Constructive trusts

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Question A - constructive trusts Constructive trusts are Trusts that Arise By Operation of the Law (TABOLs). This means that the law has imposed these trusts under certain circumstances. The law automatically creates an equitable title for beneficiaries in the property of the legal owner. They, are then, distinct from intentional trusts (which the settlor creates himself by using his power of ownership to create a trust). Constructive trusts may be imposed by the law in three circumstances; where a vendor of property fails or refuses to execute the necessary documents to transfer legal title to the recipient, equity states that the vendor holds the property on constructive trust for the recipient from the moment the contract of sale is signed. Secondly, where legal title to property is transferred to a third party in breach of an existing trust, the recipient can be described as a constructive trustee so that the original beneficiary can still claim his equitable interest. Finally, a constructive trust arises where individuals acquire an interest in another’s property because of their “past dealings or relationship with the owner.”[1] This is the category which is relevant in this instance, and the most common one of its type is the constructive trust of the family home. In basic terms, a constructive trust of the family home arises where two people (usually spouses) cohabit, and although the legal title to the property is in the name of only one, the other relies on an informal agreement of joint ownership to his or her detriment. This party will acquire an equitable interest in the property under a constructive trust. The individual must show, however, that she has “altered her position in reliance upon the agreement … thereby acquiring an enforceable interest … by way either of a constructive trust or a proprietary estoppel” (Lloyds Bank plc v Rossett). The law alters the legal owner’s property rights in what is usually the most significant asset owned. Oakley’s comment (above) reflects an ambivalence within the legal profession towards the constructive trust as a whole, and in particular those of the family home. This is based upon the fact that it is a largely arbitrary device, imposed or withheld in each case on the merits of that case, based on a consideration of what is just and equitable. The constructive trust, then, is a creature of equity which seeks to bring justice where the strict letter of the law would deliver an unjust solution. By its nature, then, it is unpredictable, which accounts for the suspicion surrounding it. Added to this is the fact that the power of equity in this case has not been informed by entirely coherent principles. A constructive trust may be imposed subject to proof of three elements. The first of these is a bargain (or common intention). This can be express or implied; that is to say the courts may infer a common intention from the parties’ conduct (Gissing v Gissing, per Lord Diplock). This is the so-called ‘common intention’ approach, which was laid down in Pettitt v Pettitt. Secondly, there must be a demonstrable change in position based upon any agreement by the person seeking to establish an equitable interest. This is usually shown by proving that the person incurred a detriment or made a ‘material sacrifice’ in response to some bargain for beneficial entitlement (Gissing v Gissing). This change in position will usually include financial contributions or “the devotion of onerous labour to a joint venture”.[2] Finally, there must be what is known as ‘equitable fraud’, or the unconscionable denial of rights. This arises where the legal owner tries to deny any bargain (which has been established) by “asserting the absolute, exclusive or unqualified nature of his own rights.”[3] These three requisite features were most clearly displayed in the case of Bannister v Bannister, where a lady conveyed her freehold interest in two properties to her brother-in-law at low rates, on the oral condition that she should be allowed to live in one of them rent-free for the remainder of her life. When the brother-in-law sought to evict her, the court held that the brother-in-law held his legal title on constructive trust, thereby giving effect to the beneficial life interest granted to the lady. A striking feature of the constructive trust of the family home is its similarity to proprietary estoppel, which is another means by which rights in land may be created informally. It has even been suggested that there is no real difference between these two strands of doctrine (Birmingham Midshires Mortgage Services Ltd v Sabherwal). It is also the case that the significance of the constructive trust in the family home has been much reduced in the case of spouses (its real significance being found in the case of other unmarried cohabitees, including same-sex couples, parents and unmarried children and others)). This is because in the case of spouses, it would commonly arise on the breakdown of a relationship, and the courts are empowered by statute to alter property rights in these circumstances.[4] A key feature of Pettitt v Pettitt was the court’s reluctance to afford the courts a general jurisdiction to rearrange the property rights of cohabitees on the breakdown of their relationship in whatever way seemed “fair and just in all the circumstances”. This pre-empted much of the uncertainty that could have arisen as a result of this type of constructive trust, but other areas persist. In many cases, for example, it is unclear whether the extent of reliance has matched what was expected under the parties common understanding. This problem was identified by Browne-Wilkinson VC in Grant v Edwards. Although there is a degree of uncertainty surrounding the constructive trust, then, and a high level of overlap with proprietary estoppel, the uncertainty ha been reduced by the courts’ general reluctance to afford themselves an open-ended jurisdiction to alter property rights, as seen in Pettitt v Pettitt, and the fact that the various developmental strands of the doctrine have been drawn together in the case of Lloyds Bank plc v Rossett, in which the House of Lords delivered a unanimous verdict. As Penner states, this is now the “authoritative enunciation” of the basic principles, and has reduced the lack of certainty considerably.