Transfer of land – Resulting trust – Respondent and first appellant proposing joint venture to develop land – Respondent providing purchase monies – Land purchased in name of second appellant wife to avoid stamp duty – Parties falling out – Judge ordering second appellant to transfer land to respondent – Appellants appealing – Whether judge erring in law by giving effect to resulting trust in respondent’s favour – Appeal dismissed.
The first appellant was a builder. The respondent had made loans to the first appellant over a ten-year period to undertake renovation or development projects or to purchase plant and equipment.
The possibility of a joint development project was discussed. Land at the rear of The Grove, 22 Ramsgate Road, Louth was purchased for £230,000, with planning permission for two residential properties.
Although there was nothing in writing, it was common ground that the respondent would provide the purchase price and the first appellant his labour in the development of the houses on the land. The intention was for any profit to be split equally between the appellants on the one hand and the respondent on the other.
The land was purchased in the name of the second appellant (the first appellant’s wife) as it was thought she might be considered as a first-time buyer and avoid stamp duty. (In the event stamp duty was paid).
Disputes arose between the parties and the joint development did not proceed. The respondent brought a claim for the second appellant to transfer the land to him.
The judge found as a fact that the true nature of the transaction was that the respondent was the sole legal and beneficial owner of the land which was held by the second appellant on a resulting trust in his favour. Therefore, she was ordered to the transfer the full legal and beneficial interest to the respondent for nil consideration. The appellants appealed.
Held: The appeal was dismissed.
(1) Title to property could pass under an unlawful transaction but the court would not assist an owner to recover the property if he had to rely on his own illegality to prove his title. The same applied to real property in which the claimant had a beneficial interest. It was enough to show that there was a common understanding that the parties were joint owners. The effect of illegality was not substantive but procedural. The question was, “In what circumstances will equity refuse to enforce equitable rights which undoubtedly exist”: Tinsley v Milligan [1993] EGCS 118; [1994] 1 AC 340 considered.
The true nature of the transaction depended on its substance, not the label the parties attached to it. In the present case, the judge found that the true transaction was a purchase, deliberately mislabelled by the parties as a loan to get a tax advantage, even though those involved knew it was not. The judge gave effect to the purchase monies resulting trust which, based on his voluntary payment of the purchase price of the land, arose in the respondent’s favour: Westdeutsche Bank v Islington London Borough Council [1996] 2 WLR 806 considered.
(2) In most related cases, the presumption of advancement applied. In those cases, the rule had been stated that a claimant could not rely on evidence of his own illegality to rebut the presumption that the claimant intended to make a gift of the property to the transferee. The crucial point was the inability of the claimant to lead evidence rebutting the presumption of advancement: Gascoigne v Gascoigne [1919] 1 KB 223 and Tinker v Tinker [1970] 1 All ER 540 considered.
It might be thought that the application of the “reliance” principle in this case led to the same result as the judge found. There was no relationship between the respondent and the appellants leading to a presumption of advancement which the respondent needed to rebut in reliance on his own illegality in seeking to avoid stamp duty. The respondent having voluntarily advanced monies to the second appellant, the presumption that arose was one of a resulting trust in the respondent’s favour, with no need for him to lead evidence of his own illegality (or to prove the negative that those monies were not advanced by way of loan).
(3) However, in Patel v Mirza [2016] UKSC 342; [2017] AC 467, the Supreme Court adopted a more flexible approach to whether illegality should result in the denial of a claim. The essential rationale of the illegality doctrine was that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system. In assessing whether the public interest would be harmed, it was necessary to consider: (i) the underlying purpose of the prohibition transgressed and whether that purpose would be enhanced by denial of the claim; (ii) any other relevant public policy on which the denial of the claim might have an impact; and (iii) whether denial of the claim would be a proportionate response to the illegality. The public interest was best served by a principled and transparent assessment of those considerations, rather by a formal approach capable of producing results which might appear arbitrary, unjust, or disproportionate.
The court was unable to conclude that enforcing the resulting trust in the respondent’s favour would produce inconsistency and disharmony in the law to cause damage to the legal system. The relevant prohibition was intended to limit stamp duty relief to genuine first-time buyers to prevent the avoidance of tax. To “upend” the respondent’s purchase by imposing on the parties a transaction which, on the judge’s findings, was a fiction would be disproportionate when the stamp duty potentially to be avoided was relatively minor, the correct stamp duty was, in fact, paid, all the parties were “in on” the arrangement and, had that arrangement proceeded, the tax authorities would still have had the power to ensure the payment of any tax due and impose any appropriate penalty.
(4) Based on the judge’s findings, the parties’ understanding was that the respondent had purchased the land. The justice of the case suggested that they should be held to their (internal) mutual understanding; even if the joint venture had gone ahead, the parties would have shared any profit equally. On the appellants’ case, they would be entitled to any profit arising on the sale of the land (after repayment of the loan) without having contributed to the purchase price or otherwise to the development. The injustice to the respondent (and disproportionality of outcome) would be palpable in that event.
Accordingly, the judge was correct to give effect to the resulting trust arising in the respondent’s favour through his provision of the purchase price.
John Virgo (instructed by Direct Access) appeared for the appellants. The respondent appeared in person.
Eileen O’Grady, barrister
Click here to read a transcript of Karpavicius and another v Waites
