Constructive Trusts 2
Judith Puech
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Constructive Trusts 2.
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In the first lecture on constructive trusts, the discussion began with the case of Carl Zeiss Stiftung and the words of Lord Justice Edmund Davis that English law provides no clear and all-embracing definition of a constructive trust and whilst the unconscionable conduct of the owner appears to be the connecting factor in the circumstances where a constructive trust has been imposed, constructive trusts in fact arise over a wide variety of circumstances. An exhaustive categorisation is not possible and, as such, constructive trusts are best considered by looking at the most usual situations in which they have been found to exist. We went on to consider the first two situations and will deal with the remaining examples here, the main focus of which will be on constructive trusts of the family home.
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Constructive trusts can arise from the creation of mutual wills. Mutual wills will arise where two or more people make wills in agreed terms and agree that neither will revoke without the consent of the other. If the first to die carries out his part of the agreement, equity will regard it as unconscionable for the survivor to deviate from the agreed terms. Therefore, equity will impose a trust on the survivors property. The survivor remains free to revoke his will but because of the existence of the trust, the new dispositions of the property will be ineffective.
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In the case of re Dale the court held that it was not necessary for the testators to agree to leave property to each other. Equity will intervene to impose a trust on the property of the survivor where the agreement is that each testator shall leave property to a third party, for example, their children. In the case of Goodchild v Goodchild, the Court of Appeal confirmed that in order for wills to be mutual there must be clear evidence of mutual intention not to revoke unilaterally.
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In the lecture on the creation of express trusts, it was seen that whilst no formalities are required for the creation of an inter vivos trust of personality, certain formalities must be met when creating an express trust of land, and all testamentary trusts must comply with the formality requirements of section 9 of the Wills Act 1837. This provides inter alia that for a will to be valid, it must be in writing, signed by the testator in the presence of two witnesses who each sign in the presence of the testator. If the provisions of section 9 are not met, the will and accordingly any trust it creates are void.
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Secret trusts, however, are trusts which take effect on the testator’s death and which do not comply with the terms of the Wills Act. Generally, the testator will leave property by will to a person, someone trusted by the testator, a friend or the testator’s solicitor. And from the face of the will, it looks like an outright gift to that person. However, the understanding is that the donee will in fact take it upon certain trusts. This is called a fully secret trust.
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Alternatively, the testator can leave property in his will to the person, declaring that it is to be held on trust but without specifying the terms of the trust. This is called a half-secret trust, as it is clear that the person is a trustee but the details of the trust are secret.
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The usual reasons as to why a testator wishes to create a secret trust are to keep the identity of the beneficiary secret, for example, the beneficiary is his illegitimate child or mistress, or the testator may simply have not made up his mind about all the details of his dispositions. Subject to certain conditions, mainly the timing of the communication of the terms of the trust to the trustee, secret trusts are valid and enforceable by the courts. Accordingly, by the use of a secret trust, the testator can effect such dispositions and avoid the statutory formalities of the Wells Act.
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The existence and enforcement by equity of such trusts, contrary to the provisions of the Wells Act, is justified historically on the basis of the doctrine of fraud. However, the modern view is that secret trusts are enforced because they are not created by the will but arise outside of and operate independently of the will. Closely connected with this is the question of whether secret trusts are considered as express or constructive trusts, a particularly important issue in the case of land, as the formality requirements of section 53 1b of the LPA 1925 apply to express trusts of land but not constructive trusts. The question remains unsettled.
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As a rule of public policy, a person may not benefit from his crime. Thus, if one person kills another, he cannot take any benefit under the victim’s will or the intestacy rules if the victim dies intestate. If the killer acquires legal title to the victim’s property, he will hold it on constructive trust for the people next entitled to it under the victim’s will or his next of kin. The most famous example of this principle in operation is the case of re Crippen, where Dr. Crippen, having inherited his wife’s estate as a result of murdering her, was not beneficially entitled to. As the property had actually come to him, a constructive trust was imposed for the benefit of those next entitled.
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Similarly, where a person obtains property by fraud, he will hold it as constructive trustee. This principle can be seen to be operating in cases such as Rochefoucauld v Boustead, Bannister v Bannister and Binnions v Evans.
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Contracts for the sale of land are specifically enforceable and, as such, as soon as a vendor enters into a contract to sell land, he immediately holds it in constructive trust for the purchaser. The constructive trust arises as a result of the application of the equitable maxim that equity treats as done that which ought to be done. Generally, contracts for the sale of personal property are not specifically enforceable. In instances where specific performance is available, however, as for example in Oughtred v Inland Revenue Commission, which involved a contract for the sale of shares in a private company, a constructive trust will arise.
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Constructive trusts can be imposed to complete imperfect gifts. The substantive law relating to this area has been dealt with elsewhere. It is of note to remember that in those limited circumstances where equity will treat a failed attempt at making a transfer to trustees or a failed attempt at an outright gift as a declaration of trust, there has in fact been no real declaration of trust. Consequently, if equity wishes to treat the intended settler as having declared himself as trustee for the intended beneficiary, it must impose its own trust. This can be seen in the cases of Re Rose, Mascall v Mascall and more recently and somewhat controversially in Pennington v Waine, which were considered in greater detail in the lectures on the creation of express trusts.
