Cohabitation Outcomes after the Law Commission Report

In July 2007, the Law Commission published its long awaited report into the financial consequences of the breakdown of a relationship where the parties were cohabiting. In addressing this issue, the Commission has looked to the changes to our society in recent years and the problems associated with the persistent urban myth of the 'common law' wife or husband. There has been much media comment as to whether those who have chosen – by the very nature of their relationship – not to enter into the rights and obligations associated with marriage ought now to benefit from (or be burdened with) those consequences anyway.

It is now widely accepted that, in a society where so many are now choosing not to marry, there must be protection provided not only for the children of cohabitants but also for the cohabitants themselves if they are left vulnerable when their relationship comes to an end. The present system for cohabitants is – as is acknowledged by the Law Commission – 'complex, uncertain, expensive to rely on and often gives rise to outcomes that are unjust'. However, the Law Commission promises that its recommendations offer a 'workable system to deal with the separation of cohabitants that would be a considerable improvement on the current law' and would 'ensure a fairer division of assets on relationship breakdown'.

THE CURRENT LAW
The Court of Appeal and the House of Lords have both grappled with this 'patchwork of legal rules' recently: in Oxley v Hiscock [2004] EWCA Civ 546, [2004] 2 FLR 669 and Stack v Dowden [2007] UKHL 17, [2007] 1 FLR 1858. The facts and outcomes of both cases are well known but worth repeating.

Oxley v Hiscock
The parties had been in a long relationship, although not always cohabiting, for 15 years. The original property was owned by Ms Oxley, which she had purchased under the right to buy scheme. However, the purchase was entirely financed by Mr Hiscock from the proceeds of sale of his previous home. His interest in the property was secured by a charge. This property was then sold and the proceeds, as well as Mr Hiscock's savings and a building society mortgage (later repaid), were used to buy another property in Mr Hiscock's sole name which the parties then lived in with the children of Ms Oxley from a previous marriage for a period of 10 years. Following the breakdown of the relationship, the property was sold and Ms Oxley brought proceedings that the net sale proceeds ought to be held on trust for her and Mr Hiscock in equal shares or in such proportions as the court should determine.

At first instance it was held that the proceeds should be held in equal shares as, although there was no evidence that the parties had ever discussed or reached agreement on the issue, it did not prevent the judge from inferring agreement between them. Mr Hiscock appealed on the basis that the judge had misdirected herself in law as the proceeds ought to be divided on the basis of the proportions in which the parties had originally provided. In the Court of Appeal it was held that when deciding the split of proceeds between former cohabitants, the following questions must be asked:

whether there is evidence from which to infer a common intention communicated by each party to the other that each shall have a beneficial interest in the property. If there is then;
what is the extent of the parties' respective beneficial interests?

In answering the second of these two questions, and in a case where there is no evidence as to any discussion between the parties as to their respective shares, it is for the court to infer what is a fair division, having regard to the whole course of dealings between the parties in relation to the property.

The Court of Appeal held that the judge at first instance had asked herself the wrong question; she directed herself to look at the whole course of dealings between the parties to infer what the arrangement for ownership of the property was, but in fact she should have asked herself what would be a fair share to each party given the contributions they had made to the purchase of the property. The Court of Appeal held that the fair outcome, taking into account the fact that Mr Hiscock had made a far greater contribution to the purchase price of the property and the fact that it was held in his sole name, was a 60/40 split in his favour.

Stack v Dowden
By the time they separated in October 2002, Barry Stack and Dehra Dowden had been in a relationship lasting 27 years. They had lived together for 18 of those and had four children. Aside from in relation to the purchase of real property and the running of the household (including payments toward the mortgage secured on their home), the couple managed their finances separately during the entirety of their relationship. The court was asked to determine in what shares the couple held the net proceeds of sale of 114 Chatsworth Road, London NW2, a property which had been purchased in joint names with Miss Dowden providing over 65% of the purchase price from her savings. The remainder was borrowed from Barclays Bank, secured by a mortgage and two endowment policies – one in joint names and the other in Ms Dowden's sole name. By the time the parties separated, Mr Stack had paid £33,747 in mortgage interest and premiums on the joint endowment premiums. In addition, both parties also paid capital off of the mortgage – Mr Stack £27,000 and Miss Dowden £38,435. It was Mr Stack's case that there should be an equal division of the net proceeds of sale of Chatsworth Road; Miss Dowden said that there ought to be a 65/35 split in her favour.

While Mr Stack was successful at first instance and an order for sale was made, on Miss Dowden's application the Court of Appeal dissented from the view of the trial judge and substituted a 35/65 division of the proceeds of sale. Mr Dowden's appeal to the House of Lords was unanimously dismissed, with Lord Hope of Craighead concluding that there was never a stage when both parties intended that their beneficial interests in the property should be shared equally' (para [12]).

