Is this the end of constructive trusts in commercial cases?

The recent judgment of the Court of Appeal in Crossco 4 Unlimited v Jolan Ltd and Others [2011] EWCA Civ 1619 has potential ramifications for disputes in relation to the ownership of commercial property. Does the relevance of constructive trusts to commercial cases survive this decision?

Traditionally, a constructive trust will arise in equity where it would be unconscionable to allow a legal owner of a property to retain the beneficial ownership of it. The law in relation to constructive trusts has developed over the years primarily in relation to issues arising from the separation of unmarried couples.

The Law Commission's recommendations for a statutory scheme for cohabiting couples have not been taken up and trust law is developing to plug the legislative gap. In Jones v Kernott [2011] UKSC 53, the Supreme Court decided that the presumption that equity follows the law could be rebutted by evidence that the parties' common intention was different either when the property was purchased or that the parties subsequently formed the common intention that their shares would change. The Supreme Court held that common intention could be objectively deduced or inferred from the conduct and dealings between the parties, but, where there was no such conduct, it could impute an intention in respect of their shares in the property which the court considers to be fair having regard to the whole course of dealings between them.

Given how the law has developed to assist unmarried couples, does the common intention constructive trust still have applicability in commercial cases?

The Court of Appeal in Crossco considered the decision in Jones and constructive trusts in the form of Pallant v Morgan equity as discussed in the decision in Banner Homes Group Plc v Luff Developments Ltd [2000] CH 372. The Court of Appeal in Banner Homes decided that a constructive trust in the form of a Pallant v Morgan equity had arisen and that it would be inequitable for a commercial party acquiring a property in its sole name to retain the property without giving effect to an informal agreement it had reached with the claimant regarding the beneficial ownership of that property where the claimant had acted to their detriment in reliance on the agreement.

The claim in Crossco arose as a result of the demerger in 2009 of the interests in a substantial commercial organisation owned by two sides of the same family. The dispute concerned a property in Manchester that was demised by lease to Piccadilly, an unlimited company. The lease contained a landlord's break clause operable on three months' notice. The landlord of the building was Crossco No 4 unlimited, which transferred the freehold of the property subject to Piccadilly's lease to Jolan Piccadilly Limited.

Piccadilly operated an amusement arcade from the ground floor of the building, the upper floors being vacant and in poor repair. The parties envisaged that, following the transfer of the freehold, Jolan would redevelop the upper floors and the parties would need to vary the existing lease or grant a new lease to Piccadilly of part of the ground floor, although no agreement as to the extent of the ground floor demise was concluded.

Jolan obtained planning permission to develop the upper floors as a hotel with retail and restaurant units on the ground floor and served notice on Piccadilly under the break clause and also under section 25 of the Landlord and Tenant Act 1954. Crossco and Piccadilly claimed that Jolan was prevented from doing so because during the de-merger negotiations Jolan had known that Piccadilly had been unaware of the break clause and a constructive trust had arisen preventing its operation.

No fiduciary duty

It was established that Jolan owed no fiduciary duty to Crossco and Piccadilly and that it had been unaware the other parties had overlooked the break clause. There was no unconscionable behaviour on Jolan's part.

Lord Justice Etherton decided that Banner Homes was based on the existence and breach of a fiduciary duty rather than a constructive trust, and, as Jolan did not owe Crossco and Piccadilly a fiduciary duty, the appeal failed. Lord Justice McFarlane and Lady Justice Arden agreed with Etherton LJ's judgment except in his analysis of Banner Homes, which they considered was based on a constructive trust. Further clarification is needed from the Supreme Court.

Etherton LJ's dissenting view was that constructive trusts had been developed to assist unmarried couples and had changed in nature so much so that they were no longer applicable in the commercial world. This approach is consistent with the stricter approach being taken in proprietary estoppel cases, which will not ordinarily be available to parties who engage in 'subject to contract' negotiations (Cobbe v Yeoman's Row Management Ltd [2008] UKHL 55).

Confining Pallant v Morgan equity to the existence and breach of a fiduciary duty would restrict constructive trust cases in commercial disputes and provide a degree of certainty for negotiating commercial parties who 'do not expect their rights to be determined in an 'ambulatory' manner by retrospective examination of their conducts and words over the entire period of their relationship' (Etherton LJ).