Constructive Trusts and Proprietary - Estoppel




Constructive Trusts

The tension between the desirability of certainty of legal rules, on the one hand, and the desire of the courts not to allow just claims to be thwarted by technical rules, has been played out in the history of the “constructive trust”.

Before the Judicature Acts in the 1870s, there were two parallel courts systems: Court of “Law” and Courts of “Equity”. Their respective roles can be illustrated by the case of someone, S, who transfers money he owns to another person T with instructions to use the money for the benefit of a third person, the beneficiary B. The Courts of Law recognised T as the owner of the money and did not recognise the rights of B at all. The Courts of Equity recognised that T was the “legal” owner of the money but also recognised that B was the “beneficial” owner so that T was required, by the Court of Equity, to hold and use the money as “trustee” for the benefit of B.

This example illustrates, at a more general level, the approach to the avoidance of conflict between the two systems: Equity recognises the rule of law, but imposes a personal obligation on the legal owner to avoid unconscionable conduct and to act in accordance with the equitable rights of others. This is still the case – there are separate equitable and legal rules - even though there are no longer separate courts of Law and Equity.

The interaction between the strict legal rules and the requirements of equity is seen particularly in land law where many statutes, over the centuries, have required land transactions, and trusts of land, to be in writing. If A and B paid for land to be placed in the name of A alone, then, on the face of it A could use the land for his own benefit (because it had been conveyed to A in writing and there was no written trust deed in favour of B). To avoid this obviously unconscionable result, Equity developed rules collectively known as resulting, implied or constructive trusts, and modern statutes (e.g. s.53 of the Law of Property Act 1925) now expressly recognise that the strict rules requiring trusts of land to be in writing are subject to the rules of resulting, implied or constructive trusts recognised by Equity.

If Equity were to simply regard all declared trusts of land valid, even if not in writing, that would create unacceptable uncertainty so the rules have developed in a way which requires something more than a mere oral declaration of trust, something which makes it unconscionable for a trust not to be recognised.

In the case of what is called a “common intention constructive trust” what is required is an intention by two (or more) people that one of them will hold the land on trust for both of them, but in addition the party who does not have legal title must act to his or her detriment in reliance on that common intention. This “detriment” could be contributing to the purchase price or to mortgage payments but that is not the only form of possible detriment.

The question of whether there is a “common intention constructive trust” (and if so what proportion of the beneficial interest is held by the respective parties) commonly arises where two people who are not married to each-other set up house together with only one of them having the legal title.

Where the parties are married, the question of a constructive trust is not normally of any practical importance whilst they live together and if, sadly, there is a divorce, the family court, upon divorce has wide powers, in dividing the assets, to transfer property from one spouse to another so that the question of who is the actual owner (whether under a constructive trust or otherwise) is normally of little importance. If one spouse only should become bankrupt then their beneficial share of the property transfers to the trustee in bankruptcy for the benefit of creditors, so in that case the question of a constructive trust would be of real importance, but in most cases of married couples it is not.

However where the parties are not married – they may be a couple living together as if married – or two friends or relatives – and one party only has legal title, the question of a constructive trust is of great importance if the property is to be sold (or if one party wishes to buy the other out).

A constructive trust can be founded on an actual verbal agreement between the parties that they are to have agreed shares in the property, or the parties’ intention can be inferred from their actions. Where a claim is based purely on actions and not also on words, the approach of the courts has varied over the years (the appeal courts – Court of Appeal and Supreme Court – set legal precedents which the courts which initially hear cases – High Court and County Courts – follow) but as a general guide it is often difficult to establish a constructive trust based purely on actions occurring after the property has been acquired, but such a trust may more readily be found where the actions date back to the time of acquisition (such as a couple setting up home together and sharing finances from the outset). 

The question of a constructive trust also arises where the parties are joint legal owners of the property but where they have never made a written declaration as to the percentage of their “beneficial” interests.

 

Proprietary estoppel

Proprietary estoppel is another remedy developed by Equity and, like a common intention constructive trust, applies where someone has acted to his detriment upon a the belief, encouraged by the owner of land, that he has (or will have) some right in that land.

There are, however, some differences between proprietary estoppel and a constructive trust. Firstly, in the case of a proprietary estoppel there does not have to be a common intention. For example the owner of land, O, may have unconscionably led the other party R to believe that R was a part owner of the land in order to induce R to carry out improvement work all the while intending that R would not have any claim on the land. In a case such as this where one party is intending to take advantage of the other, there is no common intention and so no constructive trust, but there will proprietary estoppel.                  

Secondly the remedy is different. Once a constructive trust is found based on a common intention the parties are entitled to whatever share of the property they are found to have intended. In the case of proprietary estoppel, on the other hand, it is for the court to decide, in the exercise of its discretion, what remedy is appropriate. The court may declare a party entitled to a share of the property, or simply order the property owner to pay back to the other party the money they have expended, or make some other order such as allowing the other party to remain in the property for the remainder of their life.

In the past it has been easier to show the necessary “detriment” in proprietary estoppel cases because the court generally demanded a more substantial detriment to be shown in constructive trust cases, but that now appears to be changing so that it may well be that in many more shared occupation cases a constructive trust will be found so that it is no longer necessary to rely on the “fall-back” claim of proprietary estoppel.


Disclaimer

The above explanation of the law is only an overview and in order to be reasonably concise I have had to leave some details out - details which are likely to affect what the law would say about your own situation. So please do not rely on the above but Contact me for advice   

This page was lasted updated in August 2016          Disclaimer