Summary
The High Court held that property purchased in one brother’s sole name (William, the claimant) and then transferred by him to another brother (Elias, the defendant) was not held under a common intention constructive trust by the claimant for the defendant before the transfer.
A common intention constructive trust can arise where one party shares a common intention with another that the other should have a beneficial interest in the property.
Instead, the Court ordered that the legal title be transferred back to the claimant as it had transferred as a result of a mistake that the defendant had provided consideration for the claimant’s interest. The property was held under a constructive or presumed resulting trust by the defendant for the claimant.
A constructive trust can arise where it would be unconscionable for one party who owns property to deny the beneficial interest of another in the same property. A presumed resulting trust can arise where one party fails to give consideration in exchange for property, with the consequence that the beneficial interest results back to the selling party.
The facts
In 1972, William Fattal (the claimant) purchased 106 Nottingham Terrace, London, NW1 (the Property) in his sole name. In January 2014, he transferred it to his brother, Elias Fattal (the defendant) for no consideration (the Transfer). The Transfer was on the basis that in or around 1990, the claimant had orally agreed to transfer the Property to the defendant under a proposal that the defendant would pay the claimant £400,000. Neither party argued that the Transfer was a gift.
The claimant sought relief on grounds that the Transfer was made under the mistaken belief that he had been paid £400,000 in or around 1990. The defendant argued that the Property was beneficially jointly owned as tenants in common from the acquisition in 1972 under a common intention constructive trust.
Furthermore, the proposal in 1990 was for the defendant to acquire the claimant's 50% beneficial share. Although the defendant could not point to the specific details, it was suggested that the claimant would have accounted for £400,000 from one of the accounts of their jointly owned companies, a director’s loan account, a trust account or something similar.
The decision
The Court held that:
- There was no common intention constructive trust in the defendant’s favour that had arisen on purchase of the Property or subsequently. No evidence was provided to support the defendant's claim that he had contributed financially to the purchase or refurbishment of the Property. Although the claimant and defendant had lived together in the Property for a number of years, there was no common intention to share the beneficial interest and there was no detrimental reliance by the Defendant to support such an intention.
- The defendant had not paid the claimant for his beneficial interest in the Property, either in 1990 or at any other time.
- The Transfer was a void contract for the sale of land which had not been fully performed on both sides. It had to be unwound on the basis that the defendant held the Property on constructive trust for the claimant.
- The defendant was ordered to account to the claimant for rental income received since the transfer of the Property in 2014. This was on the basis that the Transfer was mistaken and/or the defendant held the Property on a constructive or presumed resulting trust for the Claimant.
Comments from Counsel
Senior Associate, Stephen Burke caught up with Evie Barden of Landmark Chambers, who was led by David Holland QC in representing the successful claimant, to discuss the implications of this case.
Stephen: The defendant argued that the Property was held under a common intention constructive trust when it was acquired. What would he have needed to have proved to successfully argue this?
Evie: Equity follows the law, generally, so the Court starts from the position that the beneficial ownership mirrors the legal ownership.
This was a sole legal ownership case, so the starting point was sole beneficial ownership of the Property when it was purchased. The defendant needed to show that the parties had a different common intention when the Property was first acquired or that they formed a different common intention at a later date.
There were no express discussions or writing that the defendant pointed to to say that the parties had a common intention that the beneficial ownership of the Property was different to the legal ownership. So, the Court had to look at the parties’ words and conduct, to see whether each party’s intention as reasonably understood by the other party evinced an intention that the beneficial ownership of the Property be shared between the brothers.
The sort of factors the Court will look at are financial contributions, as well as what advice or discussions there are at the time of transfer which cast a light onto why the parties did what they did. Other relevant factors are: why the property is in the person’s name, what the purpose behind acquisition was, the nature of the relationship, how the purchase was financed, how the parties arranged their finances, how the outgoings were discharged as well as other household expenses. It is all fact-specific.
In this case, the defendant’s position was that he had contributed to the purchase price and subsequent refurbishment of it. The money used to fund the purchase was a loan from a company the brothers controlled to the claimant and a mortgage in the claimant’s sole name. The defendant said that the loan was effectively joint funds because of the way that the brothers operated the (many) companies’ accounts and that there must have been some accounting mechanism to regularise the position as between the two of them, with his counsel pointing to a £3,500 payment from the defendant to the claimant in the year the Property was purchased. But, this was highly speculative and unsupported by any evidence from the defendant so ultimately was rejected by the judge. The same sort of point was run in respect of the monies used to redeem the mortgage ie, the defendant’s counsel posited that because of the way the brothers organised their affairs it might have come from joint funds. Again, it was all ultimately too speculative.
