Archive for the ‘constructive notice’ Category

Common intention constructive trust and equity’s darling

May 13, 2014

In Mo Ying v Brillex Development Ltd ([2014] HKEC 724, CFI) (partly reversed by the Court of Appeal) title to the flat that was the matrimonial home was in H’s name alone. H entered into an agreement to sell the flat to B and took a lease back. The lease arrangement continued after completion. When H failed to meet the rental payments, B brought proceedings to recover possession. W then claimed that she had a beneficial interest under a common intention constructive trust and that B had imputed or constructive notice of this interest and so took subject to it.

W argued that there was an express common intention in that, after acquisition, H had given an excuse for not putting her name on the title deeds. W invited the court to follow the example given by Grant v Edwards and Eves v Eves but the court refused to do so. The ‘excuse’ was equivocal and, anyway, did not induce W to believe that she had or would have any interest in the property ([59]). Further, this was an alleged post-acquisition agreement and the courts are reluctant to infer a common intention constructive trust in such a case ([60]). There was no express common intention.

W argued that a common intention constructive trust could be inferred from the fact of the marriage. Marriage, alone, however, is not a basis from which to infer a common intention constructive trust ([66] – [68]). W’s sister had made a loan to H. It could not be shown that this was used towards the purchase price of the property. In any event, it was not clear that this could be regarded as a contribution by W ([69] – [70]). While the pooling of family assets could be evidence of a common intention ([71]), there was no evidence of such pooling. In any event, it seems that the court was of the view that there was simply no such common intention ([80]); so even if there had been evidence of pooling, it would only be a factor to be taken into account in determining on the balance of probabilities whether or not there was a common intention. The court was not prepared to infer a common intention from W’s contributions to household expenses (‘the everyday expense of the family’ ([81])) ([81] – [85]).

There was no detrimental reliance; neither her contributions to household expenses nor her decision to give up her job could be so regarded in this case. The necessary causal link was missing ([92]).

Deputy Judge Eugene Fung SC went on to consider whether if, contrary to her view, W had a beneficial interest, B was subject to it. W argued that the estate agent handling the transaction knew of the interest and that this knowledge should be imputed to B. The factual basis of this proposition was doubted. In any event:

‘In cases where an agent’s function is to receive communications on behalf of his principal, one can readily understand why the knowledge of the agent would be imputed to the principal. However, I have some doubt as to whether such a principle applies to an estate agent in Hong Kong. In a typical case, an estate agent’s function is to perform a service by introducing a counter-party to his principal so as to enable his principal to conclude a particular transaction with that counter-party; his function is not to receive communications on behalf of his principal. No cases have been cited to suggest that an estate agent in Hong Kong has the general authority to receive communications for his principal. Accordingly, I am unable to accept Mr Wong’s submission that notice of an estate agent in Hong Kong is imputed to his principal.’ ([117]).

B had, however, failed to inspect the property and so, by virtue of W’s occupation, had constructive notice of any interest that W might have. The fact that this was a sale and leaseback made no difference to this ([131] – [132]).

B’s attempt to avoid this conclusion by invoking estoppel by representation failed since W did not owe B a duty to speak out and inform B of her interest ([148]). The facts did not support B’s defence of waiver ([154]) nor acquiescence ([155] – [157]).

Nor could B rely on laches. Section 20(2) of the Limitation Ordinance provided the limitation period for an action to recover trust property from a third party and this had not expired. In any event, there had been no substantial lapse of time and it was not inequitable for W to enforce her claim against B ([165]).

Michael Lower

Equity’s darling

September 17, 2013

In Pilcher v Rawlins ((1871 – 72) LR 7 Ch. App. 259) a father set up a trust for his children. There were three trustees, one of whom was P the children’s uncle (a solicitor). The trustees advanced money to R on the security of a mortgage (the mortgage deed explained the existence of the trust). Two of the trustees died leaving P as the sole trustee.

P and R connived in a fraudulent scheme. R (also a solicitor) prepared an abstract of title making no mention of the mortgage. R then purported to convey the property to S and L (who had no notice of the trust or the fraud). Immediately before that P executed a deed reconveying the property to R free of the mortgage (despite the fact that the loan had not been repaid). P and R agreed that the reconveyance to R would only be produced if necessary. S and L had no notice of this conveyance either.

The fraud came to light and the beneficiaries sought a declaration that they were the beneficial owners and an order that S and L convey the title back to the trust. They failed on the basis that S and L were bona fide purchasers for value without notice of a legal estate (Sir G Mellish LJ at 273).

Given the facts above, the conveyance of the property by P to R (with its reference to the trust) was an essential element of S and L’s title. This did not fix them with constructive notice. They had acted diligently and at the time of the purchase had reasonably believed that they had good title. The later conveyance to R only came to light in the course of the proceedings. At the relevant time, S and L had ‘neither knowledge nor means of knowledge’ of the trust (Sir G Mellish LJ at 274).

