Stand-off from Standish: where now for the reform of English financial divorce law

This article looks specifically at the question: when many cases depend on whether an asset has become marital and therefore subject to sharing, is there greater clarity as a consequence of the Court of Appeal’s decision on the mechanism of matrimonialisation?

Standish

This much-awaited Court of Appeal decision was handed down on 23 May 2024. Its primary subject matter is the concept of matrimonalisation. This is the process by which an asset that was entirely non-marital before the marriage, perhaps even during the marriage, becomes marital and is therefore shared between the parties. If the asset stays non-marital, it won’t be shared at all on divorce, other than in a situation of overriding need. If it becomes marital, it will be shared either equally or in other percentages. This process can often only be understood in hindsight, often long after the matrimonialisation has occurred. It is seldom ever a consequence actively agreed upon by both parties.

It might be argued that in any open and transparent justice system, people should be free to plan their affairs with the knowledge of what might happen if ever they are considered by the courts. I would go so far as to suggest that a significant number of people who are happily or ok married are wholly unaware of how the courts might approach the way in which they and their spouse are choosing to deal with their financial affairs. Even between the legal teams in Standish there was significant difference of opinion about the consequence a divorce should have on how the couple dealt with their finances whilst married.

Why is this important now?

There is presently an active Law Commission review of the appropriate approach to financial remedies on divorce, with a scoping paper due in November and potential reform thereafter. There has already been very wide consultation across the profession and more broadly. The concept of matrimonialisation is likely to be important, perhaps even fundamental to the Commission’s findings.

Standish was a big money case, involving total assets of £132 million, of which £20 million was non-marital, i.e. not considered for sharing. The parties began their relationship in 2003, married in 2005 and had two children. The husband retired in 2007. In 2017, towards the end of the marriage, and for tax planning reasons, he transferred non-marital assets said to be worth £86 million from his sole name into the name of the wife. The marriage broke down in 2020. The wife argued that either she should retain all those assets transferred to her as they were in her name or that they should be divided equally on the basis that they had been matrimonialised.

At first instance, in the High Court, Moor J decided that the transfers had indeed matrimonialised the assets, but declined to equally divide them as they had been premarital and the transfers only occurred towards the end of the marriage. The wife was awarded 40% of the marital property.

The wife appealed, but was very unsuccessful. The Court of Appeal found that £80 million of the £86 million transferred had not become marital and she should therefore have no share in it. The mere fact of transferring the assets into her name for tax reasons did not make it marital. Whilst she received considerable sums in the way of other assets, she will have no doubt been very unhappy with this outcome.

The case highlights the great uncertainty of when assets become marital and therefore subject to sharing. It is fundamental that both lawyers and the public should know when this will happen, not least as it has an impact on how people might deal with their finances during marriage.

The three stages needed determine a non-marital property claim

In a case where needs are provided for by the sharing of matrimonial property, the approach to any non-marital property requires consideration of three core elements.

The first of these is to work out what the assets of each party were at the commencement of the marriage, or seamless cohabitation into the marriage. This is the starting point. The distillation of capital acquired during the marriage cannot occur until it is known what existed at the start. This is invariably a factual investigation carried out by lawyers, the parties and the courts.

The third element is to work out what the assets are at the time of the financial settlement and, specifically, what are marital and what are non-marital assets. At this stage, there may need to be an investigation of what assets have come into existence from the time of the separation and there is distinct case law providing guidance on this. There may well be argument about what has been acquired during the marriage. If the asset derives from joint endeavours and joint funds then it is invariably marital.

It is the second intervening element that is often the focal point for much disagreement and is common where couples are marrying later or for a second time and enter the marriage with pre-existing assets or receive inheritances. That is an examination of the degree to which the non-marital property has been integrated into the family economy and, if so, how it should be treated. If it has been used to purchase a family home, it will probably be regarded as marital. If it has been mixed and mingled with existing marital assets then again, it will probably be considered marital. If not mixed at all and remaining separate, then it will very probably not be shared. But between these extremes come many shades of grey. The parties, lawyers and courts need to know under what circumstances any previously non-marital asset will become marital and thus shared.

There is then an additional variable to be considered, being the percentage at which the sharing should occur. Although the invariable position on sharing a marital asset is equality, that doesn’t always apply. If it had been significantly or entirely non-marital and only partially became marital, the sharing may not be 50%. Here, again, the public, lawyers and the courts need clarity around how to approach this percentage division.

Guidance from Standish

The Court of Appeal made it clear that the conversion of non-marital property into marital property should be applied narrowly. Relying on K v L and the comments by Wilson LJ (as he was then), three situations were given where matrimonialisation should apply, being where:

1. The percentage of the parties’ assets (or of an asset), which were or which might be said to comprise or reflect the product of non-marital endeavour, is not sufficiently significant to justify an evidential investigation and/or an other than equal division of the wealth. Recommended approach: conventional sharing should apply.
2. Non-marital property has been used in the purchase of the former matrimonial home, an asset which typically stands in a category of its own. Recommended approach: a matrimonial home should typically be shared equally, although provenance will be taken into account.
3. The extent to which and the manner in which non-matrimonial property has been mixed with matrimonial property mean that, in fairness, it should be included within the sharing principle.

Recommended approach: the Court of Appeal advanced a test to be applied, which is to consider whether the assets have the same character as those assets built up through joint endeavour during the marriage, with the consequence that they should be shared on divorce. This clearly leaves scope for discretion and differences of opinion, so how much greater clarity this provides in practice remains to be seen. The Court of Appeal was adamant that sharing in this context doesn’t necessarily mean equal sharing. The non-marital source of the asset in question remains a relevant consideration, in other words how early or late in the marriage it has become marital and perhaps the extent of the non-marital endeavour.

Where does that leave any possibility of formulating the law if it was to be codified, as is a real possibility as a consequence of the Law Commission’s review?

International comparisons

Many countries, particularly civil law countries, with a keen community of property concept, do not have a route through which non-marital assets become marital. They will simply expect all assets to remain non-marital unless specifically described otherwise. Indeed, many premarital agreements will record this very fact.

It is likely to be New Zealand where most comparisons are made as reform is considered by the Law Commission, since until they were codified in 1975, New Zealand’s family laws were based largely on case law. There is now a distinction between relationship property, which is shared equally, and non-relationship property. There is a distinct list of what is relationship property and then a clause, s9A, setting out when non-relationship property might become relationship property. These are fairly narrow, with little scope for ambiguity or discretion. Having become relationship property, the asset will then, in most cases, be divided equally; there are only very narrow circumstances where there will be anything other than equal division. The concept from England of a more nuanced, far more discretionary approach, does not appear at all.