Apportioning the mortgage debt

In the vast majority of cases in which joint borrowers enter into a joint contract of mortgage, the personal covenants for payment will impose a joint and several liability. How this is achieved will depend on the interpretation of the contract of mortgage (it will often identify them by a defined expression such as 'Borrowers' or 'Mortgagors' and stipulate that where such expression comprises more than one person their obligations as to be joint and several). Joint and several covenantors have a restitutionary right of contribution between themselves, so that subject to any agreement to the contrary, if one has paid more than his share of the debt, he can recover the excess from the other, in equal shares. Where a party has acted as a surety only and has been called upon to answer for the debts of the principal debtor, he is entitled to an indemnity from the principal debtor, and this may arise either as an implied term of the contract between the surety and the debtor, or as a restitutionary remedy. A surety who pays the creditor is subrogated to the creditor's rights against the debtor and may be entitled to the benefit of the security belonging to the debtor and charged with the liability which the surety has been called upon to meet. He may also be entitled to an equitable right to a contribution from another surety. 

Where two persons are liable to a creditor for the same debt, but as between themselves one of them is primarily liable and the other is only secondarily liable, the debtor with the secondary liability is entitled to be exonerated from liability by the primary debtor (Highbury Pension Fund Management Co v Zirfin Investments Ltd [2014] Ch 359 Per Lewison LJ at [19]).

In practice, this most commonly arises as between a husband and wife (or cohabiting couple), where the wife stands surety for her husband’s debts, with the entitlement to exoneration being raised in a variety of different proceedings, including mortgage possession proceedings  (Graham-York v York [2015] EWCA Civ 72) , co-ownership proceedings (Day v Shaw [2014] EWHC 36 (Ch)), insolvency proceedings (Re Pittortou [1985] 1 WLR 58, Cadlock v Dunn [2015] EWHC 1318 (Ch), Armstrong v Onyearu [2018] Ch 137) or a mixture of all three (Insol Funding Co Ltd v Cowlam [2017] EWHC 1822 (Ch)). It may also arise in non-family relationships, and has been held to apply in a commercial context (Khan v Khan [2014] EWCA Civ 1077).

Where, in the common case, a wife stands surety for her husband’s debts, she is entitled to a personal right of indemnity from her husband in respect of the debt, together with a proprietary right over her husband’s share in the property, effectively to have the secured indebtedness paid out of the husband’s share of the net proceeds of sale first (Re Pittortou [1985] 1 WLR 58 per Scott J at 61F; Day v Shaw [2014] EWHC 36 (Ch); Armstrong v Onyearu [2018] Ch 137). The equitable right to exoneration rests upon the express, implied or presumed intention of the parties that the wife is to stand surety only for the debts of her husband, and that the burden of the borrowing should fall on the husband, but this may be negated to the extent that the wife has obtained a benefit from the borrowing. So, in Re Pittortou [1985] 1 WLR 58, where a husband and wife executed a legal charge over the jointly owned matrimonial home to secure a bank account in the husband’s name, it was held that the wife’s equity of exoneration should be confined to payments out of the account which did not have the character of payments made for the joint benefit of the household (per Scott J at 62H, with the consequence that the payments made for their joint benefit were to be discharged first out of the proceeds of sale before division, per Scott J at 63C).

The idea that husbands and wives function as a family unit and derive their livelihood and consequently a joint benefit from the husband’s borrowings is a particular theme in many of the authorities (Paget v Paget [1898] 1 Ch 47; Hall v Hall [1911] 1 Ch 487; Re Pittortou [1985] 1 WLR 58), with the court considering all the circumstances of the case, including whether and to what extent the parties pool their resources, manage their financial affairs jointly and share in their prosperity (Lemon v Chawda [2014] BPIR 49; Graham-York v York [2015] EWCA Civ 72).

Of more difficulty are those cases in which the wife may have obtained only an indirect, as opposed to a direct, benefit. In Armstrong v Onyearu [2018] Ch 137, following a review of the authorities, the Court of Appeal concluded that English law has not regarded an indirect benefit to be itself sufficient to deny a right of exoneration to the surety. The benefit must be direct or closely connected to the secured indebtedness. In general, the benefits must be capable of carrying a financial value ([2018] Ch 137 per Richards LJ at [82], [83]).

Where, on the evidence, the court can only identify a proportion of the secured indebtedness which represents monies paid or applied for the benefit of the husband, but not the rest, it may limit the wife’s right to exoneration accordingly (in Cadlock v Dunn [2015] EWHC 1318 (Ch) a husband and wife mortgaged the jointly owned matrimonial home in the sum of £196,500 of which £150,700 was used to purchase the husband's half share back from his trustee in bankruptcy, but there was no evidence about how the balance was paid or applied, so the court limited the wife's right to exoneration to the sum loaned in respect of the acquisition of the husband's half share plus interest). In, perhaps, an exceptional case where there is no evidence at all to assist the court in ascertaining what, for the purposes of the equity of exoneration, is the express, implied or presumed intention of the parties, and that the only conclusion is that one partner has secured her interest without any arrangement having been made, acting purely as a volunteer, no equity of exoneration will arise (Insol Funding Ltd v Cowlam [2017] EWHC 1822 (Ch)).

In terms of practice and procedure, a defendant surety (the wife in the examples referred to) who wishes to assert an equitable right of exoneration in standard residential mortgage possession proceedings will need to counterclaim for declaratory relief as to the nature and extent of her right of exoneration against the mortgagee (under CPR 20.4(2) a defendant may make a counterclaim against a claimant without the court's permission if she files it with her defence or at any other time with the court's permission), and bring an additional claim against the co-defendant principal debtor (the husband in the examples referred to) for similar relief, together with (where necessary) a declaration as to the nature and extent of her beneficial interest (a defendant who wishes to counterclaim against a person other than the claimant must apply to the court for an order that that person be added as an additional party under CPR 20.5(1)).