It is often thought that once a diagnosis of Alzheimer’s or a similar mental disease is made, any changes to a will, or a new will, must be invalid, but this is by no means always the case. If you have a relative who suffers from a mental disorder who has not made a will, or who wishes to amend a will already made, it may still be possible to have a valid will created. Contact us for advice.”
Court Adopts Broad Brush Valuation of Business on Divorce
On divorce, the valuation of a family business is often a highly emotional and contentious issue, so it was unsurprising when the divorce of a couple after 15 years of marriage led to an acrimonious dispute over the value of their successful restaurant business.
The ex-husband valued the total assets (including the business, which he had run for 33 years) at £4.2 million. His ex-wife placed a valuation on the assets of £7.6 million, valuing the business at £5.3 million. She sought 50 per cent of the net assets plus school fees for the children. Her ex-husband offered 42 per cent of the net assets (£1.7 million), although this offer was later reduced.
Both produced expert witnesses to back up their respective valuations of the business, which was the main point of dissent. The experts differed, but the main point of contention was whether the valuation should be based on a multiple of six times ‘maintainable earnings’ or nine times.
The judge relied on evidence of transactions in similar circumstances and ruled that the multiplier should be 6.5. He commented that the valuations of experts were of ‘doubtful utility’ because they are a matter of opinion and experts’ opinions differ. He therefore adopted a broad brush approach. Since there were insufficient resources for a ‘clean break’ arrangement to be financed, he ordered that the wife should receive £1.45 million plus periodical payments of £60,000 annually, child maintenance of £20,000 per annum and the cost of the school fees.
Brethertons’ view:
“Few aspects of the financial arrangements in a divorce can be as contentious as the value of a family business and it is by no means uncommon for quite unrealistic values to be put forward. In many cases, the best overall result is achieved by the use of a single joint expert and sensible negotiation.”
Bankruptcy and the Family Home
With the economy in poor shape and personal debt still at high levels, the outlook is less than rosy for people who are facing insolvency. Even after the changes made by the Enterprise Act 2002, bankruptcy is still a difficult experience for most bankrupts. This is especially true where the family home is the main asset of the bankrupt’s estate.
The trustee in bankruptcy will normally seek a possession order over the property so that it can be sold to satisfy the claims of creditors.
When deciding whether the possession order is to be granted, the court is obliged to consider:
• the interests of the creditors;
• the conduct of any spouse or civil partner (current or past) in contributing to the bankruptcy;
• the needs and financial resources (if any) of the current or former spouse or civil partner and any children; and
• the other applicable circumstances of the case.
Where an application for a possession order is made more than a year after the property has vested in the trustee in bankruptcy, the court will normally regard the interests of the creditors as paramount. The 12 month delay between the bankruptcy and the application may give a false sense of security, but does at least allow time for alternative living arrangements to be made if a sale is probable.
An application to resist the possession and sale can be made if there are exceptional circumstances, but consequences for the family arising from the bankruptcy will only very rarely be considered as exceptional circumstances.
Where a delay in paying creditors is unlikely to cause them any prejudice, a case may be able to be made out that the circumstances are exceptional enough to justify the defeat of an application for possession. An example might be when there is a great deal of equity in the property, such that the debts plus interest thereon are likely to be paid in full on an eventual sale. Such an argument might apply where the creditor is HM Revenue and Customs, for example.
Serious illness in the family (not that of the bankrupt personally, except where this creates a need for a family member to remain in the house to look after the bankrupt) may also be regarded as an exceptional factor.
There are a number of other factors that may also constitute exceptional circumstances. If you are faced with a possession application, it is important to take legal advice promptly as there may be other solutions (such as a relative purchasing the trustee in bankruptcy’s interest in the property) which can be explored.
However, the best approach is to take advice as soon as you get into financial difficulty. Normally, the earlier such issues are addressed, the greater the likelihood of a satisfactory outcome – possibly avoiding bankruptcy altogether.