Michael Lower

Elements of a Pallant v Morgan equity

December 7, 2011

In Baynes Clarke v Corless ([2010] EWCA Civ 338, CA (Eng)) B and C were neighbours. There was a common access road and turning circle leading from the public highway to their property. It was privately owned by the developer of their respective homes. They had a meeting at which they agreed that the access road would be acquired by a management company on behalf of them both. C then bought the access road himself. B claimed that it was held partly in trust for him and invoked the Pallant v Morgan equity. The English Court of Appeal said that this relied on an agreement that one party was to take steps to acquire the relevant property and an agreement that it would be acquired on behalf of both parties. There also had to be an advantage to one party or a detriment to the other. The Court of Appeal held that there had been the necessary agreement (it did not matter that the precise legal mechanism had not been decided on). There had not, however, been any reliance by B. For that reason, the claim failed.

Details on loan application form as a source of constructive notice

January 18, 2011

A borrower’s replies to questions on a lender’s application form that are inconsistent with other knowledge obtained by the lender can be a source of constructive knowledge. In such a case, the lender should make such further inspection as is reasonably necessary. Otherwise it is subject to any equitable interest that such further enquiries would have revealed.

In Kingsnorth Finance Co Ltd v Tizard ([1986] 1 WLR 783) the matrimonial home was in Mr Tizard’s name but the wife had a 50% equitable interest in it. When the marriage broke down she moved out of the home. She returned each day to look after the children and stayed the night if her husband was away. Mr Tizard applied for a loan. In the application form he stated he was single. The valuer who visited the property on behalf of the lender noted in his report to the lender that the occupants were Mr Tizard and the two children. He knew that the couple were separated and that Mrs Tizard lived nearby but did not note this in his report. The loan was made and was secured by a mortgage on the matrimonial home. Mr Tizard did not keep up with the repayments and the lender brought proceedings seeking possession or an order for sale and directions as to how the sale proceeds should be distributed.

It was held that the lender’s mortgage was subject to the wife’s equitable interest. She was in occupation even though she did not live at the matrimonial home all the time. The discrepency between the statement on the application form that the lender was single and his disclosure to the valuer that he was married put the lenders on notice. The same could be said of the presence of the son and daughter. The lender should have made further inquiries. It did not do so. Since it could not show that, given its knowledge, no further inspection was reasonably necessary it was subject to Mrs Tizard’s equitable interest.

The judgment is interesting for its practical guidance as to the sort of enquiries a purchaser or lender should make to avoid being fixed with constructive notice of unwritten equitable interests.

Proprietary estoppel and constructive trust and the ‘double assurance’ aspect of proprietary estoppel in contractual settings

November 1, 2010

In Kinane v Alimamy Mackie-Conteh ([2005] WL 62273 and [2005] EWCA Civ 45 CA (Eng)) K made a loan of GBP50,000 to a company (“Almack’) owned by M. M wrote a letter to K confirming that K was to have a second charge over M’s home. This letter created an equitable charge and envisaged that there would be a later formal charge  M failed to repay the loan and K sought to enforce his security.

M argued that the agreement contained in the letter was invalid.  It did not comply with section 2(1) of the UK’s Law of Property (Miscellaneous Provisions) Act 1989; this requires contracts concerning land to be signed and in writing:

‘A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document, or where contracts are exchanged, in each …’

K argued that he could take advantage of the exception for constructive trusts in s.2(5). He succeeded on this ground. This was a case of a proprietary estoppel giving rise to a constructive trust.

Arden LJ explained how a proprietary estoppel could arise in cases where there is an agreement that does not satisfy section 2(1). In the ordinary case, the fact that the parties have not yet satisfied the formalities or have used the ‘subject to contract’ label is an indication that they do not intend to be bound. But there can be other cases where the promissor not only promises to create or transfer an interest in land but gives a ‘double assurance’ that he will not rely on the failure to comply with statutory formalities.  Arden LJ explained:

‘Thus, the requirement that the defendant encouraged (or allowed) the claimant to believe that he would acquire an interest in land may (depending on the facts) consist in the defendant encouraging the claimant (by words or conduct) to believe that the agreement for the disposition of an interest in land (here a security interest) was valid and binding’ (at para. 28)

The cause of action is founded on the defendant’s conduct and not the unenforceable agreement (at para 29).

Given that there was a proprietary estoppel, was there also a constructive trust?

‘Unconscionability on the part of a party seeking to rely on subsection (1) is the touchstone giving rise to a constructive trust. It will arise where a party leads another to believe that he would obtain an interest in property to another and then stands by while that other party acts to his detriment in reliance on that promise.’ (at para. 32)

Neuberger LJ reached the same conclusion but his explanation as to when the proprietary estoppel would give rise to a constructive trust was slightly different:

‘The other question is whether Mr Mackie-Conteh can contend that the equity is satisfied by a mere estoppel, or whether … it is an estoppel which can also be said to amount to a constructive trust.’ (at para 45)

He explains:

‘[T]he essential difference between a proprietary estoppel which does not give rise to a constructive trust, and one that does, is the element of agreement, or at least expression of common understanding, exchanged between the parties, as to the existence, or intended existence, of a proprietary interest, in the latter type of case.’ (at para. 51)

Arden LJ stresses unconscionably allowing another to believe that he will have an interest in land while while Neuberger LJ stresses the fact of agreement or common understanding.

