Herbert v Doyle: certainty and the common intention constructive trust

Introduction

Section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 requires agreements for the sale or other disposition of an interest in land to be in writing and section 2(3) requires the written agreement to be signed by or on behalf of the parties to the agreement. Land contracts that do not comply with section 2(1) are invalid. Section 2(5), however, provides that resulting, implied or constructive trusts are not subject to these formality requirements.

The common intention constructive trust arises when A, the owner of an estate in land, enters into an agreement with B to the effect that B will have a beneficial interest in respect of that estate and B relies on that agreement to his detriment (Lloyds Bank v Rossett [1991] 1 AC 107, p. 132). While the common intention constructive trust often arises in the domestic context, it  can arise even out of commercial bargains entered into between sophisticated business people. The necessary agreement can even arise when the parties have negotiated a detailed formal agreement which they expect to be in a form that would comply with section 2(1) but which does not do so. This seems surprising since the constructive trust then seems to offer a relatively easy way to by-pass the formalities requirements of section 2.

In fact, it is not so easy to persuade a court that the agreement necessary to the common intention constructive trust has been formed. If the parties intend to enter into a formal written agreement, their failure to do so will usually be a signal that the parties were still negotiating and that their mutual assurances were, in effect, ‘subject to contract’. If some details of the informal agreement have not been fully articulated and agreed upon, there may be an argument that the ‘agreement’ is not sufficiently certain or complete to be made enforceable by means of the common intention constructive trust.

In Herbert v Doyle ([2010] EWCA Civ 1095), the English Court of Appeal had to consider whether a commercial land contract that did not comply with section 2 nevertheless gave rise to a constructive trust. The facts of the case required the court to examine the degree of certainty required for the purposes of the common intention constructive trust. It also had to decide whether the parties intended to be bound by their mutual assurances.

The facts in Herbert v Doyle
Mr Herbert was the freehold owner of a house and large garden. Mr Doyle and Mr Talati owned the freehold of a neighbouring property in which they carried on their practice as dental surgeons. Mr. Herbert got planning permission to build houses on the garden of his property. To carry out the development, Mr Herbert needed to acquire some of the parking spaces on his neighbours’ land.

In essence, the parties agreed to a land exchange; Mr Doyle and Mr Talati were to have title to car parking spaces on Mr Herbert’s land. In return, they would convey car parking spaces on their land to Mr. Herbert. Mr. Herbert was also to grant leases of two other parts of his land to them. Mr. Doyle and Mr. Talati were to pay a premium to Mr. Doyle. These terms had been agreed in principle in February 2003. It was, however, in April 2003, when Mr. Herbert was getting ready to begin the development work, that the parties had a further meeting at which they agreed that these terms would be immediately binding upon them despite the lack of the anticipated formal written contract. This arrangement was altered as a result of two later variations that the parties agreed. Other variations were discussed but these discussions did not lead to any further agreed variations.

Mr. Herbert later decided that he did not wish to proceed with the agreement. The question was whether the April 2003 agreement gave rise to a constructive trust so that it could be enforced by Messrs. Doyle and Talati notwithstanding the failure to comply with section 2(1).

Cobbe-compliant?
Mr. Herbert argued that the conditions for the creation of a common intention constructive trust were not satisfied. Arden L.J. identified the essence of what the House of Lords had said in Cobbe v Yeoman’s Row Management Ltd ([2008] 1 WLR 1752) about the element of certainty required:

‘[I]f the parties intend to make a formal agreement setting out the terms on which one or more is to acquire an interest in property, or, if further terms for that acquisition remain to be agreed between them so that the interest in property is not clearly identified, neither party can rely on constructive trust as a means of enforcing their original agreement.’ (Herbert v Doyle [2010] EWCA Civ 1095 [57]

There had to be clarity both as to the intention to be bound and as to the interest in property that is the subject matter of the trust. Mr. Herbert contended that each of these types of certainty was lacking as regards the April 2003 agreement.

