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Equity in Grubby Hands

About The Author

Thomas Horton (Former Writer)

Thomas studied Law at the University of Birmingham, and graduated with a 2:1 in July 2013. In the elapsed time, Thomas has worked for law firm HowardKennedyFsi LLP as a paralegal in the property department. Thomas has also been awarded a Major Scholarship by the Honourable Society of the Inner Temple and will begin the BPTC with City Law School in September 2014.

A change in the law, however sensible and just it seems, always carries a real risk of new and unforeseen uncertainties and unfairnesses. That is a particular danger when the change is effected by the court rather than the legislature, as the change is influenced by, indeed normally based on, the facts of a particular case, there is little room for public consultation, and there is no input from the democratically elected legislature.

These were the comments of Lord Neuberger in his dissenting judgment of the House of Lords’ decision in Stack v Dowden [2007] UKSC 17, which saw the creation of the common intention constructive trust: an equitable remedy that, in particular circumstances, determines the parties’ beneficial interest in property based on their entire course of dealings.

Whilst the decision was welcome in the face of inaction from the legislature, the wide scope for determining beneficial interests through a common intention constructive trust is representative of an equitable development of old. In particular this refers to the myriad considerations that the courts can take into consideration when determining who out of an unmarried cohabiting couple should have what beneficial share in the property they live in.

The recent decision of the Court of Appeal in O’Kelly v Davies [2014] EWCA Civ 1606 has seen a realisation of Lord Neuberger’s concerns. The court, in consideration of the equitable maxim ex turpi causa non oritur actio (“from a dishonorable cause an action does not arise”), allowed for a fraudulent proprietary arrangement to be determined as an unnecessary consideration when taking into account factors affecting the common intention of the parties’ beneficial interests in the family home.

Whilst it is positive to see that equity is continuing to be developed by our courts, it is vital for the developments that are made to be principled and determinative with some certainty. The flexibility of equity should not be used as a scapegoat for making easy decisions.

The Common Intention Constructive Trust

The common intention constructive trust is the offspring of changing social tendencies. The increase in the number of unmarried persons jointly-purchasing property has increased dramatically in light of changing attitudes towards marriage and inflated house prices. Problems arise when the parties purchase the property and declare their legal title to the property yet then fail to detail the beneficial interests in the property in registration documents (see point 9 of the FR1 registration form and point 10 of the TR1 registration form).

Should the cohabiting couple unfortunately decide to split-up, and if they have failed to indicate the apportionment of the beneficial interest in the property, the difficult task of determining each parties’ beneficial interests then arises (and has a tendency to lead to litigation). The scenario is considerably different for married couples that find themselves in this situation, as the court have a prescribed list of considerations to bear in mind that have been provided by the Matrimonial Causes Act 1973 (see s. 25 in particular).

The determination of the beneficial interest is incredibly important for the cohabiting parties. Whilst the legal title is naturally important to allow for effective registration and transfer of the property into subsequent purchasers’ names, this does not reflect the beneficial interest the original cohabiting parties have in the property, which represents their financial interest. As a simple illustration: a property whereby cohabitee A has a 60% beneficial interest, and cohabitee B has a 40% interest, should the property be worth £100,000, the cohabitees would hold a £60,000 and £40,000 beneficial interest respectively.

The basic approach where there is no indication as to the beneficial ownership of the property by the joint tenants is that ‘a conveyance into joint names indicates both legal and beneficial joint tenancy, unless and until the contrary is proved’ (per Lady Hale at [58], Stack v Dowden). In other, simpler words: equity follows the law, despite what Lady Hale and Lord Walker say to the contrary in Jones v Kernott [2011] UKSC 53. However, in exceptional circumstances, if one of the legal co-owners is able to demonstrate circumstances of a common intention to the contrary, equity will not follow the law, and the beneficial interest in the property will be apportioned on the court’s analysis of those exceptional circumstances (per Lady Hale at [69] – [70], Stack v Dowden).

When the court is able to determine by imputing or inferring that there was a common intention of the beneficial ownership, of which has been relied upon to the detriment of the party claiming a beneficial interest different to the basic approach, a constructive trust arises.

The result of the constructive trust being found is that the legal title continues to be held by the joint tenants (i.e. by both cohabitees). However, the beneficial interest, held on trust by the legal owners for the beneficial owners (both owners being the cohabitees), is held by way of a tenancy in common, which allows for the appropriate apportionment of the parties’ interests based on an assessment of the circumstances presented to the court. The constructive trust’s existence is neatly able to avoid the need to be in writing pursuant to s. 53(2) of the Law of Property Act 1925.

