Constructive thinking

In Yeoman's Row Management Ltd v Cobbe [2008] UKHL 55, Lord Scott intimated that an agreement for the acquisition of an interest in land, which did not comply with the prescribed formalities contained in s.2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 Act, could not be saved via the application of proprietary estoppel. Albeit obiter, this proposition has recently been followed and applied by Peter Smith J in Hutchison v B & DF Ltd [2008] EWHC 2286 (Ch) which involved oral agreements made between a tenant and landlords for the grant of three-year leases in respect of certain industrial units. While s.2(5) expressly makes an exception for 'resulting, implied or constructive trusts', there is (significantly) no reference to proprietary estoppel in the subsection. An estoppel can only operate, therefore, in appropriate circumstances, to save the failed contract if the facts also give rise to a constructive trust so as to bring the transaction within s.2(5).

This was, indeed, the view taken in the earlier case of Kinane v Alimamy Mackie-Conteh [2005] EWCA Civ 45, where the Court of Appeal concluded that the policy underlining s.2(1) would not be violated if the unconscionability underlying an estoppel claim also gave rise to a constructive trust within s.2(5). Again, most recently, the court in Herbert v Docherty [2008] EWHC 1950 (Ch) has reaffirmed that 'the analysis. . . may be that the court gives effect to the proprietary estoppel by recognising or imposing a constructive trust, and it is this which enables s.2(5) to apply': ibid, para. 15.

Significantly, the essential difference, in this context, between a proprietary estoppel that does not also give rise to a constructive trust, and one that does, is the element of agreement or expression of common understanding as to the existence of a proprietary interest: see, Kinane, at para.50. This element of agreement or common understanding is, of course, crucial to the establishment of the so-called 'common intention' constructive trust and, in Etherton J's view (at first instance), was held to be present on the facts in Yeoman itself. In other words, the learned judge accepted that, on his findings of fact, the claimant was entitled (apart from any claim in estoppel) to claim relief under a constructive trust. Unfortunately, however, this was not the approach taken by the House of Lords who preferred to characterise the relevant species of constructive trust in this case as that applying to joint venture agreements (that is the so-called

'Pallant v Morgan' equity). On this basis, the House of Lords emphatically rejected the notion that the claimant could succeed in his claim to a beneficial interest by the imposition of a constructive trust.

Common intention constructive trust

The facts in Yeoman may be briefly stated (for a fuller account, see SJ 5August 2008). The claimant reached an 'in principle' oral agreement to buy a block of flats in Knightsbridge, London, from the defendant for redevelopment into six town houses. Despite there being no legally binding contract within s.2(1) of the 1989 Act, the claimant incurred considerable expenditure in obtaining planning permission for the development of the property with the knowledge of the defendant and in reliance on various assurances that, if he obtained the requisite permission, the sale would be honoured. When permission was granted, however, the defendant sought to resile from the agreement saying that the expense incurred by the claimant was entirely at his own risk.

As mentioned earlier, Etherton J, as an alternative to an equity based on proprietary estoppel, concluded that the claimant was entitled to claim relief under a common intention constructive trust: [2005] EWHC 266 (Ch), at para.172. In this connection, earlier case law had already confirmed that there was a 'close overlap' between proprietary estoppel and constructive trust and that, where the two doctrines overlapped, a claimant could rely on the saving contained in s.2(5) of the 1989 Act so as to render the transaction valid: Yaxley v Gotts [2000] Ch 162. Interestingly, the learned judge was not persuaded to draw any distinction between pre-acquisition cases (that is, where the parties' arrangement or understanding precedes the acquisition of the relevant property) and post-acquisition cases (that is, where the arrangement or understanding is reached in relation to property already owned by one of the parties). In his view, the formulation of the essential elements of the constructive trust as enunciated by Lord Bridge in Lloyds Bank plc v Rosset [1991] 1 AC 107 in referring to 'any agreement, arrangement or understanding' reached 'at any time prior to acquisition, or exceptionally at some later date' was apposite to either type of acquisition case: ibid, at para.206. The imposition of a constructive trust did not, therefore, depend on the existence of an agreement which was sufficiently certain to be enforceable as a contract.

Joint venture constructive trust

This approach, however, was emphatically rejected by the House of Lords. Lord Scott (who gave the leading speech) approached the constructive trust issue by reference to the so-called 'joint venture' cases relating to land (see, Pallant v Morgan [1952] Ch 43). Having, however, characterised the relevant equity in this way, his Lordship then proceeded to reject its application to the facts. In this connection, the property in Yeoman was never joint venture property because it was already owned by the defendant some years before negotiations had begun with the claimant. By contrast, the equity in the Pallant v Morgan scenario arose because of the very fact that the defendant had acquired the property in circumstances where it would be inequitable to allow him to treat it as his own: London & Regional Invetsments Ltd v TBI Plc [2002] EWCA Civ 355. On this reasoning, the Pallant v Morgan equity had no application and the claimant could not rely on a constructive trust in order to avoid the difficulty created by s.2(1) of the 1989 Act. In Lord Scott's words (at para. 38):

' . . . a claim for the imposition of a constructive trust in order to provide a remedy for a disappointed expectation engendered by a representation made in the context of incomplete contractual negotiations is, in my opinion, misconceived and cannot be sustained by reliance on unconscionable behaviour on the part of the representor.'