In short, the reason the defendant’s arguments on financial contributions failed was that there was no credible evidence to support them, especially in the face of detailed accounting documents. At its lowest, it would have needed to have been supported by the defendant’s witness evidence and be more specific and less speculative. Remarkably, there was also no support from any independent witness on the accounting matters, such as the accountants from the time.
Against that background, factors such as that the defendant lived at the Property with the claimant and paid some of the outgoings were not sufficient to get the defendant over the line. The Court concluded that that was not done on the basis that the claimant had said or done anything or that there was any understanding or agreement about the beneficial ownership of the Property, as the Court was satisfied that there were no discussions of that nature.
There was also an issue regarding whether the defendant could show detrimental reliance on the common intention, which the Court of Appeal in O’Neill v Holland [2020] EWCA Civ Civ 1583 held remains an essential feature of the cause of action (although do watch this space for joint names cases as the Court of Appeal will be revisiting the issue of detrimental reliance in joint names cases in Hudson v Hathway later this year). Given the Court found there was no common intention, that issue was subsidiary. But, the Court held that there was also no detrimental reliance: any spending on council tax and utilities was done because it was the decent thing to do while living rent-free in the Property, not because the defendant relied on a common intention to share the Property beneficially.
It will always depend on the facts of the specific case and these cases are multi-faceted and messy, but, ultimately, what discussions the parties have will be key as will the financing of the property purchase (as well as any later capital expenditure for refurbishment of it). In circumstances where there is unlikely to be a paper trail or documentary evidence regarding the discussions or the reasons why the parties conducted themselves as they did, the witness evidence is absolutely key!
When did the defendant argue that he had paid £400,000 to the claimant?
His pleaded case was that there must have been consideration provided in some form in either 1990 or 1992. As you’ve noted, the provision of the consideration was formulated in a very nebulous way: there must have been some accounting mechanism between the brothers, either in one of the company accounts, a trust account, a loan account or…somewhere else…
This, unsurprisingly therefore, formed a significant chunk of evidence during the trial and the claimant’s cross-examination of the defendant, Elias, focused very heavily on this. And, the way that the defendant put it in closing was that it was for the claimant to prove that he had not provided the consideration rather than that he had, such that if the Court could not dispose of it by being satisfied either way, the claimant had not discharged the burden of proof. In doing so, he pointed to an absence of documentation such as bank statements, company ledgers for a certain company and absence of trust documents.
While the Court found that the burden was indeed on the claimant to show he had not been paid for his interest in the property, it was satisfied that the burden had been discharged. It did so on the basis that it had assessed the credibility of the two brothers; there was documentary evidence which existed and that documentation showed no record of payment from the defendant; the brothers’ nephew’s evidence; and the defendant’s whole case on payment was wholly speculative.
A key problem for the defendant was he had failed to close off all avenues relating to relevant documents. There had been no enquiries, for example, made of the trustees of the family trusts. So, if you are going to run an argument like this (i.e., it is impossible for me to say for certain because relevant documentation does not exist), you really need to dot your is and cross your ts.
What steps can someone take to clarify the status in which property is owned to avoid any disputes?
The best bet is a declaration of trust. Of course, in order to declare a trust of land one can do that orally, but it needs to be manifested and proved in writing which is signed by the person declaring the trust. So, if solely owned property is going to be held on trust for someone who is not the registered proprietor, the best bet is a deed of trust. Similarly, if there is jointly owned property, the safest course of action is going to be a deed of trust. This is even if the joint owners are joint tenants as it removes the prospects of one of them arguing subsequently that they are tenants in common in different shares.
The next best thing after a declaration of trust is written records. In truth, however, it is going to be a pretty rare case where one person sends a Whatsapp message or email to another saying “I’ll buy this in my name, but obviously it’s equally yours”! But, the contemporary correspondence and records are going to be pored over. Similarly, whatever is said in mortgage applications or to solicitors or accountants is going to be helpful and relevant evidence. So, the timeless advice that you should imagine a High Court judge reading those messages stands true here.
And, the parties should be careful about how they frame their cases in pre-action correspondence! The Court took into account how the defendant had failed to make certain allegations about the payments in his pre-action correspondence and how his position had changed on that. Consistency is key.
Our comment
Although it was unsuccessful in this case, it is a clear reminder that the beneficial interest in property can be different to the legal interest, even if one party does not necessarily intend for that to be the case. While a constructive trust most often arises in circumstances where unmarried couples are co-habiting, it is not exclusively reserved for such situations.
To avoid costly disputes, interests in jointly owned property should be clearly documented. If any payments are made, towards the cost of acquisition or otherwise, these should also be clearly recorded.
