Divided we fall

The recent case of Suggitt v Suggitt (2011) EWHC 903 (Ch) (see box) is a reminder to private client practitioners of the risks of overlooking the issue of proprietary estoppel, when advising clients on their wills and succession planning. Questions posed to the client should dig deeper than simply asking whether there are any dependants. Otherwise the result may be a costly and damaging family dispute after the client’s death.

Equity will provide a remedy in circumstances where a claimant (A) to his detriment relies on promises or assurances made by another (B), using the doctrine of proprietary estoppel to acquire an interest in land.

Age old

The concept of proprietary estoppel has been with us for centuries. Unlike other forms of estoppel, it can be used not only as a defence but also as a cause of action. The most recent authority is the House of Lords case Thorner v Major (2009) UKHL 18 in which the claimant had done substantial work for 30 years, without pay, on a farm belonging to a relative. The relative died intestate and the claimant did not inherit the farm. The claimant was awarded a beneficial interest in the farm on the basis of proprietary estoppel.

To establish a case of proprietary estoppel, it is necessary to show all of the following elements:

(a) that an equity has arisen out of the relationship and conduct of the parties – in other words,

• B makes a promise that B will give A a right over B’s property, or encourages A in the belief that he will be given such a right;

• A relies on the promise; and

• A suffers a substantial detriment as a result of his reliance on B’s promises.

(b) the extent of the rights that A believed he would be given must be sufficiently certain.

(c) A’s belief must be reasonable in the circumstances.

(d) there must be a clear link between the promise relied upon, and the detriment suffered by A.

The relief awarded to A will be the “minimum equity required to do justice” to the claimant (per Scarman LJ in Crabb v Arun District Council (1975) 3 All ER 865). This could be, for example, the grant of an easement, a beneficial interest in land, a licence to occupy or the repayment of money spent by A.

Unconscionable behaviour by B will not in itself be sufficient, in the absence of adequate certainty about the rights A believed he would be given, and evidence to show the link between the promise and the detriment.

B does not need to have made express verbal promises or encouragement: depending on the evidence, B’s silence or failure to correct A’s mistaken belief may be sufficient. In Thorner v Major there was no express promise, but the Court found that in the circumstances, it was reasonable for the claimant to have understood his relative’s inferences and indirect statements to mean that the claimant would inherit the farm.

Setting out

Case law distinguishes between commercial and domestic contexts. Where the relationship between the parties is commercial, at arm’s length, proprietary estoppel is unlikely to arise as, in these circumstances, the parties would have access to legal advice and would normally have a written agreement. Conversely, in cases where the relationship between the parties is a domestic or family one, proprietary estoppel can apply because in these circumstances, it is unlikely that the parties would be consulting lawyers or setting out their agreement in writing.

In proprietary estoppel cases, there is not usually any written agreement between the parties. This causes some difficulty in the interpretation of the rule (section 2 Law of Property (Miscellaneous Provisions) Act 1989; see also Land Registration Act 2002) that agreements relating to dispositions of land must be in writing. There is no specific statutory exemption from the legal formalities required to create an interest in land for proprietary estoppel cases, as there is for constructive trusts.

Nevertheless, in many cases (for example, Yaxley v Gott (2000) 1 All ER 711), the courts seem able to find a sufficient overlap between proprietary estoppel and constructive trusts to justify disapplying the legislation. Further, in the judgment of Lord Neuberger in Thorner v Major, a proprietary estoppel claim is not a contractual matter, therefore it is unaffected by the statutory provisions requiring agreements relating to land to be in writing.

There are also inheritance tax consequences in proprietary estoppel cases, as the existence of A’s interest affects the value of B’s property. Does this mean that, when B has died, there is a reduction in inheritance tax due on B’s estate? There has not been a potentially exempt transfer because A’s interest did not arise as a result of a gift.

For inheritance tax purposes, HM Revenue & Customs appears to have accepted the possibility that the taxable estate could be reduced (see, for example, Moggs v IRC (2005) STC (SCD) 394). However any such claim is likely to be resisted by HMRC. Clear evidence would be required to prove that the proprietary estoppel exists. Valuing the reduction will be difficult – the court in a proprietary estoppel case would only award the minimum relief needed to do justice.

Tread carefully

The doctrine of proprietary estoppel is alive and well. The difficulty in many cases is that the claim arises after B’s death, so B is not able to give evidence – such evidence, if it were available, may be crucial in rebutting a proprietary estoppel claim.

When advising clients about their estate planning, practitioners should ask not only who the client wishes to benefit, but also whether there is anybody who might consider that a proprietary interest is owed to them. It is a difficult concept to explain to clients, but a cautious practitioner should ask appropriate questions and be alert to possible situations requiring further investigation, with a view to avoiding expensive disputes after the client’s death. n

Penny Wright is a senior associate at Manches LLP