[5] Question B - problem question In this scenario, the property 8 Emerald Way is purchased in the sole name Mary. That means that she has sole legal title to the property, which in turn means that Philip does not own the legal title. At first sight, then, this situation looks promising for Mary when the relationship breaks down, as it would suggest that she, as sole legal owner, can exercise those rights associated with ownership that one would usually expect; most significantly in this scenario, the power of sale. The situation is not that simple, however. Judging by the facts of the case, it seems certain that the courts would conclude that a constructive trust had arisen in favour of Philip. There is a further problem for Mary which relates to the contract of sale into which she has entered with Sam. This will be dealt with in turn, but it certainly seems likely that Philip will come off best. A constructive trust of the family home arises when three conditions are met. Firstly, there must be a bargain (or common intention) between the parties. This may be implied (inferred from the parties’ conduct) or express. In this situation, it does not appear there was an express bargain made. The fact that there was a specific reason for the legal title to be put in the sole name of Mary (in order to avoid claims from creditors endangering the property if Philip’s business ran into difficulty), however, could be seen to constitute a bargain. It is, however, sufficient that there is a common intention to “confer or share some definable beneficial interest in the property concerned” (Bannister v Bannister). As it appears that it was the parties’ intention to share the beneficial ownership of the property, this condition of the constructive trust is met. This is a positive situation for Philip, but not so positive for Mary. The second aspect of a constructive trust is that the party seeking to establish a beneficial interest has changed his or her position in reliance upon the bargain (Gissing v Gissing). This additional requirement is a response to the statutory provision that an oral declaration of a trust of land is unenforceable.[6] Again, it seems likely in the present scenario, that Philip would have little trouble establishing detrimental reliance upon the bargain. We are not informed how the 5% deposit of £5,000 was paid, but it seems likely that it was paid in equal shares by Mary and Philip. On top of this, the utility bills and general household expenses have been paid by Philip. These may be considerable. The fact that he bought the couple’s new car, and funded their recent holiday to Corfu would add to this, as it has been held that “indirect expenditure on the household or otherwise - comprise a sufficient change of position for the purpose of founding … a constructive trust.”[7] If Philip is relying upon an implied bargain to share beneficial ownership as opposed to an express agreement, as seems likely in this case, the courts will require much more stringent proof of detriment on his part. The courts would largely be preoccupied with contributions of a monetary nature. In Lloyds Bank plc v Rossett, Lord Bridge doubted that anything less than “direct contributions to the purchase price” would be sufficient evidence of a detrimental change in position. It seems to be in favour of Mary’s case that the only direct financial contribution which Philip made to the purchase price was, possibly, half of the initial 5% deposit. It is significant that although it seems likely that the courts would find there to be a constructive trust in favour of Philip, that does not necessarily mean that they would be found to own the beneficial interest in equal shares. The court would be free to attribute whatever ownership shares it thought appropriate and fair (Midland Bank plc v Cooke). This would argue in favour of Mary, as she has undoubtedly made more financial contribution to the property through the mortgage repayments that Philip has. In Eves v Eves, for example, the claimant redecorated the entire house, demolished a garden shed, and prepared the garden for turfing. The Court of Appeal awarded her a one-quarter share under a constructive trust. From Sam’s point of view, the constructive trust in favour of Philip will probably be found to bind Sam as well (as happened, for example, in Williams & Glyn‘s Bank Ltd v Boland). Before entering the contract for sale, Sam should have made such enquiries as were reasonable to discover Philip’s interest. If a constructive trust is found in favour of Philip, then, he remains the beneficiary while Sam would become the constructive trustee. Mary would be liable to Philip for whatever monetary loss Philip has incurred. In summary, then, Mary’s position with regard to claiming sole ownership of the property is not very strong. Although she is the sole legal owner, it seems likely that the courts will impose a constructive trusteeship on her in relation to Philip’s beneficial share of the property. This may not be a 50% share, but it is certainly likely to be something. The contract of sale is subject to the constructive trust, and Philip would have a direct money claim against Mary for losses suffered. BIBLIOGRAPHY Statutes Law of Property Act 1925 Matrimonial Property and Proceedings Act 1970 Matrimonial Causes Act 1973 Cases Bannister v Bannister [1948] 2 All ER 133 Birmingham Midshires Mortgage Services Ltd v Sahara [2000] 80 P & CR 256, CA Eves v Eves [1975] 1 WLR 1338, CA Gissing v Gissing [1971] AC 886 Grant v Edwards [1986] Ch 638 Lloyds Bank plc v Rossett [1991] 1 AC 107 Midland Bank plc v Cooke [1995] 4 All ER 562, CA Pettitt v Pettitt [1970] AC 777 Williams & Glyn‘s Bank Ltd v Boland [1981] AC 487 Secondary sources Gray, K., and Gray, S.F., Elements of Land Law (Oxford, 2005) Martin, J.E., Modern Equity (London, 2001) Penner, J.E., The Law of Trusts (LexisNexis, 2004)

Footnotes

[1] Penner, J.E., The Law of Trusts (LexisNexis, 2004), p.127 [2] Gray, K., and Gray, S.F., Elements of Land Law (Oxford, 1995), p.937 [3] Gray, K., and Gray, S.F., Land Law (Butterworths, 2003), p.288 [4] Matrimonial Property and Proceedings Act 1970, s37, and Matrimonial Causes Act 1973, s24 [5] Penner, p.133 [6] Law of Property Act 1925, s53(1)(b) [7] Gray and Gray, p.297
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