Accordingly, the court has provided an innovative application of property law and the flexible, equitable instrument of a constructive trust. Indeed, in a standard equitable approach, the courts are able to avoid any injustice or unconscionable conduct, as the claimant is able to demonstrate their greater entitlement to the beneficial interest in their home that would otherwise be unobtainable.

Moreover, the availability of this mechanism is not restricted to instances where the property is held in joint names. A common intention constructive trust can be found where a claimant is cohabiting with another person who is the sole legal owner of the property. The additional hurdle in those instances that the claimant initially has to overcome is demonstrating that they ever had a beneficial interest in the property at all, as they have no legal title. This may be achieved, for example, if the claimant can demonstrate that they made some contribution to the purchase price.

O’Kelly v Davies [2014] EWCA Civ 1606

O’Kelly and Davies were a cohabiting couple, and purchased their first house in 1987 in joint names. This first property was later transferred into O’Kelly’s sole name. O’Kelly then sold the property back to Davies in 2006, and a second property was purchased as the family home, but the legal title was in O’Kelly’s sole name. When the parties split in 2011, the question arose as to whether Davies held a beneficial interest in the second property despite O’Kelly being the sole legal owner.

It transpired through the proceedings that the reason for having the legal title to the property in O’Kelly’s sole name was to facilitate false benefit claims, as she would appear to be living as a single parent to the couple’s child. Nonetheless the court held that Davies had acted as an arm’s length purchaser, therefore overcoming the hurdle to demonstrate that he had some beneficial interest in the second property. Pursuant to this finding, the substantial financial contributions made, and the whole course of dealings between the parties, it was held that O’Kelly held the property on trust for herself and Davies in equal shares.

The Court of Appeal came to this decision, dismissing O’Kelly’s appeal of the finding of a trust, despite the illegal purpose that permeated throughout the parties’ dealings: facilitating false benefit claims.

O’Kelly, Oh Dear!

There are three problems with the Court of Appeal’s decision. Firstly, the decision undermines the well-established maxim ex turpi causa non oritur actio. Secondly, the court has, again, unnecessarily used the common intention constructive trust in a scenario where a resulting trust would have been more appropriate. Thirdly, in light of the two previous downfalls, the court has unnecessarily contorted the already-sinuous common intention constructive trust.

Ex turpi causa

Simply known as ‘illegality’, this defence can be used in private law to prevent an individual being entitled to enforce their normal rights or remedies because they have been involved in illegal conduct linked to the claim. A claimant must come to equity with clean hands.

O’Kelly raised this defence against Davies’ claim for equal shares in the second property in order to prevent the possibility of a constructive trust being found. However, in reliance of the House of Lords’ decision in Tinsley v Milligan [1994] 1 AC 340, which was apparently ‘on all fours’ with this case, the court rejected O’Kelly’s argument.

Tinsley concerned a cohabiting couple that bought a house together using joint money, however the property was registered in the name of only one of the cohabitees so that the other could claim social security benefits that she would otherwise be unable to claim. The couple’s relationship came to an end, and the registered owner, Tinsley, sought to evict Milligan. Milligan counterclaimed on the basis of her financial contribution to the property and that she was therefore entitled to a beneficial share of the house on the basis of a resulting trust. A resulting trust is similarly able to avoid the formality of being in writing.

The House of Lords held in favour of Milligan; by using a resulting trust as the mechanism for determining whether Milligan held a beneficial interest in the property, there was no need for the illegal purpose to be relied upon.

A resulting trust has a focused method of application, unlike the constructive trust explored above. In consideration of the financial contributions made by the parties in dispute, the court can determine the parties’ beneficial interests by simply looking at the financial contributions made, which will then result in beneficial shares equivalent to those financial contributions. This focus on the financial contributions allows the court to avoid the need to look at the exceptional circumstances of the case, which, as in O’Kelly and Tinsley, could require consideration of, and reliance on, matters intrinsically linked to an illegal purpose.

The absence of a link between the illegal purpose and the method used to determine the existence of a trust that is crucial for assessing whether or not an illegal purpose is being relied upon. Whilst the link can safely be removed by using a resulting trust, as Tinsley demonstrates, the Court of Appeal in O’Kelly proceeded with an application of a common intention constructive trust. This approach, unfortunately, is a natural stem from the comments of Lady Hale and Lord Walker at [51] – [52] of Jones v Kernott; in the context of a cohabiting couple, it is a common intention constructive trust that is to be applied, and not a resulting trust.

