Breaking up is hard to do: matrimonial property

The Law Commission is in the midst of a project examining the law relating to financial consequences of divorce/dissolution of a civil partnership. So, what are they looking at and how does the law in these areas stand currently?

Pre-nuptial agreements

The Commission first issued a consultation paper in January 2011 on prenups and postnups. The most important question addressed in that consultation was the enforceability of such agreements, particularly after the decision of the Supreme Court in Radmacher v Granatino in October 2010.

As part of the government response to the Family Justice Review, it was announced in February 2012 that the Commission would not begin work on a prenups report and draft Bill, but would instead consider two other significant aspects of the financial consequences of divorce and dissolution first.

It is of note that the Commission’s ‘Overview for Lawyers’ paper states that, in relation to the prenups consultation: “We have not yet made formal recommendations for a change in the law following that consultation; when we do so we intend to recommend the introduction of a ‘qualifying nuptial agreement that would be enforceable without the exercise of the court’s discretion provided that certain preconditions are met.’

We may yet see prenuptial agreements on the statute books.

The current Law Commission review is therefore now looking at two specific aspects of the law relating to financial provision on divorce:

• to what extent one spouse should be required to meet the other’s financial needs, and what exactly is meant by needs; and

• what happens to property that one of the partners owned before the relationship or acquired during the course of it.

It is useful first to recap where the law currently stands.

White

In the noughties, we saw changes in the courts approach to financial provision. First came White in the House of Lords, where Lord Nicholls enunciated equality: “In seeking to achieve a fair outcome, there is no place for discrimination between husband and wife and their respective roles.

“Typically, a husband and wife share the activities of earning money, running their home and caring for their children. Traditionally, the husband earned the money, and the wife looked after the home and the children. This traditional division of labour is no longer the order of the day. Frequently both parents work. Sometimes it is the wife who is the money-earner, and the husband runs the home and cares for the children during the day.

“But whatever the division of labour chosen by the husband and wife, or forced upon them by circumstances, fairness requires that this should not prejudice or advantage either party when considering paragraph (f). . .’the contribution which each has made or is likely . . . to make to the welfare of the family, including any contribution by looking after the home or caring for the family.’

“If, in their different spheres, each contributed equally to the family, then in principle it matters not which of them earned the money and built up the assets. There should be no bias in favour of the money-earner and against the home-maker and the child-carer. There are cases, of which the Court of Appeal decision in Page v Page (1981) 2 FLR 198 is perhaps an instance, where the court may have lost sight of this principle.

“A practical consideration follows from this. Sometimes, having carried out the statutory exercise, the judge’s conclusion involves a more or less equal division of the available assets. More often, this is not so. More often, having looked at all the circumstances, the judge’s decision means that one party will receive a bigger share than the other.

“Before reaching a firm conclusion and making an order along these lines, a judge would always be well advised to check his tentative views against the yardstick of equality of division. As a general guide, equality should be departed from only if, and to the extent that, there is good reason for doing so. The need to consider and articulate reasons for departing from equality would help the parties and the court to focus on the need to ensure the absence of discrimination.

“Today there is greater awareness of the value of non-financial contributions to the welfare of the family. There is greater awareness of the extent to which one spouse’s business success, achieved by much sustained hard work over many years, may have been made possible or enhanced by the family contribution of the other spouse, a contribution which also required much sustained hard work over many years.

“There is increased recognition that, by being at home and having and looking after young children, a wife may lose for ever the opportunity to acquire and develop her own money-earning qualifications and skills.”

Miller and McFarlane

Following the House of Lords’ judgment in Miller and McFarlane in 2006, there are now three strands of financial provision: needs, compensation and sharing.

Lord Nicholls again: “In the search for a fair outcome it is pertinent to have in mind that fairness generates obligations as well as rights. The financial provision made on divorce by one party for the other, still typically the wife, is not in the nature of largesse.

“It is not a case of ‘taking away’ from one party and ‘giving’ to the other property which ‘belongs’ to the former. The claimant is not a suppliant. Each party to a marriage is entitled to a fair share of the available property. The search is always for what are the requirements of fairness in the particular case.

“What then, in principle, are these requirements? The statute provides that first consideration shall be given to the welfare of the children of the marriage. In the present context, nothing further need be said about this primary consideration. Beyond this several elements, or strands, are readily discernible.

“The first is financial needs. This is one of the matters listed in section 25(2), in paragraph (b): ‘the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future.’ This element of fairness reflects the fact that to greater or lesser extent every relationship of marriage gives rise to a relationship of interdependence.

“The parties share the roles of money-earner, home-maker and child-carer. Mutual dependence begets mutual obligations of support. When the marriage ends, fairness requires that the assets of the parties should be divided primarily so as to make provision for the parties’ housing and financial needs, taking into account a wide range of matters such as the parties’ ages, their future earning capacity, the family’s standard of living, and any disability of either party. Most of these needs will have been generated by the marriage, but not all of them. Needs arising from age or disability are instances of the latter.

“In most cases, the search for fairness largely begins and ends at this stage. In most cases, the available assets are insufficient to provide adequately for the needs of two homes. The court seeks to stretch modest finite resources so far as possible to meet the parties’ needs. Especially where children are involved, it may be necessary to augment the available assets by having recourse to the future earnings of the money-earner, by way of an order for periodical payments.

