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Trusts | Formation

Constructive Trusts: Overview

Revision Note | Degree

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  • constructive trusts arise by operation of law: imposed on trustee (T) because his conscience is affected
    • Lord Millett: .. constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his beneficial interest in the property...

Trusts of the family home

  • constructive trusts important in family property disputes
  • after marriage breakdowns: ownership of beneficial interest has to be established & courts have wide powers to make property adjustment orders under divorce/annulment legislation
  • unmarried couples entitlement determined by trust law
  • X & Y are unmarried couple & Y holds legal title to property
    Y does not necessarily own entire beneficial interest
    X may have equitable interest (due to contributions to family)
    • s.53(1)(b): declaration of trust in respect of land must be evidenced in writing

Legal ownership: joint names

  • parties have purchased home in joint names & hold legal title as joint tenants
  • beneficial interest: if parties hold as tenant in common respective proportions will inevitably be stated (conclusive in absence of fraud or mistake)
  • if trusts not expressly stated
    • domestic property conveyed into joint names of cohabitants without declaration of trust:
      prime facie both legal & beneficial interests joint & equal
      onus of proof on party seeking to establish otherwise: prove common intention beneficial interests different legal
      to discern common intention court consider: whole course of conduct, factors other than financial contributions might be relevant
      such cases unusual
    • Supreme Court: purchase of property in joint names for joint occupation by married or unmarried couple:
      presumption: parties intended joint tenancy in law & equity
      rebuttable by evidence of contrary intention (more readily shown where financial resources not shared)

Legal ownership: estate in name of one party only

  • in absence of an express declaration of trust that owner holds on trust for C a resulting or constructive trust may be found

Resulting trusts: capital contributions

  • home in D's name (defendant) & C (claimant) contributed to purchase price
  • traditionally C obtained interest proportionate to contribution by resulting trust
  • since Stack v Dowden role of resulting trust less clear
    • Lord Neuberger found resulting trust had role to play, other judges disagreed
    • direct contribution likely to indicate common intention as required for constructive trusts

Constructive trusts: common intention

  • two stages to determine whether C has beneficial interest, C must show:
    common intention between parties that both have an interest
    & C acted to detriment as result of common intention
  • questions arise as to whether common intention can be inferred & what amounts to detriment
    • house in sole name of husband (D)
    • wife (C) claimed beneficial interest under constructive trust
    • D charged house to bank as security for an overdraft
    • C attempting to prevent sale of house under charge by showing she had beneficial interest
    • was there a constructive trust?
    • no constructive trust: no common intention
    • common intention: can be shown by express agreement or inferred from conduct
    • insufficient: C had supervised builders renovation of property & decorated
    • Lord Bridge: .. where the court must rely entirely on the conduct of the parties both as the basis from which to infer a common intention... direct contributions to the purchase price by the partner who is not the legal owner, whether initially or by payment of mortgage instalments, will readily justify the inference necessary to the creation of a constructive trust. But... it is at least extremely doubtful whether anything less will do...

    Curley v Parkes [2004] All ER (D) 344

    • only payments at the time of acquisition give rise to a resulting trust

    Le Foe v Le Foe & Woolwich [2001] 2 FLR 970

    • common intention inferred: express agreement that one party pays mortgage & certain outgoings & other meet all the other (substantial) household expenses
    • Lord Walker: trend moved on from Stack v Dowden, court should look at whole of course of dealings & not solely direct contributions to purchase price
  • common intention may be inferred: if agreement to share mortgage & other outgoings, if other outgoings substantial also suffice for detriment
  • if interest claim successful question arises how quantified
    • Court of Appeal: mathematical calculation based on proportion of purchase price incorrect approach
    • correct approach: whole course of dealing between parties (including indirect contributions) to ascertain shares intended
    • Baroness Hale found factors include: discussion at time of purchase
      nature of parties' relationship
      how parties' arranged their finances
      how discharged outgoings on property
      & whether parties had were responsible for housing children

    Jones v Kernott [2011] UKSC 53

    • Supreme Court correct approach:
      determine if equitable interest arose under constructive trust
      quantify interest: if not possible to ascertain shares parties intended by direct evidence or inference, court consider what fair having regard to whole course of dealing (financial & non-financial contributions)