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The remainder of this lecture will concentrate on constructive trusts of the family home.
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Trusts often arise in the context of the family home and disputes over its ownership, typically where the property is owned by one of the parties to the relationship but the other claims an interest in the property by virtue of contributions to the purchase price or improvements to the property or the payment of domestic expenses. We saw in resulting trusts that when two people contribute towards the purchase of property, whoever is the legal owner of the property will hold it on resulting trust for both parties in proportion to their contributions. However, if one of the parties does not make any direct financial contribution to the purchase price, the question then arises as to whether the non-legal owner may claim a proprietary interest in the home under the doctrine of constructive trusts. Note that the doctrines of resulting and constructive trusts also apply where the property is in the joint names of the parties but the title documents do not deal with their respective beneficial interests. However, the typical situation and indeed the majority of the cases involve the legal title being in one name only, and the question then of how the claimant can obtain an equitable interest in the home under a resulting or constructive trust or a proprietary estoppel calim, which we shall consider towards the end of the lecture.
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Consideration should be given to the social context in which constructive trusts have developed. Initially, in response to the situation of married women and the question on divorce of ownership of the matrimonial home typically purchased in the sole name of the husband. The wife may claim in an interest under a resulting trust if a direct contribution was made to the purchase price. However, in the majority of cases the house would be purchased by means of a mortgage repaid from the husband’s income. Such a trust would not recognise anything other than financial contributions and certainly would not reflect the value of other contributions made by the wife. Accordingly, the constructive trust was developed particularly so by the House of Lords in Pettit v Pettit and Gissing v Gissing to provide the non-owning spouse with a share in the matrimonial home. The advent of the Matrimonial Causes Act 1973 has lessened the significance of the role of the constructive trust and indeed the resulting trust as the Act gives the court jurisdiction over the distribution of the spouse’s property.
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The Act however has no application to unmarried couples and in modern society cohabitation outside marriage is increasingly common. As such, the rights of the unmarried cohabitees in the property will fall to be determined on general law principles under the doctrines of resulting and constructive trusts, the question of ownership arising when the relationship breaks down. The issue of whether a resulting or constructive trust has arisen will also be of importance to married couples, one of whom is claiming an interest in priority to a third party, most commonly the mortgagee of the property.
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The claiming of an interest under a resulting trust requires that at the outset the claimant has made a direct contribution to the purchase price. The claimant’s interest under such a trust will be in proportion to the contribution to the purchase price so provided. We saw in the lecture on resulting trusts that this contribution can be by of payment to the mortgage in instalments, provided that at the outset the claimant had undertaken to make such payments. Thus the claimant will be entitled to the share which he or she has paid for or has undertaken to pay for.
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The limitations of the resulting trust can be clearly seen. It is particularly of no use to a claimant who has not provided for any part of the initial purchase price and indeed even if such a payment is established, the proportionate resulting trust analysis may not provide a just result. It may be preferable therefore for a claimant to establish an interest under a constructive trust. As we shall see, the claimant’s conduct is not limited to payments to the purchase price and the court has considerable leeway in determining the size of the share to which the claimant is entitled.
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There are two matters which must be demonstrated in order to establish a constructive trust. The claimant must show that there was a common intention to share the beneficial interest in the property and that he or she has acted to his or her detriment on the basis of that common intention.
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The most recent and authoritative statement of the law in this area was set out in the judgement of Lord Bridge in the House of Lords case of LLoyds Bank v Rosset in which his lordship drew a distinction between two very different situations. Those cases in which there has been some agreement, arrangement or understanding reached between the parties that each is to have a beneficial share in the property and those cases in which there has been no such agreement. In such a case the court has to rely on the conduct of the parties from which to infer a common intention to share the property.
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The constructive trust gives effect to the common intention of the parties and accordingly is often referred to as a common intention constructive trust. Further, as can be seen from Lord Bridge’s speech, this common intention can arise as a result of the parties’ express agreement to share the beneficial interests in the property or such an intention can be inferred from their conduct. It is proposed to deal with each of the categories in turn.
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An agreement to share the beneficial interest is required. In Rosset, Lord Bridge emphasised the distinction between shared use of assets and shared ownership.
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The agreement to share must be based on evidence of express discussions, As observed in Springett v Defoe, trust law does not work on telepathy.
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Lord Bridge considered the case of Eves v Eves and Grant v Edwards to be outstanding examples of cases within the first category. In both cases, the female partner had been clearly led by the male partner to believe that the property would belong to them jointly. In Eves v Eves, the male partner had told the female partner that the only reason why the property was to be acquired in his name alone was because she was under 21 and that, but for her age, he would have had the house put into their joint names. He admitted in evidence that this was simply an excuse.