Suggested Answer to Exercise 11.4 (Part 3)
A Detailed Answer Plan
Since 1 January 1997, whenever two or more people own land concurrently there will be a trust of land as defined by section 1 of the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA). The rights of ownership are divided between the legal owners (the trustees) and the beneficial owners, even when they are the same people. TOLATA contains detailed provisions setting out the duties and powers of the trustees and regulating the relationship between all the co-owners.
There are two types of co-ownership of land: joint tenancy and tenancy in common. It is important to distinguish between the two types. In a joint tenancy all of the joint tenants own the whole, whereas a tenant in common owns a share in the land (albeit undivided from the other shares). Consequently, when a joint tenant dies, the remaining joint tenants continue to hold the whole title by survivorship, but when a tenant in common dies, her share passes according to her will or the rules of intestacy. Joint tenancy requires the four unities of possession, time, title and interest. A tenancy in common (where the property is held in undivided shares) requires only unity of possession.
Since 1 January 1926 the trustees can only hold the legal estate as joint tenants (LPA 1925, s 1(6)). However, beneficial interests can still be held as joint tenants or as tenants in common. A beneficial joint tenancy can be ‘severed’ to convert it into a tenancy in common. It is impossible to sever a joint tenancy at law (LPA 1925, s 36(2)).
The Interests of the Parties in the Land.
If the five friends were all parties to the purchase the house as a single transaction, it seems probable that the four unities of possession, interest, title and time are present in this case. The purchase of the house in joint names by the five friends will automatically create a trust of land (LPA 1925, ss 34, 36; TOLATA 1996, s 1). If the four unities are not present, then the five friends will not be co-owners of the house, but will each hold separate interests in it (A G Securities v Vaughan  1 AC 417.
It is not possible to create a tenancy in common at law (LPA 1925, ss34, 36) so the legal title will be held as a joint tenancy. Neither is it possible for all five of the friends to be joint tenants at law, as section 34(2) of the LPA 1925 restricts the number of trustees of a trust of land to no more than four. Consequently the first four of the friends named on the deed of transfer (assuming that they are willing and able to act) will hold the legal title as joint tenants on trust for all five of them. It is likely that all of the friends are aged over 18 (they have just graduated), so assuming that the names appear on the deed in the same order as stated in the question, the four trustees will be Denise, Michael, Florence and Jacob.
The five friends may hold the beneficial interest in the land either as joint tenants or as tenants in common. The normal rule is that equity follows the law, with the beneficial interest being held as a joint tenancy (this principle was recently restated in the House of Lords case of Stack v Dowden  2 AC 432). However, a beneficial tenancy in common can be created expressly, or by the use of words that indicate that the beneficial interest is to be divided into shares (Barclay v Barclay  2 QB 677). The question contains no information about the wishes of the parties on this point. In the absence of evidence to the contrary, equity will assume a tenancy in common where the parties contribute unequally to the purchase price, are business partners or are lending money on a mortgage (Malayan Credit Ltd v Jack Chia-MPH Ltd  AC 549). The third of these circumstances is not relevant here. The friends contributed equally to the deposit and mortgage liability, and there is no indication that any of them were in business together. It seems highly probable, therefore, that immediately after the purchase of the house, legal title was vested in Denise, Michael, Florence and Jacob (as joint tenants) holding on trust for themselves and Ben as beneficial joint tenants.
Denise’s act of selling her share to Amanda is clearly inconsistent with her continuing as a beneficial joint tenant. Indeed, assigning her interest in this is a classic example of severance by acting upon one’s share, one of the three methods of severance identified in Williams v Hensman (1861) 1 John & H 546 and preserved by section 36(2) of the LPA 1925. The result of Denise’s assignment is to sever her beneficial share. However, as Denise cannot unilaterally deal with the legal title, the sale of her interest to Amanda will have had no effect at law, and Denise remains a trustee. Therefore, Denise, Michael, Florence and Jacob hold the legal title on trust, with the beneficial interest being divided between Amanda (one-fifth) as tenant in common with Michael, Florence, Jacob and Ben, who hold the remaining four fifths as joint tenants between themselves.
The Division of the House
The general rule is that trustees must act unanimously. Consequently, no changes can be made to the house without the consent of Denise (notwithstanding that she is sailing around the world) and Jacob. The trustees are also required to consult Ben and Amanda (who are beneficiaries but not trustees) by section 11 of TOLATA. As the parties cannot come to an agreement, Florence and Michael could make an application to the court under section 14 of TOLATA, asking the court to order the trustees to exercise their powers of management of the house and divide it into maisonettes.