Proprietary estoppel

  • doctrine of proprietary estoppel: method person may be entitled to equitable interest in property without appropriate formalities
    • legal owner of property (D) repeatedly told unmarried partner (C) house was hers
    • C paid repairs & decorated property in reliance on D's assurances
    • D allowed C spend money to do so
    • was D estopped from denying C equitable interest?
    • D estopped: unable to deny assurances when C had acted in reliance
    • despite no written evidence of declaration of trust (contrary to s.53(1)(b) LPA 1925)
  • proprietary estoppel may be used as cause of action: not remedy in itself but raises estoppel equity & court decides remedy which will satisfy that equity

Proprietary estoppel: establishing the equity

  • equity may assist if:
    legal owner has acted in way that claimant believes he has or will get rights in relation to property (expectation)
    & C has acted to his detriment as a result such that would be unconscionable for legal owner to insist on strict legal ownership
  • may be active assurance (Pascoe v Turner) or passive

    Inwards v Baker [1965] 2 QB 29

    • father persuaded son to build bungalow on his land
    • does doctrine of proprietary estoppel apply?
    • father estopped from claiming bungalow belonged to him
    • passive assurance: legal owner stands back & lets C act to his detriment in belief that he is entitled to interest in the property
  • assurance may relate to future rights
    • G worked for H for 40yrs: G was paid very little & incurred expense
    • H promised he would leave his estate to G
    • is future assurance valid?
    • Walker LJ: .. Mr G and his wife devoted the best years of their lives working for Mr H... They went far beyond the usual extent of an employee's duties. G refused offers of alternative employment. Why? Because H repeatedly assured G that he would leave his entire estate to him...
    • T worked for M as a framer for many years for no pay
    • M made oblique comments which at first led T to hope he would inherit the farm & later to expect
    • was there sufficient assurance?
    • Lord Walker: .. to establish a proprietary estoppel the relevant assurance must be clear enough. What amounts to sufficient clarity, in a case of this sort, is hugely dependent on context...
    • Lord Neuberger: .. at least normally, it is sufficient for the person invoking the estoppel to establish that he reasonably understood the statement or action to be an assurance on which he could rely...
  • C must act to his detriment in reliance on the assurance (causal connection between assurance & detriment) but does not have to be sole reason
  • onus on C to show causal connection as matter of fact
  • detriment may be: personal & financial (Gillett v Holt) or improving land (Inwards v Baker) & can be in relation to care provided

    Re Basham [1986] 1 WLR 1498

    • C looked after her stepfather (S)
    • S promised that C would inherit the house he lived in paid for by C's mother
    • was there sufficient detriemnt?
    • .. acts went well beyond what was called for by natural love and affection... [C] and her husband made it very clear in their evidence that there was no great love and affection between her husband and the deceased, and that he was only willing to pay for meals... [C] provided for the deceased and to work as he did in the garden of the cottage because of the expectation that the deceased's estate would in due course pass...
    • C established sufficient detriment by evidence that she had looked after the family including a mentally ill member

Proprietary estoppel: satisfying the equity

  • principle: remedy should be minimum to satisfy equity & depends on facts of each case
    • mutual bargain: A says to B if you move into my house and look after me, then I will leave you my house in my will
      A & B regard expectation as roughly equivalent
      court may well fulfil expectation & order A's estate to transfer house to B
    • if expectations less certain: court may take C's expectation as starting point but also consider factors such as:
      extent of detrimental reliance
      unconscionability, including misconduct by C & D
      alterations in D's finances
      financial obligations owed by D to others
      effect of taxation
      any benefits C derived from situation, such as rent-free accommodation
      whether proposed remedy is practical
      proportionality: is the remedy proportional to the detriment suffered?
  • awarded: transfer of freehold
    • transfer of freehold to C who expected home for life: licence would not guarantee home for life because no protection against sale
  • awarded: compensation
    • expectation was generous legacy: court valued detriment
    • awarded compensation equivalent to cost of full-time nursing care for time C looked after deceased
  • transfer of whole state in both Gillett v Holt & Thorner v Major or an equitable interest in property under a constructive trust

Proprietary estoppel: constructive trusts

  • overlap between proprietary estoppel & constructive trusts
    • C refurbished & converted house into flats on basis of oral agreement with owner that he would acquire ground floor flats
    • which approach should be adopted?
    • Court of Appeal same outcome: C entitled to an interest by proprietary estoppel & alternatively interest under common intention constructive trust
  • however, there is difference between approaches
    • Lord Walker: Proprietary estoppel typically consists of asserting an equitable claim against the conscience of the 'true' owner. The claim is a 'mere equity'. It is to be satisfied by the minimum award necessary to do justice... which may sometimes lead to no more than a monetary award...
    • A common intention constructive trust, by contrast, is identifying the true beneficial owner or owners, and the size of their beneficial interests...

