A Charging Order is a widely used method of securing a debt owed to a creditor by registering the creditor’s interest against the debtor’s property. Charging Orders can lead to applications being made to sell the debtor’s property in order to realise the debt owed. However, issues can arise where a creditor looks to apply for a Charging Order or an Order for Sale of a property which is registered in the debtor’s sole name, when a third party seeks to claim a beneficial interest in that property.
A look at the property’s title register should show any interests in the property, such as a mortgagee, but it could be the case that a third party is able to evidence a beneficial interest without it being recorded against the property’s title. If such an interest can be established then it could have a serious impact upon the extent of the creditor’s security.
Charging Orders and residential property
When considering residential property (typically a family home held as tenants in common) the 2007 House of Lords case of Stack v Dowdon ruled that the parties were entitled to joint and equal shares in the property unless a clear contrary intention could be shown. This case confirmed that, in the context of a family home, the test for the relevant spouse wishing to establish his or her interest is whether there is a common intention constructive trust. The proving spouse must be able to establish that the spouse in whose name the property is registered induced him or her to act to their detriment by, for example, paying towards the mortgage or by telling them/leading them to believe that they had an interest in the property.
The case established some key principles for determining the respective beneficial interests. Those being:
- A conveyance into joint names will result in a legal and beneficial joint tenancy unless the contrary is shown.
- The burden of proof is on the owner seeking to show that the couple intended that their beneficial interests should be treated differently from their legal interests in accordance with a joint tenancy.
- The court must ascertain the parties’ shared intentions in the context of the whole course of their conduct relating to the property, rather than what the court considers is fair, the factors to considered include:
- any advice or discussions at the time of the transfer, that would indicate their intention at the time;
- the reasons why they purchased the house jointly;
- the reasons why the survivor of the couple was authorised to give good receipt for capital monies;
- the purpose for which the house was acquired;
- the nature of the parties’ relationship;
- Whether the couple had children for whom they both had responsibility to provide a home;
- how the purchase was financed, both initially and subsequently;
- how the parties arranged their finances, for example, whether their accounts were held separately, together or a combination of both; and
- how the couple discharged their outgoings on the house and other household expenses.
If such an interest can be established then the creditor’s Charging Order will only attach to the debtor’s interest in the property. This means that where a property is worth say £100,000 the creditor’s Charging Order would only secure its debt to the value of £50,000 (on the basis that an equal split is established). The problem the creditor faces is, of course, that upon making the application for a Charging Order and subsequent Order for Sale, it may not know that a beneficial interest exists or is being claimed.
Charging Orders and commercial property
Where the property in question is not the family home, but say a buy-to-let flat purchased to produce an additional income stream for the owners, the same issue can arise. Such a scenario was considered recently in the case of Erlam v Rahman.
The background to the case saw proceedings first issued against Mr Rahman to remove him as Mayor of the London Borough of Tower Hamlets. The claim was successful and Mr Rahman was ordered to pay the claimants’ costs but failed to do so. The claimants obtained interim and final charging orders over various properties owned by Mr Rahman in his sole name as security. However, Mr Rahman’s wife, Mrs Farid, sought to claim that she had a 74% interest in one of the properties which had been secured by the claimants. Mrs Farid argued that her interest arose from a trust deed which was based upon an alleged contribution she made to the purchase of the property.
If Mrs Farid was able to establish that such a trust existed and that she did have a valid interest in the property, then the result would be that a significant proportion of the property’s value would be put beyond the reach of the claimants. However, upon consideration of Mrs Farid’s claim, the Court rejected the evidence put forward of the alleged contribution made and failed to find any other evidence which supported the notion of the property being subject to a trust in her favour. Whilst in this example the alleged interest failed it illustrates the potential issues a creditor faces.
It is always advisable to secure an outstanding debt, where possible, through a Charging Order. However, whilst, on the face of it, a person’s interest in a property may seem to be exclusive, it must be borne in mind that an application for Charging Order and any subsequent application for Order of Sale may be hampered by unknown third parties.