Intention to be bound or mere agreement in principle?
Was this a case, like Yaxley v Gotts ([2000] Ch. 162) in which the parties intended to be bound by an informal agreement? Or was it, like Cobbe, one in which the parties regarded themselves as being bound in honour only until a formal written agreement had been prepared and signed? The judge at first instance had found that the April 2003 agreement was not ‘subject to contract’  and that the parties intended to be bound by it. Arden L.J. regarded this as being surprising but thought that there was no basis on which the Court of Appeal could hold that this conclusion was clearly wrong (Herbert v Doyle [2010] EWCA Civ 1095 [79]).

Certainty as to the relevant property and terms
The April 2003 agreement could only give rise to a constructive trust if the relevant property and the terms of the agreement were sufficiently certain. While the number of spaces to be transferred by Mr. Herbert to Messrs. Doyle and Talati had been agreed in April 2003, one of the spaces had not been. The Court of Appeal upheld the decision at first instance to the effect that the parties had impliedly agreed that the court could identify a suitable space if Mr. Herbert refused to do this himself (Herbert v Doyle [2010] EWCA Civ 1095 [71] – [72]). The way to this conclusion was eased by the fact that the judge at first instance had found that the agreement was to transfer ‘reasonably accessible parking spaces on the site, so far as possible adjacent to [Mr. Herbert’s property].’ As Morgan J. (sitting in the Court of Appeal) pointed out, when the judge at first instance nominated a space, he did no more than to give effect to the term that the parties had already agreed (Herbert v Doyle [2010] EWCA Civ 1095 [87]).

Second, the fact that the parties continued to negotiate after the April 2003 had been reached did not mean that the April 2003 agreement was not sufficiently certain at the time when the parties’ property interests were agreed (Herbert v Doyle [2010] EWCA Civ 1095 [73]).

The April 2003 agreement provided for Mr. Herbert to grant leases of parts of his property. He argued that the terms of these leases had not been agreed and so there was a lack of certainty in this respect too. This failed since it had been agreed that the terms of these leases would follow the terms of an existing lease between the parties (Herbert v Doyle [2010] EWCA Civ 1095 [76]).

The question is whether the parties intended to be bound by their assurances
As Arden L.J. remarked, there is something surprising about the idea that the common intention constructive trust can be based on a sophisticated commercial agreement negotiated by experienced business people. Its more natural home is the agreement between a co-habiting couple as to how the beneficial ownership of their home is to be shared between them. In this domestic context it is easy to understand that the parties might be reluctant to reach a formal agreement when so much depends on trust and where even to raise the question of ‘shares’ seems incongruous. Herbert v Doyle is a striking illustration of the fact that in either context the question is ultimately whether each party was entitled to believe that their legal rights and duties had been affected by the agreement. Must the parties be taken to have gone past the negotiation stage of the discussions? Did they have an intention to create legal relations?

Inconsistent with principle?
Tanney (Anthony Tanney, ‘Constructive trusts to grant leases: have we not been here before?’, (2012) 16 L. & T. Review 53) has expressed some doubts as to whether the agreement in Herbert v Doyle can properly be thought of as a common intention constructive trust. Tanney questions whether this development is consistent with principle.

First, while it is true that an enforceable land agreement gives rise to an equitable interest (Walsh v Lonsdale (1882) L.R. 21 9 Ch.D. 9) the agreement in Herbert v Doyle was not enforceable since it did not comply with section 2(1). Second, some aspects of the agreement in Herbert v Doyle required the grant of new leases; that is they were agreements for the grant of new estates in land rather than for the sharing of the beneficial ownership of an existing interest. Where the enforceable contract is for the grant of a lease, the equitable interest relates not to the reversion but is a new equitable interest. Typically, however, the common intention constructive trust arises out of an agreement to share an existing interest in land.