In a dogmatic application of higher authority, the Court of Appeal’s decision in O’Kelly is vindicated. Nevertheless, it appears that the Court of Appeal have missed an opportunity to distinguish when a common intention constructive trust should not be applied. It is in the dictum of Pitchford LJ, giving the leading judgment of the Court of Appeal, that this becomes clear:

While the reason for purchase in the appellant's sole name was unlawful, the acquisition of a beneficial interest in the property arose not from the illegal purpose but from the parties' common intention, inferred from their continuing course of dealing, that the respondent should have such an interest. The unlawful purpose may have explained their conduct but it was the conduct itself that gave rise to the constructive trust. (Emphasis added.)

The tedious disassociation between the conduct and the unlawful purpose is not a principled development of when an equitable remedy should be applied. It is contrary to rationality that conduct based upon an illegal purpose can then be divorced from one another simply to allow for an unnecessary application of a common intention constructive trust and an underlying tolerance of illegal conduct.

Resulting trust

In an article written for the New Law Journal, it has previously been submitted that there are instances where a resulting trust is a more appropriate means of settling the dispute between parties seeking to rely on a common intention constructive trust. In that article, it was considered that in the context of familial disputes as to the beneficial ownership of a property purchased for some commercial means, the case is taken outside the realms of application considered by Lady Hale and Lord Walker in Jones. Accordingly, in these situations, a resulting trust would be better applied, and usually result in the same outcome, to reflect the commercial nature of the acquisition of the property; this view is similarly held by Lord Neuberger, as can be seen in his decision of Laskar v Laskar [2008] EWCA Civ 347.

On the basis that there is in an illegal purpose present in O’Kelly, and following the clear ratio decidendi of Tinsley, this case similarly falls outside the realms of those anticipated by Lady Hale in Stack. After all, in law, context is everything.

It is important to understand, therefore, that there are instances where a resulting trust should be applied, and there are three reasons why the Court of Appeal should have applied a resulting trust in O’Kelly. Firstly, the parties were on amicable terms and could have resolved apportionment of funds from the beneficial interest of the property between themselves. Secondly, a resulting trust would have seen a proper application of the ratio decidendi of Tinsley. Thirdly, the resulting trust allows for a complete avoidance of questions of public policy concerning reliance upon an illegal purpose.

It was made clear in the Court of Appeal’s judgment in O’Kelly that Davies did not want anything more than equal shares of the beneficial interest in the second property. Admittedly, the application of a resulting trust would have resulted in Davies having the greater proportion of the beneficial interest of the second property. Nevertheless, understanding that Davies never wanted to exceed a 50% share, it is not beyond the realms of possibility that the parties would have resolved financial distributions and arrived at an agreement to ensure an equal share of the beneficial interest when the property was sold.

The ratio decidendi of Tinsley is stated succinctly in Lord Browne-Wilkinson’s following dictum:

[The claimant] is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction.

Taking into account the whole course of dealings between the parties in O’Kelly, the illegal purpose of having the second property in O’Kelly’s sole name cannot be disassociated from their course of dealings. The situation intrinsically demonstrates some, no matter how minor, reliance upon an illegal purpose. The complexity of accepting the Court of Appeal’s decision has seen the realisation of Lord Neuberger’s concerns stated at the beginning of this article, and those stated by the Law Commission in their 2010 report on the defence of illegality:

It seems that the claimant may lead some evidence of a common intention, but not the most direct evidence, which reveals the true reason behind the parties’ actions. As a result, the law is uncertain and complex, and is likely to lead to arbitrary results. Some claimants will win and some will lose, depending on the exact details of the evidence led.

The only sensible approach that could have been taken by the court to avoid any link between Davies’ claim to a beneficial interest in the second property and the illegal purpose of his arrangements with O’Kelly was to rely upon an application of a resulting trust as seen in Tinsley. The natural result of applying a resulting trust allows the court to avoid problems of public policy, as the financial contributions are not associated with the illegal purpose (see in particular on this matter the leading judgment of Lord Browne-Wilkinson, and the dissenting judgment of Lord Goff in Tinsley).

Conclusion: an unnecessary development?

Whilst it is necessary for the common intention constructive trust to be flexible, any development of an equitable instrument must be principled, which the Supreme Court carefully pointed out in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. This approach to developing equity should be the same for cases of a commercial or domestic context. The decision in O’Kelly is likely to raise considerable uncertainty in future cases, and it is disappointing to see that a lazy approach by the Court of Appeal has resulted in a resulting trust not being applied in circumstances where it would have been appropriate to do so.

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Tagged: Equity, Property Law

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