Secret trusts

  • owner of property dies: property passes to those entitled under law of succession:
    testator may have left will defining chosen beneficiaries for certain benefits
    or statutory intestacy rules
  • executors must prove will (show validly executed) through Grant of Probate at this stage will becomes public document
  • secret trusts: device to keep details of gift out of public domain (ultimate recipient kept off face of will thereby gift is secret)
  • secret trusts can be viewed as conflicting with s.9 Wills Act 1837 (testamentary dispositions should be in writing, signed & witnessed):
    T makes will leaving legacy £10 000 to L
    after will but before T's death, L agrees to hold money on trust for B
    gift to B taking effect on testator's death which is not in writing or witnessed
    testator can make dispositions of property differing from will without observing s. 9
  • secret trusts originally allowed due to maxim equity will not allow a statute to be used as an instrument of fraud (if L argued lack of writing invalidated holding money on trust for B, using statute to further fraudulent claim)
  • modern explanation: secret trusts operate entirely outside (dehors) will & law relating to trust contained in wills is irrelevant
  • fully secret trust: no indication money will be held on trust to be decided in future & half secret trust: clause leaving legacy to be dealt with as agreed
  • rules for communication of obligation from testator to legatee are more restrictive for half-secret trusts

Fully secret trusts: requirements

  • three main elements

    Ottaway v Norman [1972] Ch 698

    • intention to impose trust on secret trustee
    • communication of obligation to secret trustee
    • acceptance of obligation by secret trustee

Fully secret trust: intention

  • intention of T to subject secret trustee (ST) to trust in favour of secret beneficiary (SB)
  • certainty of intention to create a trust

    Re Snowden [1979] Ch 528

    • imposition of moral or family obligation is insufficient to impose trust obligation
    • establish secret trust where no question of fraud on part of ST arises: ordinary civil standard of proof
    • ordinary civil standard of proof: balance of probabilities T intended to impose trust on ST
    • if deliberate fraud on part of ST: higher standard of proof of fraud may be necessary
    • T's intention must be that there would be sanction for ST not executing trust must be recourse to courts & not merely relying on ST's conscience

Fully secret trust: communication & acceptance

  • T must communicate terms of obligation to ST & ST must accept

    Wallgrave v Tebbs (1885) 25 LJ Ch 241

    • obligation must be communicated to intended ST before T's death
    • if not ST takes benefit of property

    Re Boyes (1884) 26 Ch D 531

    • details could be included in sealed envelope handed to ST provided he agreed to hold property on those terms
    • if ST agreed to be ST but terms of trust never communicated: ST cannot take benefit of property & resulting trust take property instead
  • acceptance may be presumed by silence on part of ST

Half secret trust: requirements

  • same three requirements as fully secret trust but interpreted differently
    • Viscount Sumner: necessary elements are intention, communication and acquiescence
    • communication & acceptance of obligation must take place before or at time will is signed
    • .. to hold otherwise would indeed be to enable the testator to 'give the go-by' to the requirements of the Wills Act, because he chose not to comply with them...

Secret trusts: proving existence

  • with fully secret trust there is a danger ST will deny
  • no legal requirement but good practice: T to ask ST to confirm acceptance in writing
  • solictor's notes may also be used as evidence (Re Snowden)

Secret trusts: express or constructive?

  • theory that secret trusts are declared outside the will: suggests they are express rather than constructive trusts

    Paragon Finance v DB Thakerer [1999] 1 All ER 400

    • Lord Millett: .. constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his beneficial interest in the property...
  • practical implication: express trusts of land are subject to the requirements of s.53 (1)(b) Law of Property Act 1925
    • s.53(1)(b):declaration of trust respecting land must be written, signed & witnessed
  • LPA 1925 seems consistent with older case law

    Re Baille (1886) 2 TLR 660

    • half secret trust unenforceable due to lack of written evidence
  • however more recently

    Ottaway v Norman [1972] Ch 698

    • enforceable: fully secret trust of land orally communicated to ST
  • argument that secret trust is a constructive trust:
    secret trust involves element of unconscionablity, despite the dehors the will theory
    departure from requirements of Wills Act 1837 justified by maxim equity will not allow a statute to be used as an instrument of fraud
    ST would be attempting to set up lack of formal signed, witnessed written document as justification for fraud (this type of trusts usually constructive trust)
  • unclear as to correct characterisation of secret trusts

