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21 May 2019

Promises, promises

Many financial orders made on divorce contain undertakings (ie promises) made by the parties to the court to do certain things. One that is commonplace is along the lines of:

‘The [husband/wife] undertaking to the court and agreeing to use [his/her] best endeavours to procure the release of the [wife/husband] from any liability under the mortgage secured upon [address] in favour of [bank etc.]’

Such an undertaking is often given when a jointly owned family home subject to a joint mortgage is transferred into the name of one of the parties. The other party understandably wishes to be released from the mortgage obligations so as to enable them to move on and buy another property on mortgage. The words ‘best endeavours’ are included as the mortgagee may not agree to one party being released from their mortgage obligations for reasons outside of the other party’s control. Many feel the introduction of such words seriously damages the efficacy of the undertaking.

However, what happens when it is said that such a promise has not been complied with? In particular, how does the court assess ‘using best endeavours’? These issues were recently considered on an appeal to Mr Justice Cohen.

The husband and wife were in a long term relationship together and married for three years when their marriage broke down in 2009. During the course of the relationship they built up a portfolio of 127 properties, most of it heavily mortgaged. A not uncommon situation. Following the marital breakdown the couple agreed that the portfolio would, in broad terms, be divided equally between them in terms of value and income and subsequently an order was made which provided for the division. Within the order each party undertook to use their best endeavours to procure the release of the other from any liability under the mortgages secured on the properties that were to be transferred to them. That order was made in September 2015 but by the following September a good number of the properties had not been transferred into the husband’s name and he had not taken steps to remove the wife’s name from the mortgages. Questions therefore arose as to whether or not the husband had complied with the obligation to use his best endeavours.

The husband’s case was that, when looking at ‘best endeavours’ in the context of commercial contracts, a party was not obliged to enter into an arrangement or to take a step which would cause significant financial loss. He argued that the same principle applied in the present context. His barrister invited the judge to adopt the following test:

‘what would an owner of the property who was anxious to obtain planning permission, do to achieve that end? The formula… is that he is bound to take all steps in his power which are capable of producing the desired results, namely the obtaining of planning permission, being steps which a prudent, determined and reasonable owner, acting in his own interests and desiring to achieve that result would take’.

Reference was also made to another commercial case in which the judge said:

‘I do agree that a court will be very slow to second guess a commercial party on matters of commercial judgment for that reason, it may in many circumstances be extremely difficult or impossible to show that a party ought reasonably to have pursued a negotiation with a particular lender or accepted a given offer or proposed lower rate of interest – to take the examples given by the defendant’s counsel but it is important to remember that the burden of proof is on the party alleging failure to comply with that obligation’.

The view of Mr Justice Cohen was that there was nothing to prevent the husband from approaching the mortgagees and asking for their consent, either independent of or pursuant to the court order, to the release of the wife from her liability under the mortgages in exchange for the transfer of the properties into his sole name. The judge found there was no evidence and it was never suggested that he had ever taken such a step. That was seen by the judge as being an ‘egregious omission’.

It seems that the husband purported to rely on a letter from his mortgage advisers which said:

‘We are proposing to re-finance a further 42 properties to a different mortgage provider. Due to the number of properties involved, I expect to receive a mortgage offer in approximately 8-12 weeks from application (which is yet to be made). I expect that the re-mortgage process will take a further 8-12 weeks to complete.’

The letter went on to say that the new rate for the mortgages would be significantly higher than the current interest rates to the extent of costing the husband a further £7,000 per month. The husband’s objection was therefore not that he could not secure the release to the wife, but that it would be a very expensive process for him. The wife had produced evidence which suggested that there were more competitive rates available but the husband’s advisers said he would not be able to obtain these.

The judge found however that the amount of information provided by the husband to the court was inadequate in a number of respects. There were no business accounts indicating how easily the increased borrowing could be sustained; there was no evidence as to the amount by which the rental income of the property had increased; there was no indication of capital value of the portfolio. Accordingly Mr Justice Cohen found that the judge had been plainly right to find the husband had not used his best endeavours – indeed he had used no or next to no endeavour at all to obtain the wife’s release from the mortgages. It was considered that the husband could not simply rely on his mortgage broker’s assertion that a re-mortgage would be at a much greater rate. He did not appear to have sought the consent of the existing mortgagees to a release of the wife and re-mortgage was not the only way of removing her liability from her. Sales of the property were plainly an option as well.

Undertakings of this nature can often be difficult to enforce. It is therefore helpful to see the court adopt a robust stance in a situation such as this.

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