The first question is whether the trustees actually have the power to divide the house in this way, not least because it will effectively exclude some of the beneficiaries from part of the house. In the case or Rodway v Landy  Ch 703 the Court of Appeal held that the trustees’ powers to restrict the rights of beneficiaries to occupy the trust land under section 13 of TOLATA did allow them to divide a building, provided that the building was suitable for physical partition. Rodway v Landy concerned a doctor’s surgery, but there seems to be no reason why the same principle would not apply to this case: although the house is being used as a home, the beneficiaries are not all living together as a single family.
In deciding what order to make under section 14 of TOLATA, the court must have regard to the circumstances of the case, including the factors listed in s.15(1). TOLATA does not assign any rank or relative importance to the four factors set out in s.15(1). All four of the factors are potentially relevant in this case.
The original intention of the persons who created the trust (s.15(1)(a)) was to share the house while they established themselves in their careers. If this is construed narrowly, the division of the house into two maisonettes would be contrary to this intention, and to the purposes of the trust (s.15(1)(b)). However, it might also be argued that to allow the status quo to continue would cause a total failure of the purposes of the trust (possibly forcing a sale) and that allowing the house to be divided would be more proportionate to the circumstances.
Section 15(1)(c) requires the court to take into account the welfare of Florence and Michael’s child. There are few, if any, reported cases in which the court has given this factor significant weight. This is often because the parties have failed to produce detailed evidence of how the children will be affected (as in First National Bank Plc v Achampong  EWCA Civ 487). However, if Florence and Michael can provide substantial evidence of how the division of the house will benefit their child the court should take this into account, although it will not automatically outweigh the other factors. In particular, the court will wish to be sure that the division of the property will not damage the interests of the lender who provided the mortgage to the four friends (s.15(1)(d)). At present the courts seem to give particular regard to the interests of secured creditors (at least in cases concerning a proposed sale of the land), even where, as in Achampong there are infant children to be considered. In this case, the interests of the mortgagee are likely to depend upon whether the division of the house will increase its potential value, and make the sale of the house easier or more difficult should the lender be forced to take action against the mortgagors. In fact, the terms of the mortgage will almost certainly prohibit any major alterations to the house without the mortgagee’s consent. This right is quite separate from the trustees’ powers under TLATA, so there is little point in Florence and Michael making a s.14 application unless the mortgagee has already agreed to their proposals in principle.
Ben’s Potential Insolvency
A mortgagee is entitled to apply to the court under section 14 of TLATA, and it is possible that the mortgagee in this case may do so (with a view to the property being sold) if it is concerned that Ben’s potential insolvency puts the repayment of the mortgage at risk. If the mortgagee does apply, the court will almost certainly give priority to its interests, not least because if Ben is declared bankrupt it is virtually inevitable that the court will order the sale of the house if asked to do so by Ben’s trustee in bankruptcy (Alliance and Leicester plc v Slayford (2000) 33 HLR 743, see below).
If Ben is declared bankrupt, his beneficial interest (which is transferred to his trustee in bankruptcy by operation of law) will be severed from that of Michael, Florence and Jacob (who will continue to hold the remaining three fifths as joint tenants between themselves).
Section 15(4) of TOLATA provides that where a section 14 application is made by the trustee in bankruptcy of one of the parties (Ben, in this case) the court must consider the case under section 335A of the Insolvency Act 1986. Section 335A replaces the factors in section 15(1) of TOLATA by a requirement that the court has regard to the interests of the bankrupt’s creditors and all the circumstances of the case except for the needs of the bankrupt. Section 335A does give limited protection to a bankrupt’s spouse, civil partner and any children, but that does not seem to be relevant to Ben. In any event, once a year has passed since the bankruptcy was declared, the court must assume that the interests of the bankrupt’s creditors outweigh all other considerations, unless the circumstances of the case are exceptional (s.335A(3)). The circumstances will only be ‘exceptional’ if they are unusual – it is not enough that the sale of the house would be disastrous for the other co-owners, unless the consequences of the sale went beyond the normal consequences of the bankruptcy of a co-owner: Re Citro  3 All ER 592 as explained in Barca v Mears  EWHC 2170 Ch. There is no indication that the consequences would be sufficiently exceptional in this case.
If Ben is made bankrupt, the other co-owners would be best advised to try to purchase Ben’s beneficial interest from his trustee in bankruptcy, if they wish to avoid the property being sold.