Proprietary estoppel the appropriate remedy
Concerns have been expressed, then, as to whether all aspects of the agreement in Herbert v Doyle could all be properly take effect as a common intention constructive trust. Were it not for section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989,  Herbert v Doyle could have been dealt with as a proprietary estoppel claim; Mr. Herbert had encouraged his neighbours to believe that they would acquire an interest in land and they had relied on that assurance to their detriment. Since Yaxley v Gotts ([2000] Ch. 162), however, the courts have thought it necessary, in the case of some types of informal land bargain, to think only in terms of the common intention constructive trust. The saving  for constructive trusts in section 2(5) has led to doubts as to whether there is any room for proprietary estoppel to work in relation to agreements concerning land.

Owen and Rees (Gwilim Owen and Osian Rees, ‘Section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989: a misconceived approach?’ [2011] Conv. 495) argue that this concern is misconceived. Proprietary estoppel is entirely independent of contract and proprietary estoppel claims do not engage section 2(1). Cases like Herbert v Doyle could more easily be dealt with as proprietary estoppel claims.

Michael Lower
Faculty of Law
The Chinese University of Hong Kong

Common intention constructive trust? Applying Jones v Kernott.

Geary v Rankine ([2012] EWCA Civ 555, CA (Eng)) concerned a claim by G to a beneficial interest under a common intention constructive trust of property initially bought as a commercial investment, title to which was in R’s name alone. R had supplied the entire purchase price. The Court of Appeal summarised its understanding of the relevant principles after Jones v Kernott. On the primary question as to whether there is a trust or not, Lewison L.J. said:

‘Mrs Geary has the burden of establishing some sort of implied trust; normally what is now termed a ”common intention” constructive trust. The burden is all the more difficult to discharge where, as here, the property was bought as an investment rather than as a home. The search is to ascertain the parties’ actual shared intentions, whether express or to be inferred from their conduct.’ ([18]) (emphasis added)

There are two exceptions to this exclusive focus on actual intention. First, where there is a presumed resulting trust (but R had supplied the entire purchase price so there was no such trust in this case). This seems to suggest that the presumed resulting trust is in some way disconnected from actual intention. Second, the court can impute an intention once the existence of a trust has been proved but where the court cannot discern any actual agreement as to how the beneficial interests are to be shared. The quantification of the beneficial interests can rely on an imputed intention ([19]).

Here there was no evidence of a common intention (either formed at the time of acquisition or subsequently) that G was to have a beneficial interest at all.

Evidence of a common intention

In Thomson v Humphrey ([2009] EWHC 3576) T and H co-habited in property belonging to H (Church Farm). He had previously bought a home for T and her children to live in (Long Stratton). This too had been in H’s name and had been sold, H retaining the proceeds of sale. When the relationship broke up, T claimed a beneficial interest in Church Farm. She failed. The court applied the approach in Lloyds Bank v Rosset as explained in Stack v Dowden. There was no evidence of an express agreement. Indeed, H had instructed his solicitor to prepare a cohabitation agreement that made it clear that H retained sole ownership of the property. This had been carefully explained to T. She had not signed it and H had continued to live with her but the court did not think that an agreement could be inferred from this. Nor had she incurred any detrimental reliance. There was no evidence that she was worse off than if she had not co-habited with T (though, of course, she would have made different arrangements).

Constructive trust: significance of assuming joint liability for mortgage

In Hyett v Stanley ([2003] EWCA Civ. 942, CA (Eng)) F and H co-habited. Their home was in F’s name alone. They pooled their financial resources. They were under financial strain and the bank would only lend money if H agreed to accept joint liability for the mortgage payments. F told her that she could safely do this without a formal transfer of title since, he asserted, allowing her name to be added to the mortgage have her a right to the property. The Court of Appeal found that this could only be construed as an agreement that she was to have an interest under a common intention constructive trust. Since she was jointly and severally liable under the terms of the mortgage the Court of Appeal inferred an understanding that each would have a one half beneficial interest in the property.

There was also a mortgage protection life assurance policy. F and H were said to be joint tenants of the proceeds of the policy. F had died and H claimed the entire proceeds. The Court of Appeal confirmed the first instance decision that the policy had first to be applied in paying off the mortgage. H was only entitled to the balance remaining after that repayment.