Mutual wills

  • doctrine of mutual wills allows: survivor access to property inherited from first to die & effectively prevents survivor from leaving any remaining property away from an agreed beneficiary
  • for doctrine to apply:
    must be agreement between two testators as to how they will dispose of their property by will
    mutual wills are made in pursuance of the agreement
    wills need not be identical in their terms, but often will mirror each other

    Re Dale [1994] Ch 31

    • wills are made pursuant to an agreement as to the disposition of the parties' property
    • property which is subject-matter of agreement is specified & held on trust for beneficiary from death of first testator (T1)
    • survivor (T2) may make a new will, but on T2's death property which is subject to the trust is held by T2's personal representatives on trust for agreed beneficiary

Mutual wills: agreement between two testators

  • mutual wills come into existence only if there is contract between two testators not to revoke their wills
    • contract between T1 & T2 required before there can be any finding of mutual wills
  • s.2 Law of Property (Miscellaneous Provisions) Act 1989 requires an enforceable contract relating to land: to be writing & incorporate all terms of the agreement
    • Mr & Mrs B intended to make mutual wills
    • orally agreed each would leave their share of London flat to C (Mrs B's niece)
    • Mrs B died & Mr B gave his share to X & subsequently died
    • could the doctrine of mutual wills be relied upon by C?
    • High Court: absence of enforceable contract not fatal to the application
    • unconscionable that Mr B should be able to avoid obligation taken on when he agreed to leave flat to C by will
    • constructive trust imposed in favour of C: Mr B failed to give effect to common intention upon which Mrs B had relied (by not altering her will)

Mutual wills: consideration

  • an enforceable contract requires valid consideration
  • in prevoius cases doctrine of mutual wills held to apply, T2 has benefited from T1's will :
    T1 may have given T2 an absolute gift, with a gift over in default to agreed beneficiary in the event of T2 dying before T1
    T1 may have given T2 a life interest, with remainder to the agreed beneficiary (contract would stipulate T2 would by will give T2's own property to agreed beneficiary & T1's estate would pass on T2's death by virtue of the remainder) as T2 receiving benefit from T1's will in return is bound by the agreement
  • underlying basis for enforcement of contract is to prevent fraud on part of T2
  • novel issue arose in Re Dale

    Re Dale [1994] Ch 31

    • T1 gave nothing in his will to T2
    • T1 left all his estate to their children. & T2's will was identical
    • what consideration had been provided by T2 to justify a finding of a legally-binding contract?
    • T2 received nothing under T1's will so could not personally benefit from fraud
    • wider fraud found: T1 performed his side of bargain by not revoking his will & leaving will in agreed form, if T2 were subsequently to attempt to dispose of estate in departure from agreement, a fraud on T1 (allows T1 to die in the belief that agreement will be given effect to by T2)
    • consideration: T1 having acted to his detriment in that he dies having not revoked the will (as was his right) leaving will in agreed form

Mutual wills: proof of agreement

  • very few wills held to be mutual wills
    • mutual will requires: clear agreement that the testators must have undertaken not to change their intentions after the death of T1, and that T2 should be bound to leave the combined estates to the agreed beneficiary...
    • reviewed case law on issue

    Re Oldham [1925] Ch 7

    • evidence required for an express agreement not to revoke the wills must be certain and unequivocal

    Re Cleaver [1981] 1 WLR 939

    • evidence must be clear and satisfactory

    Olins v Walters [2009] Ch 212

    • sufficient: wills contained a statement that they were intended to be mutual wills & solicitor's attendance note supported this
    • mutual will found despite no written evidence: two sisters (peas in a pod)
  • onus of proof on those alleging that the wills are mutual wills (person who claims to be agreed beneficiary under the contract)
  • signing identical or mirror insufficient to show intention for mutual wills (there must be clear evidence in addition to dispositions in wills that there was mutual intention that T2 be bound by the agreement

Trust in favour of the agreed beneficiary

  • remedy: imposition of a constructive trust on the property which is the subject matter of the contract
  • testator can change his will at any time prior to death but if constructive trust has already arisen, he is not free to divert affected property away from agreed beneficiary by ew will
  • trust arises on death of T1

    Re Hagger [1930] 2 Ch 190

    • T1 and T2 left mutual wills leaving everything to each other & on death of the survivor, to X
    • T1 died & then X died before T2
    • normally X would not take anything but court decided X's interest did not fail & his estate took under the constructive trust
    • trust must have arisen prior to T2's death
    • Lewison LJ: .. trust arises out of the agreement between the two testators not to revoke their wills, and the trust arises when the first of the two dies without having revoked his will...
  • property subject to the trust will depend on terms of agreement if unclear may be evidence no contract intended between Ts
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