Martin Dixon comments on this decision in ‘Invalid contracts, estoppel and constructive trust’, ([2005] Conveyancer and Property Lawyer 247).

Occupation of the property as a source of constructive notice

October 6, 2010

In Wong Chim-Ying v Cheng Kam-Wing ([1991] 2 HKLR 253) a husband paid for a flat but it was transferred into the name of his wife. He lived in the flat with her and their children.  The wife sold the flat and absconded. The husband refused to leave and the purchaser sought possession of the property. The Court of Appeal held that the husband was the sole beneficial owner of the property. The purchaser had actual notice of his occupation and had not enquired as to whether or not he had any legal or equitable interest in it. Clough JA explained that, ‘The principle is that notice of occupation is notice of the occupier’s rights.’ (at 262)  As a result, the purchaser had constructive notice of the husband’s beneficial ownership. She held the property on trust for the husband and had to transfer the title into his name.

Michael Lower

Constructive notice: when is a purchaser or mortgagee put on enquiry?

October 6, 2010

When can a purchaser or mortgagee rely on an owner’s statement that there is no-one other than the owner living at the property? When must a purchaser or mortgagee make a physical inspection of the property to see whether there is anyone living there who might have an equitable interest under a resulting or constructive trust?

This question had to be considered in HKCB Finance v Yuen Yi Wan [2006] HKEC 230 (CA). A wife claimed an equitable interest in a property owned by her husband based on her financial contributions.  Her husband agreed to sell the property to Wong and Wong agreed a sub-sale to the first defendant. The sale to Wong was at a gross undervalue and the sub-sale was at a substantially higher price. The three were conspiring to defeat the wife’s claim to the property. The first defendant granted a mortgage to the plaintiff bank.The husband had replied to an enquiry by Wong’s solicitor saying that only he lived at the property. The sale and sub-sale agreements contained warranties to the effect that no-one else lived at the property with a legal or equitable interest in it. The bank had seen these agreements.

The question was whether the plaintiff bank had constructive notice of the wife’s equitable interest. Tang JA held that the wife had an arguable case that the bank had been put on enquiry as to her interest and should have made a physical inspection to see whether anyone else was living there. This was because her husband had sold the property at a gross undervalue and this is often a sign of a fraudulent transaction. If the bank had made the physical inspection they would have discovered the wife’s presence and she would have explained that she was claiming an equitable interest in the property.

Michael Lower

The title deeds as a source of constructive notice

October 5, 2010

Sometimes the title deeds will put the purchaser on constructive notice of an equitable interest and so prevent the purchaser from being equity’s darling. In Sun Sek Haw v Au So Kum ([1999] 3 HKLRD 12) a careful reading of the title deeds revealed that the chain of title included a gratuitous transfer by two administrators of a dead person’s estate to one of those administrators. This was a breach of trust and any of the people with an interest under the dead woman’s estate could apply to have the transfer set aside. The appellants in this case had entered into a contract to buy the property and their solicitors had noticed this weakness in the seller’s title. The question was whether a reading of the title deeds just mentioned put them on constructive notice of the prior equitable interests. If so, they could be released from their obligation to buy the property.

The Court of Appeal found in the purchasers’ favour: they had constructive notice of the prior equitable interests and so need not buy the property. Rogers JA said:

‘[T]he question which should be asked is whether the enquiries which a conveyancing solicitor would have made as a matter of prudence have revealed the fact which would have given the purchaser constructive notice.’ (at 22)

Constructive notice

October 4, 2010

Equity’s darling is the bona fide (good faith) purchaser for value of a legal estate without notice of the prior equitable interest. Notice can be actual (what you actually knew) or constructive (what you are deemed to know). Gray and Gray explain it like this:

‘Constructive notice relates to matters of which the purchaser would have been consciously aware if he had taken reasonable care to inspect both land and title. Thus the purchaser is fixed with constructive notice of all those matters which a reasonable or prudent purchaser, acting with skilled legal advice, would have investigated.’ (Kevin Gray and Susan Francis Gray, Elements of Land Law, (5th ed), (Oxford, Oxford University Press, 2009), p. 1153).

So, for example, the question might be whether a purchaser or mortgagee has constructive notice of the equitable interest arising under a resulting or constructive trust.

An important judgment in this area is that of Vaughan Williams LJ in Hunt v Luck ([1902] 1 Ch 428). Dr Hunt had transferred ownership of some properties to Gilbert, allegedly by fraud so that Dr Hunt’s estate had an equitable interest in the properties. The question was whether mortgagees who had been given their mortgage by Gilbert had notice of Dr Hunt’s equitable interest in the property. It was held that they did not have notice.

In his judgment, Vaughan Williams LJ said:

‘[I]f a purchaser or mortgagee has notice that the vendor or mortgagor is not in possession of the property, he must make inquiries of the person in possession … and find out from him what his rights are, and, if he does not choose to do that, then whatever title he acquires as purchaser or mortgagee will be subject to the title of the [person] in possession.’ (at 433)