26 June 2020
The impact of coronavirus on valuing assets on divorce
As lockdown continues, but finally shows encouraging signs of easing, we continue to see the different ways in which Coronavirus is affecting day to day practice in financial remedies work.
The first stage in financial remedy proceedings is to ascertain the value of the assets and income available for distribution between the parties. Part of this process requires that businesses and property are valued so that they are identifiable resources within the matrimonial pot for division.
Covid-19 has had a severe impact on financial markets globally. It remains to be seen whether the pandemic will lead us into a severe recession, or whether the economy will bounce back once restrictions have been lifted. According to the latest forecast from the Organisation for Economic Co-operation and Development (OECD) Britain faces the possibility of the deepest recession of any nation in the developed world. One factor identified by the OECD is the importance of the service sector to the UK economy. In particular, tourism, trade, real estate and hospitality make up a large proportion of gross domestic product and all have been hard hit by a lockdown lasting three months. This will have a noticeable effect on business and property valuations in financial remedy proceedings. What is clear, is that there will be a significant period of time during which the valuations of businesses and properties will be uncertain.
For those who already have in place expert valuations of private companies, shareholdings or property, it may be important to revisit those valuations and to ensure that they remain accurate in the current landscape. Although it is possible that this exercise will incur a supplemental fee, this is likely to be inconsequential when compared to the potential losses that may result from using a valuation that is inflated, or based upon a pre-Covid-19 market. At the very least, valuers should be asked to confirm whether their valuation should be re-visited or re-assessed. Where a valuation is about to take place, practitioners should consider whether their written instructions should include (or be amended to include) an instruction to the expert to reflect upon the impact of Covid-19 on the valuation sought.
Practitioners will need to consider where shares are invested, particularly where share values have plummeted and some companies have scrapped dividend payments for this year. According to AJ Bell, as at 11 May, 289 dividends have been cut or deferred in the UK, totalling £28.3 billion. The Institute of Chartered Surveyors have identified that while the consequences of Covid-19 remain unknown, property valuations will need to be kept under review. There is some suggestion that surveyors are likely to undervalue properties to protect themselves going forward.
It will depend on the facts of an individual case, whether it is beneficial to press ahead with negotiations when the market remains so uncertain. It is also worthwhile considering whether negotiations could be conducted on the basis of percentage shares in a possible settlement, rather than a fixed figure. That way, both parties take the risk/reward on a Wells type basis.
More careful thought will need to be given to “needs” cases. Now that the housing market has been ‘re-opened’ the number of new property sales since this time is close to pre-lockdown levels, new data from Zoopla suggests. Last year 1.175 million house purchases were recorded and Knight Frank predicts this year’s figure could be as little as 734,000, whilst Savills places its estimate in the range of 566,000 and 745,000. Knight Frank forecasts that UK prices will fall by 3% this year, but bounce back by 5% in 2021, in line with its predictions around the economy as a whole shrinking this year.
Again, consideration needs to be given to the timing of property valuations and how property is to be dealt with generally upon settlement. It may be that it will take longer to sell the family home, so any financial agreement reached will need to have built into it provision for what will happen in the interim – who will pay the mortgage, how parties will agree on the sale price and so forth.
There are many options available to parties. They could agree to put matters on hold pro tem, agree to adjourn off capital claims to be dealt with in the future or agree to share assets in specie. The reality is that the best way to proceed will be determined by the specific facts of each individual case. Given the current backlog of cases that the court faces dealing with financial remedy cases, it may well be that, despite the potential recession, that the economic landscape is clearer and valuations staring to level off by the time cases come to court.
Overwhelmingly, practitioners should ensure that they do not rush their clients’ into any decision. Myerson and Cornick (No 2) make it clear that market fluctuations are not a sufficient reason to open an agreement. It is likely that Covid-19 will not suffice to open an agreement or order, and certainly not once it became foreseeable that the pandemic would have a significant impact on the global economy. Caution is required for all practitioners, therefore, in all elements of the computation of assets available for distribution.
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This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.
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