Loan to appellant — Security agreement contained in letter — Non-compliance with formality requirements of section 2 of Law of Property (Miscellaneous Provisions) Act 1989 — Enforceability — Whether constructive trust enforceable under exception in section 2(5) — Whether section 53(1)(c) of Law of Property Act 1925 applying — Appeal dismissed
The respondent agreed to make a loan of £50,000 to a company, of which the appellant was managing director, in order to enable it to take advantage of a business opportunity. As security for the loan, the appellant and his wife signed a letter agreeing that the respondent could place a charge over their home for the full amount.
The business transaction fell through, and the loan was not repaid. The respondent brought proceedings seeking specific performance of the security agreement. He contended that: (i) although the agreement did not comply with the formality requirements of section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989, which are applicable to contracts for the sale or disposition of an interest in land, it created a constructive trust and therefore fell within the exception set out in section 2(5); and (ii) in any event, the agreement complied with section 53(1)(c) of the Law of Property Act 1925, being a disposal in writing of an “equitable interest or trust subsisting at the time of the disposition”. The appellant argued that the agreement was unenforceable under either provision.
The judge held that the security agreement was enforceable under section 53(1)(c) of the 1925 Act, but not under section 2 of the 1989 Act. He made no finding as to whether a constructive trust had arisen. The appellant appealed, contending that: (i) section 53(1)(c) applied only to a disposition of a subsisting interest; (ii) no separate equitable interest in property existed until the legal and equitable estates had been divided; (iii) the effect of the security agreement was therefore to create a new interest in land; and (iv) accordingly, section 53(1)(c) could not apply. The respondent cross-appealed, submitting that the judge should have found that a constructive trust had arisen and, further, that the agreement was enforceable under section 53(1)(a) of the 1925 Act, which applied to the creation or disposition in writing of an interest in land.
Held: The appeal was dismissed and the cross-appeal was allowed in part.
Section 53(1)(c) of the 1925 Act could not apply, because it was well established that it applied only to subsisting equitable interests: Murray v Guinness [1998] NPC 79 distinguished; Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 considered.
A claimant could rely upon section 2(5) of the 1989 Act in circumstances where constructive trust and proprietary estoppel overlapped. This would be the case where a claimant, to the knowledge of the legal owner, had acted to its detriment in reliance upon a belief that it had or would obtain an interest in property: Yaxley v Gotts [1999] 2 EGLR 181 applied. A party seeking to rely upon proprietary estoppel as a basis for disapplying section 2(1) was not prevented from relying, in support of its case, upon the agreement that would otherwise be rendered invalid by section 2(1). Thus, the requirement that a defendant should have encouraged or allowed a claimant to believe that he would acquire an interest in land could, depending on the facts, consist in the defendant encouraging the claimant to believe that the agreement for the disposition of an interest in land was valid and binding. It was to be noted that, in this type of case, reliance upon the unenforceable agreement took a claimant only part of the way; it would still have to prove all the other components of proprietary estoppel. It would have to show that the defendant had represented to it, by words or conduct, that the agreement created an enforceable obligation. The cause of action in proprietary estoppel was therefore founded not upon the unenforceable agreement but upon the defendant’s conduct, which, when viewed in all relevant respects, was unconscionable.
In the present case, the respondent had made it clear that he required security for his loan, and the appellant had responded by providing the security agreement and by persuading the respondent that once he had the agreement, he should make the loan. The agreement demonstrated an intention to create a security interest, and the respondent had acted to his detriment by making the loan. The appellant had, by his conduct, encouraged the respondent to believe that the security agreement was valid and binding, and he had to stand by that conduct even if he had misunderstood the effect of section 2(1) of the 1989 Act. A proprietary estoppel arose, and section 2(5) was applicable: Actionstrength
Ltd (t/a Vital Resources) v International Glass Engineering IN.GL.EN SpA [2003] UKHL 17; [2003] 2 AC 541 distinguished.
The section 53(1)(a) point could not now be raised, since it had not been raised below: [2004] EWHC 998; [2004] 19 EG 164 (CS). In any event, it did not arise in view of the court’s conclusion on constructive trust.
Adrian Jack (instructed by TG Baynes) appeared for the appellant; Angus Macpherson (instructed by Phillips, of Basingstoke) appeared for the respondent.
Sally Dobson, barrister
