Borrowing capacity deemed a resource that can be considered in cases for financial provision for children under Schedule 1 of the Children Act 1989

ZU v LT [2024] EWHC 778 (Fam)

Schedule 1 to the Children Act 1989 (Schedule 1) makes limited financial provision for the children of unmarried parents. The courts powers to make financial provision for the benefit of children under Schedule 1 includes orders for periodical payments, secured periodical payments, lump sums, settlement of property and the transfer of property.

When the court is looking at such matters, it must consider all of the circumstances of the case. The court will have regard to the income, earning capacity, property and other financial resources available to each person or those they are likely to have in the foreseeable future. The court should consider the financial needs, obligations and responsibilities which each person has or is likely to have in the foreseeable future and the financial needs of the child.

In the case of ZU v LT [2024] EWHC 778 (Fam), the parents met in 2007 and had a relationship of 3-5 years. They rekindled their relationship in 2015 and permanently separated in 2019. At the time of the case they had two children from the relationship, aged 7 and 5 years old respectively.

The mother of the children lived in a two-bedroomed apartment owned by the father in London. This had a value of approximately £935,000. The father lived in a nearby four-bedroom property that had a value in excess of £1.2million. Both properties were owned by the father and both were heavily mortgaged. The father was making the mortgage repayments.

In terms of income, the father was the founder of a hedge fund and had a payment package of £100,000 gross per annum plus a 5% share of management fees and a 5% share of performance fees. The mother was a former professional tennis player that undertook some freelance work and worked part-time for a charity in which she was the CEO.

The children were subject to private law proceedings that culminated in a Child Arrangement Order that both children spend exactly equal time with both parents. As a result, the CMS made a nil child support assessment.

The mother issued Schedule 1 proceedings in May 2021 and by 2022 the parties had agreed to resolve these proceedings in the forum of arbitration. The arbitral award was issued in August 2022 and detailed the parties’ agreement that the apartment the mother lived in would be sold. The father agreed to contribute the gross proceeds of sale of the apartment towards the purchase of a new property, including the mortgage capacity which he had previously utilised.

The mother’s housing need for herself and the children, during their minority, was placed in the region of £1.1 – 1.13 million. This included all purchase, redecoration and removal costs. To achieve this a joint mortgage of £870,000 was required.

The father applied to challenge this award on several grounds. One of these was that the father contended the arbitrator did not have the necessary power to require the father to borrow money by effectively using his mortgage capacity. The father claimed his income had reduced to £66,000 and the hedge fund may be wound up. The father was successful in his application that was decided by Her Honour Judge Evans-Gordon. The Judge held that the court does not have the power under Schedule 1 to order a paying party to borrow money for the purposes of effecting a settlement of property order.

The twists and turns in this case did not end here. The mother then sought to appeal this order on various grounds. The main one was that Her Honour Judge Evans-Gordon was wrong in stating there is no power to settle property for the benefit of a child, under a Schedule 1 application, by requiring mortgage borrowing for its funding.

On appeal, Cobb J ruled that borrowing capacity by way of a mortgage is a “resource” of one or both of the parties under paragraph 4 of Schedule 1, just as it is under section 25(2)(a) of the Matrimonial Causes Act 1973 (MCA 1973). Therefore, Her Honour Judge Evans-Gordon had incorrectly considered that the financial “resources” of the parties were only those to which the parties had a clear right.
This is a very important case that clarifies that in Schedule 1 proceedings, the parties’ respective mortgage capacities are a “likely” resource available to them to be considered by the court. This should be seen in the exact same way as mortgage capacity is treated as under section 25(2)(a) of the MCA 1973.

Additionally, it is perhaps has been understood that Schedule 1 applications are only to be made when the paying party is very wealthy. However, Cobb J rightly noted that many Schedule 1 cases involve parties with limited means who are likely to need to borrow funds to help them to acquire or settle property.

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