This approach is, of course, in marked contrast to the view taken by Etherton J (at first instance), who felt no difficulty in holding that a common intention constructive trust could be utilised to give effect to the claimant's expectation even though based on a incomplete agreement rendered void for non-compliance with s.2(1) of the 1989 Act.

Other case law

Given this apparent divergence in approach, the question is whether there are any circumstances in which the courts will apply the constructive trust doctrine in order to avoid the consequences of s.2(1).

Apart from the Pallant v Morgan scenario, it is submitted that the constructive trust may be invoked in circumstances where the parties' arrangement is sufficiently defined so as to meet the test set out the by House of Lords in Rosset. In Yaxley, for example, Robert Walker LJ held that the oral agreement made between the claimant and the defendant's father was definite enough to satisfy the Rosset test and, therefore, sufficient to confer on the claimant a beneficial interest under a constructive trust. That being so, the claimant could rely on the saving contained in s.2(5) of the 1989 Act

without relying on an estoppel to uphold the agreement. The difficulty, of course, lies in seeking to reconcile this result with the House of Lords ruling in Yeoman. The answer, no doubt, lies in the fact that in Yeoman, the claimant's agreement was largely incomplete and speculative in so far as there were a number of terms which remained still to be agreed '“ his expectation of an enforceable contract was entirely contingent on these further terms being agreed. In essence, therefore, he never expected to acquire an interest in the property otherwise than under a legally binding contract and, hence, there was no room for the imposition of a constructive trust.

Another obvious area of overlap between estoppel and the constructive trust doctrine, expressly identified by the Court of Appeal in Yaxley, is that of a joint enterprise for the acquisition of land (for example, the family home) where the parties (a married or unmarried couple) decide to set up home together. Here too, the claimant must point to some 'agreement, arrangement or understanding' that the property is to be shared beneficially and that 'he or she has acted to his or her detriment . . . in reliance on the agreement' in order to give rise to a constructive trust: Rosset, at p. 132. Interestingly, in DS v SS [2006] EWHC 2892 (Fam), Sumner J held that an oral agreement following the parties' divorce, under which the husband gave up his interest in the family home in exchange for the wife giving up her right to maintenance, amounted to a constructive trust barring the husband from subsequently enforcing a court order that had granted him the interest in the home. His Lordship held that, as the proprietary estoppel in favour of the wife was based on an agreement, it also gave rise to a constructive trust which, under s.2(5) of the 1989 Act, ousted the usual requirement of s.2(1).

Similar reasoning has been held to apply recently in the context of a joint enterprise to purchase commercial property. In Parris v Williams [2008] EWCA Civ 1147, two business partners discussed the possibility of purchasing two flats in a residential block with a view to converting them into self-contained units and letting them out. In the end, the appellant purchased both flats in his sole name, paying the deposit and taking out mortgage loans for the balance of the purchase price. Although the respondent made no financial contribution to the purchase, he argued that the flats had been bought by the appellant as a joint enterprise and that he had paid half the renovation outgoings, fully decorated both flats and paid the annual maintenance charge on one flat. The Court of Appeal held that the facts gave rise to a common intention constructive trust which was enforceable under s.53(2) of the Law of Property Act 1925. In particular, it was unnecessary to show that the relevant arrangement or agreement involved the making of a bargain between the parties and that the claimant had performed his part of that bargain. It was enough simply that the parties had entered into an arrangement and that the claimant had acted to his detriment (or significantly altered his position) in reliance upon the arrangement. Essentially, therefore, the Court of Appeal reaffirmed the principle in Rosset that the two essential elements to establish a constructive trust were (1) common intention and (2) detrimental reliance.

Conclusions

The following conclusions may be drawn:

The effect of s.2(1) of the 1989 Act is that no contract for the sale or other disposition of an interest in land can come into existence if the parties fail to put it into writing;

Section 2(5), however, expressly provides that nothing in s.2 affects the creation or operation of resulting, implied or constructive trusts;

Consequently, there is nothing to prevent a party relying on a constructive trust to circumvent the requirements of writing under s.2(1);

Equally, a party alleging a proprietary estoppel can rely on s.2(5) provided that the same facts would ground a constructive trust of the kind recognised either in Pallant v Morgan (that is, where the parties acquire the property as result of a joint venture) or Rosset (that is, where the party who has acted to his detriment has done so in reliance on an agreement or understanding between the parties);

The relevant agreement does not have to involve the making of a bargain between the parties but it must give rise to an expectation of acquiring an interest in property; and

An expectation arising from a mere speculative arrangement where the terms have yet to be formally agreed between the parties will not give rise to the imposition of a constructive trust.