No equitable interest where the claimant would need to rely on an unlawful agreement

In Barrett v Barrett ([2008] EWHC 1061) T and J were brothers. T owned the freehold of a house. T was declared bankrupt. J acquired the house from the trustee in bankruptcy and some years later he sold it. T claimed that J held the title to the house in trust for him. He alleged that he and J had agreed that J would be the ‘paper’ owner, holding the property on trust for T who would meet all of the outgoings (which would be chanelled through J). The aim was to avoid T’s trustee in bankruptcy having any claim to T’s beneficial interest.

The judge thought that this could not be a resulting trust case since T had not directly contributed to the mortgage payments or purchase price. He paid J and J made the payments ([24]). There were alternative explanations for the payments made by J to T (J alleged that they were rent payments). So there was a need to show that the payments were referable to the unlawful agreement (unlawful because it was entered into to avoid s333(2) of the Insolvency Act 1986). The common intention constructive trust claim failed because of the unlawful purpose. The same problem would be fatal to claims based on the agreement to found a claim of an express trust, proprietary estoppel or a Pallant v Morgan equity.

As David Richards J. explained:

‘Without that [unlawful] purpose the agreement or arrangement has no rational explanation. Thomas needs to allege and prove it in order to establish the agreement, but in doing so he relies on his own illegal purpose and thereby renders his interest unenforceable.’ [25]

Nor was the unlawful purpose too remote from the creation of the alleged beneficial interest. The whole purpose of the alleged agreement was to deprive the trustee in bankruptcy of the opportunity to acquire T’s beneficial interest in the property.

Common intention constructive trust: imputed intention in a sole name case

In Aspden v Elvy ([2012] EWHC 1387) A and E had cohabited and had two children. Long after the relationship broke down A transferred the ownership of a barn with planning permission for conversion to a dwelling-house to E. He may have hoped that they would resume their relationship. A also provided between GBP65,000 to GBP70,000 towards the cost of the conversion works. They had a further dispute and there was a question as to whether A had an interest in the barn under either a common intention constructive trust or proprietary estoppel. The judge found that A had intended an outright gift of the title but had not intended to make a gift of the money needed for the conversion works. He intended to acquire an interest in the barn and E knew this. As a result, he was entitled to a 25% interest in the barn (it had a market value of GBP400,000 so this would give him GBP100,00 which the judge thought was a reasonable return on his investment). The judge said that the elements of a proprietary estoppel were also present and would have led to the same outcome.

On the question of the valuation, HH Judge Behrens said that there had been no express discussion as to how the beneficial ownership was to be shared and the only available evidence was the market value of the property. In these circumstances,

‘I have to impute an intention by reference to what is fair having regard to the whole course of dealing between the parties.’ ([123]).

Resulting / constructive trust of Ting house

In Lau Kwai Kiu v Bian Xintian ([2012] 2 HKLRD 954) O applied for land by way of private treaty grant in Lok Lo Ha Village near Shatin under the Small House Policy. He was successful. He paid the premium and a grant of land in the village was made to him. At that time, the Lands Department did not require applicants to sign a declaration to the effect that they had not entered into an agreement to sell the land, hold the property on trust or sell it (the Department later did insist on such declarations).

O had agreed to sell the land to P before making the application. P had supplied the funds for the premium. Once the grant was made, she supplied the funds for the construction of the house and she and her family lived in it from the time of the issue of the certificate of compliance. O had written letters to P confirming that he would give the property to her and would transfer the title to her after five years. This would require a further application to the Government and payment of a premium to lift the restriction on alienation in the grant to O. This application was never made because P could not afford the additional premium. O died and the question of P’s interest in the land had to be decided.

O’s wife (W) argued that P had no interest in the land and that any resulting or constructive trust there might have been was unenforceable on the grounds that the arrangement was illegal or contrary to public policy.

