Living together
The Law Commission's Proposals
07/08/2007
As readers of previous articles on this website will know the existing law relating to the property and assets of unmarried cohabiting couples on relationship breakdown is uncertain complex and inflexible (see for example the articles entitled Jointly Owned Property 1 and 2). The law of trusts may determine how property is to be shared at the time it is acquired but once ownership is fixed it cannot be adapted according to changed circumstances leading to possible hardship and an economic imbalance on a later separation. An order for capital provision under Schedule 1 Children Act 1989, focused on the needs of a dependent child, may keep a roof over the head of a primary carer but only while the child remains a dependant.
The Law Commission's final report and recommendations entitled Cohabitation: the Financial Consequences of Relationship Breakdown has now been published. As predicted it recommends a statutory framework governing the division of property and assets on separation but with very significant differences from the system applicable to divorcing couples.
The essential difference between the ancillary relief provisions of the Matrimonial Causes Act and the proposed framework for cohabitants is that whereas the former enables the court, using its wide discretionary powers, to have regard to all the circumstances in producing a result which is intended to be fair overall. The latter, if enacted, would be limited to dealing only with the economic consequences of the parties' cohabitation. For this reason we may all have to grapple with such new concepts as qualifying contributions, retained benefit and economic disadvantage as these underpin the proposals. These principles are intended to be compensatory.
Who may apply for relief?
A couple living together in a household as a couple who either have a child together or who have cohabited for a minimum period of two years at the date of separation and are neither married to each other nor in a civil partnership. The actual length of the qualifying period has been left to Parliament but should not exceed five years.
To make a claim for relief the applicant will first need to show that she/he has made a qualifying contribution to the relationship. This is defined as "any contribution arising from the cohabiting relationship which is made to the parties' shared lives or to the welfare of members of their families". Examples of qualifying contributions may be care of a child of the parties or of a dependent relative, financial support, activities enhancing the value of assets or which enable the respondent to acquire or retain capital assets, funding professional or other courses undertaken by the respondent, giving up secure accommodation etc. However, it seems that these acts must have economic consequences, either conferring a financial benefit upon the respondent or a disadvantage to the applicant. In the case of a married couple the contribution of homemaker and carer is regarded as of equal weight with the breadwinner even though there may be no measurable financial effect.
Next the applicant will be required to prove that either the respondent has acquired a "retained benefit" or that the applicant has suffered an "economic disadvantage" as a result of such contributions.
A "retained benefit" may take the form of capital income or earning capacity which has been acquired retained or enhanced. Examples of retained benefit may include a house acquired in the joint names but without any express declaration of trust. It is now presumed that this will be held on a joint tenancy irrespective of the fact that one party may have made a greater financial contribution (Stack v Dowden). But on separation the other party may not be allowed to retain the benefit of the half share. Similarly one party may have improved the value of a property belonging to the other by carrying out works of improvement or become involved in the other's business and thereby generated increased profits.
An "economic disadvantage" is a present or future loss and examples include loss of earnings and earning capacity, failing to secure pension provision or other savings or investments as a result of giving up or interrupting a career. The report specifically refers to the tort principles for assessing compensation for personal injury in such a case.
Remedies
These are the familiar remedies applicable to ancillary relief with one most important exception, there is no provision for periodical payments for the applicant. The Law Commission felt that a continuing financial obligation was not appropriate for separating cohabitants (as opposed of course to divorcing couples where a clean break is encouraged where possible but is certainly not universal). Otherwise the types of remedy available are a lump sum order, which may be by instalments, property transfer, property settlement, order for sale and pension share and pension attachment. The clean break settlement will be the rule. Minor children will be maintained under the Child Support Act as now.
How will these remedies be exercised?
Financial provision on divorce is based primarily on the needs of the parties in relation to the available resources and the standard of living previously enjoyed by them during the marriage. Any remaining surplus would then usually be divided equally having regard to the "yardstick of equality" (White v White). No such presumption will apply to the proposed scheme for cohabitants. A needs based scheme was specifically rejected. The court in exercising its discretion as to what order to make will need to have regard to the need to compensate for any economic imbalance which arose out of the cohabitation. This may overlap with meeting the applicant's needs generally but is not its primary purpose. A list of the discretionary factors to which the court must have regard is set out in the report. It is similar to, but not as comprehensive as, the factors contained in Section 25 Matrimonial Causes Act. An award of a lump sum or property transfer should compensate the applicant for loss of earnings or career opportunities or correct a benefit which the other party had obtained as a result of the applicant's efforts but the Commission ruled out activities which, though worthy in themselves, did not produce an economic loss to the applicant or benefit to the respondent. No order should be made, however, which would have the effect of putting the applicant in a better financial position than the respondent.
The Opt Out
It is well known that an agreement regulating financial and property matters made by separating married couples can be reviewed by the courts and may not be upheld in all cases. Similarly a pre-nuptial agreement may be persuasive but, the longer a marriage lasts and circumstances change, the more the chance is that it will be departed from in ancillary relief proceedings. However, the Commission propose that cohabitants be given the chance to opt out of the statutory scheme by means of a written and signed opt out agreement and in this case they would not be required to provide each other with detailed financial disclosure (contrast again the case of married couples entering into pre-nuptial or separation agreements). However a cohabitation agreement which, as well as covering the parties rights etc during cohabitation, also purported to cover their position on separation would only be enforceable if there were a further opt out agreement. A valid opt out agreement could then only be set aside on the grounds of "manifest unfairness" - this is intended to be very narrow in scope.
Limitation
The Commission propose a cut off point of two years from the date of separation within which a claim must be brought.
Death of a cohabitant
The Commission propose no changes to the intestacy rules or to the Wills Act so that a surviving cohabitant will not be treated as a spouse for these purposes. However it does support changes to the Inheritance (Provision for Family and Dependants) Act 1975 so as to bring the definition of "cohabitant" under that Act into line with the test for eligibility under the rest of the statutory scheme. In that case, if a cohabiting couple had a child or children together, the survivor would be eligible to apply for relief whatever the length of the relationship (currently a minimum of two years under the 1975 Act).
If and when these or similar proposals are enacted a three tier system will come into being. The ancillary relief regime for married couples and civil partners based on the widest discretion of the courts to ensure a fair outcome; the "compensatory" scheme for cohabitants with children or at least two years cohabitation and the general law for unqualified cohabitants or for those who have validly chosen to opt out of the scheme. The last category will no doubt be taking appropriate legal advice before they choose to opt out.
So lawyers may eventually need to gear up to draft "pre-non nuptial" agreements and opt out agreements with provision for the financial consequences of separation. But if there is no valid opt out and the statutory scheme applies it seems that the parties will not then be able to fall back on trust law to determine their property and finance rights - as indeed is the present case with married couples who may not exclude the Matrimonial Causes Act.
These proposals are bound to be controversial. Some may say they go too far in allowing the state to interfere in peoples lives; others may hold that they do not go far enough and should perhaps go the whole way and put qualifying cohabitants in the same position as married couples or civil partners. Whatever is finally enacted the public's need for specialist legal advice will be all the greater.
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