A constructive trust may arise where two parties agree that one will acquire a property for their joint benefit and, in reliance on that agreement, the other refrains from attempting to acquire the property itself: Pallant v Morgan [1953] Ch 43 and Banner Homes Group Ltd v Luff Developments Ltd [2000] Ch 372.
The equity does not permit the acquiring party to retain the whole of the benefit for himself to the exclusion of the non-acquiring party. It arises even though the arrangement was not intended to have contractual effect, or was too uncertain to be enforced. Indeed, there would be no need to invoke a Pallant equity if the agreement was enforceable as a contract.
The doctrine survived Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, where the House of Lords refused to allow a developer to rely on proprietary estoppel to circumvent the requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. It also emerged relatively unscathed from Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619, despite Lord Justice Etherton’s attempt to restrict its use to cases where there is a pre-existing fiduciary relationship.
Indeed, Kearns Brothers Ltd v Hova Developments Ltd [2012] EWHC 2968 (Ch) suggests that the doctrine is alive and kicking. The parties had reached an informal agreement concerning the acquisition and development of a plot of land. The buyer agreed to acquire the land and to employ the builder, who found the site, to develop it out. The parties also agreed that the buyer would retain 60% of any profits and pay the balance to the builder. After exchanging contracts, the buyer changed its mind, sold the site to a third party and offered the builder a finder’s fee instead.
The judge decided that the parties had agreed a basic structure for what was to happen if the transaction went ahead. However, they were not contractually bound to each other. There were still far too many details to agree and neither party had intended to enter into a legal relationship with the other at such an early stage in the discussions. Nonetheless, a Pallant equity had arisen.
The parties had come to an understanding. The builder then allowed the buyer to acquire the property in reliance on their arrangement, without doing anything to destabilise the process. The buyer had obtained an advantage as a result. It did not announce its change of heart before exchanging contracts to buy the plot and it would be inequitable to allow it to act inconsistently with the arrangement once it had done so.
The parties had not intended the builder to acquire a direct proprietary interest in the property. Nontheless, having reviewed the authorities, the judge decided that this did not prevent the equity arising. It sufficed that the parties had intended to utilise or exploit the property for their joint benefit.
This did not mean that the buyer should have allowed the development to proceed. However, the builder was entitled to 40% of the profits realised from the sale, in accordance with the parties’ arrangement that they would split the profits 60/40 between them.
Allyson Colby is a property law consultant