It was held that P had an interest under either a resulting and / or a common intention constructive trust because of the payments and the agreement set out in the letters (signed by the parties and, in the case of one letter, witnessed). There was no illegality on the facts of this case. Even if there were, P had no need to plead it since she could rely on the payments she had made to establish her beneficial interest; she did not need to rely on the letters at all (see Tinsley v Milligan). Nor was the arrangement contrary to public policy since there had been no false declaration. The express agreement envisaged that the necessary application to the Government would be made and the additional premium for the lifting of the restriction of alienation would be made.

The Court of Appeal held that the land was held on a resulting and / or a common intention constructive trust (but expressly subject to the Government’s rights).

Post-acquisition common intention to create an ambulatory constructive trust

In Tong Ka Nin v Tam Chun Wah ([2012] HKEC 563) P and D were joint owners of a flat as tenants in common. They made equal contributions to the down-payment and, at first, to the mortgage installments. Then D became unable to keep up with his share of the mortgage installments so P took on a larger portion of these payments. The judge found that there was “sufficient and / or compelling evidence”  that, after the acquisition, the parties had formed  a common intention that P’s beneficial share would be larger than 50% and that his ultimate beneficial share should reflect his total contribution to the purchase price. That is there was the necessary compelling evidence (Chan Chui Mee v Mak Chi Choi) of an agreement to create a post-acquisition ambulatory constructive trust.

Resulting or common intention constructive trust

In Lui Kam Lau v Lui Hon Yiu ([1992] HKEC 8) title to property was in the name of N. She had paid about half of the price and D had paid the other half. He had not intended his contributions to be a gift. N and D had gone through a form of marriage ceremony but were not legally married. N died and the question of beneficial entitlements had to be resolved. The court’s analysis was principally that of resulting trust and it held that D was entitled to 50% of the beneficial ownership on the basis of his contributions. The judge started his analysis by saying that this was a resulting trust case rather than a constructive trust case. Nevertheless, he referred to the Gissing v Gissing line of authorities to the effect that mortgage contributions could be evidence from which to infer a common intention constructive trust. It is possible to argue that the court was simply pointing to the strong similarities between the two types of trust in this context. Unfortunately, the line is blurred where the judge says:

‘The key to the resolution of disputes such as the present one is therefore to identify the common intention of the parties by reference to the evidence.’

The latter part of the analysis seems to be principally that of constructive trust despite the fact that the court had decided that this was a resulting trust case.

Attempting to invoke the Pallant v Morgan equity to overcome lack of agency or partnership

In National Trust for Places of Historic Interest v Birden ([2009] EWHC 2023) N and B entered into a share farming agreement from 1995 to 2004. B was to farm N’s land and the profit was to be divided between them. The arrangement was entered into to avoid creating a tenancy. It was agreed that each party was carrying on its own business and that there was no agency or partnership. The judge was happy to accept that this reflected the true nature of the parties’ relationship. The agreement provided that any government subsidies paid would be shared between them. When the agreement ended B moved to another farm not owned by N. In the meantime, the nature of the subsidy paid to farmers changed as a result of EC legislation. B claimed the subsidy he was entitled to in respect of the new farm to which he had moved. His period of managing N’s farm was an important part of his entitlement to the claim in respect of the new farm (the claim was for subsidy for the period after the share farming agreement had ended). N made its own claim for subsidy for the same period (which began after the end of the share farming agreement) and B completed certain forms in an attempt to assist. The government refused to pay N since it did not meet the statutory criteria. N then asked B to hand over part of the payment that he had received on the basis that it was partly attributable to the time that he had spent farming on N’s farm. Thus, N argued, it fell within the requirement to share subsidies.

The court found that the payment was not caught by the subsidy-sharing clause in the agreement. N argued that the agreement showed that there was a common intention that such payments should be shared and that a common intention constructive trust (along the lines of the Pallant v Morgan equity as explained in Banner Homes) came into effect. This failed too. This was an attempt to argue that the share farming agreement amounted to a joint venture and the court found that there was no ‘joint venture’ (para. 157). There was nothing unconscionable about B’s retention of the entire amount of the subsidy he had received.