“Another strand, recognised more explicitly now than formerly, is compensation. This is aimed at redressing any significant prospective economic disparity between the parties arising from the way they conducted their marriage. For instance, the parties may have arranged their affairs in a way which has greatly advantaged the husband in terms of his earning capacity, but left the wife severely handicapped so far as her own earning capacity is concerned.

“Then the wife suffers a double loss: a diminution in her earning capacity and the loss of a share in her husband’s enhanced income. This is often the case. Although less marked than in the past, women may still suffer a disproportionate financial loss on the breakdown of a marriage because of their traditional role as home-maker and child-carer.

“A third strand is sharing. This ‘equal sharing’ principle derives from the basic concept of equality permeating a marriage as understood today... The parties commit themselves to sharing their lives. They live and work together. When their partnership ends, each is entitled to an equal share of the assets of the partnership, unless there is a good reason to the contrary.

“Fairness requires no less. But I emphasise the qualifying phrase: ‘unless there is good reason to the contrary.’ The yardstick of equality is to be applied as an aid, not a rule.”

When dividing assets on divorce, each of the three strands of needs, compensation and fairness should be considered by judges. But, in the vast majority of cases, there will only be sufficient resources to provide for needs.

It should be noted that none of the three strands are in statute, they are principles to assist the court in its search for fairness. They are not clear guidelines and there are regional differences.

Charman

In Charman v Charman [2007] the Supreme Court discussed how to apply the three principles.

Sir Mark Potter: “Then arises a difficult question: how does the court resolve any irreconcilable conflict between the result suggested by one principle and that suggested by another? Often conflict can be reconciled by recourse to an order for periodical payments: as,for example, in McFarlane...

“Ultimately, however, in cases in which it is irreconcilable, the criterion of fairness must supply the answer. It is clear that, when the result suggested by the needs principle is an award of property greater than the result suggested by the sharing principle, the former result should in principle prevail... It is also clear that, when the result suggested by the needs principle is an award of property less than the result suggested by the sharing principle, the latter result should in principle prevail.

Application of the case law

It is striking that a Resolution survey of members conducted in March 2012 found that the majority (80 per cent) of practitioners could only “sometimes” predict how the court would quantify needs. 57 per cent of respondents also said they had issued proceedings in a certain court or area of the country because they believed the outcome would be more favourable to their client than issuing elsewhere.

To what extent should one spouse be required to meet the other’s financial needs, and what exactly is meant by needs?

The law on needs affects the majority of cases and, post April 2013, will be harder for people to access and understand when Legal Aid for financial cases ends and many will find it difficult to obtain legal advice. The Commission is of the view that there is a lack of principle relating to needs: that there is no single principle setting out what financial orders are supposed to be achieving.

It is also seen as an area of law which is inaccessible (particularly to those without lawyers) and uncertain.

The consultation therefore discusses what to tell the courts and the parties is to be achieved by provision for needs. Should it be:

1. Compensation for needs generated by the relationship?

2. Support to enable a transition to independence?

3. Support for a limited time, to create incentives for independence (such as in Scotland)?

The consultation then goes on to ask whether financial support should be determined by a formula or whether the judge’s discretion should remain – albeit a reformed discretionary approach. The beauty of a formula is that it gives certainty.

However, personally I remain in favour of the judge’s discretion. I am uncomfortable with a ‘one size fits all’ formula and the number of eventualities that would have to be set out where the case would be exempt from a formula would be considerable.

What happens to property that one of the partners owned before the relationship or acquired during the course of it?

The other interesting area the paper then goes on to consider is non-matrimonial property. Non-matrimonial property is an asset received by one party to the marriage by gift or inheritance (at any time) or property generated by one party prior to the marriage. Currently, such assets are invaded if needs cannot be met without recourse to them. Otherwise, they are less likely to be shared. Again, however, there is no certainty and it is an area that couples litigate on.

The consultation paper asks questions about:

1. The definition of non-matrimonial property. Should it, for example, include the matrimonial home? Lord Nicholls, in Miller and McFarlane, said: “The parties’ matrimonial home, even if this was brought into the marriage at the outset by one of the parties, usually has a central place in any marriage. So it should normally be treated as matrimonial property for this purpose. As already noted, in principle the entitlement of each party to a share of the matrimonial property is the same, however long or short the marriage may have been.”

2. Should non-matrimonial property be excluded if acquired by one party during the period of cohabitation before the marriage and should it remain non-matrimonial if it has been used by the family?

3. Should there be a rule that it is not shared, and should that rule be subject to the further rule that it must be shared if it is required to meet needs (as now)? and

4. Whether non-matrimonial property can ever become matrimonial, either through time, or because it has been sold and replaced or has increased in value as a result of investment or management by one party.

I have had a number of case where needs have ‘trumped’ inheritance and I would hope that approach will remain; certainly in cases where needs are severe, for example, to care for someone of poor health.

Practitioners have a wealth of knowledge and experience at their fingertips and I’d urge all to respond to the consultation paper: it is a fascinating debate.

For more information on the Law Commission’s consultation, see https://lawcommission.justice.gov.uk/consultations/matrimonial_property.htm

 

Lisa Pepper is a partner at Osbornes www.osbornes.net. Follow Lisa on twitter @LisaPepperLaw