No constructive trust or estoppel where the ‘agreement’ or ‘assurance’ is a mistake of which the other party is unaware

The fact that one party enters into a transaction under a misapprehension as to its terms does not give rise to any kind of equitable claim (based either on estoppel or constructive trust) to give effect to a transaction on the terms that had been anticipated by the mistaken party.

Crossco No 4 Unlimited v Jolan Limited ([2011] EWCA Civ. 1619, CA (Eng)) arose out of a demerger that split a group into two (a trading group and a property group) with each group to be separately owned and controlled. Late in the demerger negotiations it was agreed that a property in central Manchester would be transferred to the property group. It was agreed, however, that the trading group would continue as tenants of the ground floor. The trading group had not checked the terms of the relevant lease. It did not appreciate that the lease contained a break clause allowing the landlord to terminate the lease by giving notice. The property group knew of the break clause and was entitled to assume that the trading group also knew of it. Once the demerger had been completed, the trading group served notice to terminate the lease in accordance with the break clause.

The trading group argued that the parties had a mutual understanding that the trading group could use the ground floor and that this gave rise to a common intention constructive trust (based on the Pallant v Morgan equity) that made it unconscionable for the property group to evict the trading group. Alternatively, the initial understanding meant that the property group was estopped from exercising its rights under the break clause. The property group failed on both grounds. They had simply made a mistake. There was no agreement, common intention or assurance to prevent the property group from exercising its legal rights.

There was a difference of opinion in the English Court of Appeal as to the jurisprudential basis on which the decision in Banner Homes rested. The majority thought that it was bound by authority to hold that it was a common intention constructive trust. Etherton LJ thought that it was, rather, a case of a breach of fiduciary duty.

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