OUTCOME UNDER THE NEW LAW
How would Elayne Oxley and Barry Stack have fared if their cases had been heard after the proposed reforms had come in? Since the Law Commission's proposals do not automatically apply to all cohabiting couples, we first need to determine whether they would have been eligible for the new remedies. The report recommends that a remedy is only available where:

the couple had a child together or had cohabited for a specified number of years, say between 2 and 5; and
the couple had not agreed to disapply the scheme and entered into their own private 'opt out' agreement, setting out how their assets were to be divided on separation; and
the applicant had made qualifying contributions to the relationship giving rise to certain enduring consequences at the point of separation.

In both cases, the parties had cohabited for a sufficient period of time to satisfy the first limb of the test. Presuming that neither had chosen to 'opt out', we then need to consider whether each potential applicant had made a 'qualifying contribution'. To satisfy the test, Elayne Oxley and Barry Stack would need to prove either that:

their respective cohabitees had retained a financial benefit because of the contributions that they (ie the applicant) had made during the relationship as a result of the 'qualifying contributions' they had made; or
they had suffered an economic disadvantage as a result of such a contribution.

It seems clear that the series of lump sum payments that Barry Stack made towards the mortgage on 114 Chatsworth Road would qualify as 'qualifying contributions'. Both he and Dehra Dowden retained an economic benefit by virtue of that property, even though the rest of their finances were kept separate (a concept that the report describes as being 'economically neutral'). It is not clear whether 'indirect contributions', such as those identified by Lord Hope of Craighead in Stack v Dowden (para [12]) are to be considered.

On this analysis, and as you would expect, both Elayne Oxley and Barry Stack would have eligible to claim under the scheme. Would this have affected the outcome of their cases in monetary terms? According to the report, the 'value of any award would depend on the extent of the retained benefit or continuing economic advantage'. As a mother of four children, Dehra Dowden certainly would have stood to do better under the scheme. If she had not returned to work as a highly successful electrical engineer after each period of maternity leave, Barry Stack could, under the proposed scheme, be obliged to take responsibility in financial terms for her loss of earnings. While his obligation to pay child support for any minor children would be unaffected, he may now have to pay an additional amount for childcare. The court may also decide to make a larger capital award to Dehra if it found the children had capital needs that could not be met by 65% of the net proceeds of sale of Chatsworth Road. Barry Stack would not, however, be obliged to make ongoing maintenance payments.

THE OPT OUT AGREEMENT
If the parties of Oxley v Hiscock and Stack v Dowden were to approach their lawyers for the first time in the wake of the Law Commission's reforms being introduced, then they may decide to opt out of the system for providing financial relief at the end of the relationship.

The Law Commission was very aware that many cohabiting couples choose not to marry precisely because they do not want to be financially bound to each other in the manner of a married couple or civil partners. The Commission, therefore, was at pains to provide an opportunity to opt out of its proposed scheme, while continuing to protect both the parties and any children in the break up of a relationship. However, in order for an agreement to opt out to be binding, certain criteria would have to be adhered to. The qualifying criteria for an opt-out agreement as suggested by the Commission is that the agreement:

be in writing;
is signed by both of the parties;
makes clear the parties' intention to disapply the statute; and
should be enforceable as an opt out agreement in place of the recommended scheme.
The agreement may be entered into before, during or after the parties become cohabitants.

Significantly, unlike the case with prenuptial agreements, the Commission did not think it was necessary for the parties to seek independent legal advice before signing the agreement. In Australia, where an equivalent system has already been introduced, legal advice is a requirement, but the Commission did not think it necessary that in England the parties incur the associated legal costs. Equally it did not think it necessary that there be full and frank financial disclosure in advance of signing the opt out agreement. The reason for this is that the purpose of the Commission's recommended scheme is to address the financial consequences of cohabitation, not to redistribute the parties' resources following separation. The Commission also seemed anxious that although it should be possible for the court to set aside these agreements, that should only be the case where enforcement would cause:

'manifest unfairness having regard to:

the circumstances at the time the agreement was made; or
the circumstances at the time the agreement comes to be enforced which were unforeseen when the agreement was made' (para 5.61)

The Commission did not therefore want these agreements to hold the same position as prenuptial agreements, but instead that the court should start from the presumption that an agreement is enforceable and it is for one of the parties to prove that it should not be. It should also be noted that, in contrast to claims arising out of a divorce or dissolution of a civil partnership, the Commission proposed that claims for financial relief be brought within two years of the couple's separation.

CONCLUSION
Reform of the law on cohabitation has been long awaited, and while the Commission's report makes that important first step in highlighting the potential problems for former cohabitants and the grounds on which those cohabitants ought to be able to make claims, it does not explain how it considers the courts should calculate the economic advantage or disadvantage gained by each party. It is very clear on how parties can opt out, but less clear on the basis of any calculation of the award that may follow as a result of not having done so. It would be wrong to attempt to immediately apply the s 25 criteria from the Matrimonial Causes Act 1973, but the criteria need to be considered further.

(by Linzi Bull, published in Family Law, January 2008)