Introduction
Section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 requires agreements for the sale or other disposition of an interest in land to be in writing and section 2(3) requires the written agreement to be signed by or on behalf of the parties to the agreement. Land contracts that do not comply with section 2(1) are invalid. Section 2(5), however, provides that resulting, implied or constructive trusts are not subject to these formality requirements.
The common intention constructive trust arises when A, the owner of an estate in land, enters into an agreement with B to the effect that B will have a beneficial interest in respect of that estate and B relies on that agreement to his detriment (Lloyds Bank v Rossett [1991] 1 AC 107, p. 132). While the common intention constructive trust often arises in the domestic context, it can arise even out of commercial bargains entered into between sophisticated business people. The necessary agreement can even arise when the parties have negotiated a detailed formal agreement which they expect to be in a form that would comply with section 2(1) but which does not do so. This seems surprising since the constructive trust then seems to offer a relatively easy way to by-pass the formalities requirements of section 2.
In fact, it is not so easy to persuade a court that the agreement necessary to the common intention constructive trust has been formed. If the parties intend to enter into a formal written agreement, their failure to do so will usually be a signal that the parties were still negotiating and that their mutual assurances were, in effect, ‘subject to contract’. If some details of the informal agreement have not been fully articulated and agreed upon, there may be an argument that the ‘agreement’ is not sufficiently certain or complete to be made enforceable by means of the common intention constructive trust.
In Herbert v Doyle ([2010] EWCA Civ 1095), the English Court of Appeal had to consider whether a commercial land contract that did not comply with section 2 nevertheless gave rise to a constructive trust. The facts of the case required the court to examine the degree of certainty required for the purposes of the common intention constructive trust. It also had to decide whether the parties intended to be bound by their mutual assurances.
The facts in Herbert v Doyle
Mr Herbert was the freehold owner of a house and large garden. Mr Doyle and Mr Talati owned the freehold of a neighbouring property in which they carried on their practice as dental surgeons. Mr. Herbert got planning permission to build houses on the garden of his property. To carry out the development, Mr Herbert needed to acquire some of the parking spaces on his neighbours’ land.
In essence, the parties agreed to a land exchange; Mr Doyle and Mr Talati were to have title to car parking spaces on Mr Herbert’s land. In return, they would convey car parking spaces on their land to Mr. Herbert. Mr. Herbert was also to grant leases of two other parts of his land to them. Mr. Doyle and Mr. Talati were to pay a premium to Mr. Doyle. These terms had been agreed in principle in February 2003. It was, however, in April 2003, when Mr. Herbert was getting ready to begin the development work, that the parties had a further meeting at which they agreed that these terms would be immediately binding upon them despite the lack of the anticipated formal written contract. This arrangement was altered as a result of two later variations that the parties agreed. Other variations were discussed but these discussions did not lead to any further agreed variations.
Mr. Herbert later decided that he did not wish to proceed with the agreement. The question was whether the April 2003 agreement gave rise to a constructive trust so that it could be enforced by Messrs. Doyle and Talati notwithstanding the failure to comply with section 2(1).
Cobbe-compliant?
Mr. Herbert argued that the conditions for the creation of a common intention constructive trust were not satisfied. Arden L.J. identified the essence of what the House of Lords had said in Cobbe v Yeoman’s Row Management Ltd ([2008] 1 WLR 1752) about the element of certainty required:
‘[I]f the parties intend to make a formal agreement setting out the terms on which one or more is to acquire an interest in property, or, if further terms for that acquisition remain to be agreed between them so that the interest in property is not clearly identified, neither party can rely on constructive trust as a means of enforcing their original agreement.’ (Herbert v Doyle [2010] EWCA Civ 1095 [57]
There had to be clarity both as to the intention to be bound and as to the interest in property that is the subject matter of the trust. Mr. Herbert contended that each of these types of certainty was lacking as regards the April 2003 agreement.
Intention to be bound or mere agreement in principle?
Was this a case, like Yaxley v Gotts ([2000] Ch. 162) in which the parties intended to be bound by an informal agreement? Or was it, like Cobbe, one in which the parties regarded themselves as being bound in honour only until a formal written agreement had been prepared and signed? The judge at first instance had found that the April 2003 agreement was not ‘subject to contract’ and that the parties intended to be bound by it. Arden L.J. regarded this as being surprising but thought that there was no basis on which the Court of Appeal could hold that this conclusion was clearly wrong (Herbert v Doyle [2010] EWCA Civ 1095 [79]).
Certainty as to the relevant property and terms
The April 2003 agreement could only give rise to a constructive trust if the relevant property and the terms of the agreement were sufficiently certain. While the number of spaces to be transferred by Mr. Herbert to Messrs. Doyle and Talati had been agreed in April 2003, one of the spaces had not been. The Court of Appeal upheld the decision at first instance to the effect that the parties had impliedly agreed that the court could identify a suitable space if Mr. Herbert refused to do this himself (Herbert v Doyle [2010] EWCA Civ 1095 [71] – [72]). The way to this conclusion was eased by the fact that the judge at first instance had found that the agreement was to transfer ‘reasonably accessible parking spaces on the site, so far as possible adjacent to [Mr. Herbert’s property].’ As Morgan J. (sitting in the Court of Appeal) pointed out, when the judge at first instance nominated a space, he did no more than to give effect to the term that the parties had already agreed (Herbert v Doyle [2010] EWCA Civ 1095 [87]).
Second, the fact that the parties continued to negotiate after the April 2003 had been reached did not mean that the April 2003 agreement was not sufficiently certain at the time when the parties’ property interests were agreed (Herbert v Doyle [2010] EWCA Civ 1095 [73]).
The April 2003 agreement provided for Mr. Herbert to grant leases of parts of his property. He argued that the terms of these leases had not been agreed and so there was a lack of certainty in this respect too. This failed since it had been agreed that the terms of these leases would follow the terms of an existing lease between the parties (Herbert v Doyle [2010] EWCA Civ 1095 [76]).
The question is whether the parties intended to be bound by their assurances
As Arden L.J. remarked, there is something surprising about the idea that the common intention constructive trust can be based on a sophisticated commercial agreement negotiated by experienced business people. Its more natural home is the agreement between a co-habiting couple as to how the beneficial ownership of their home is to be shared between them. In this domestic context it is easy to understand that the parties might be reluctant to reach a formal agreement when so much depends on trust and where even to raise the question of ‘shares’ seems incongruous. Herbert v Doyle is a striking illustration of the fact that in either context the question is ultimately whether each party was entitled to believe that their legal rights and duties had been affected by the agreement. Must the parties be taken to have gone past the negotiation stage of the discussions? Did they have an intention to create legal relations?
Inconsistent with principle?
Tanney (Anthony Tanney, ‘Constructive trusts to grant leases: have we not been here before?’, (2012) 16 L. & T. Review 53) has expressed some doubts as to whether the agreement in Herbert v Doyle can properly be thought of as a common intention constructive trust. Tanney questions whether this development is consistent with principle.
First, while it is true that an enforceable land agreement gives rise to an equitable interest (Walsh v Lonsdale (1882) L.R. 21 9 Ch.D. 9) the agreement in Herbert v Doyle was not enforceable since it did not comply with section 2(1). Second, some aspects of the agreement in Herbert v Doyle required the grant of new leases; that is they were agreements for the grant of new estates in land rather than for the sharing of the beneficial ownership of an existing interest. Where the enforceable contract is for the grant of a lease, the equitable interest relates not to the reversion but is a new equitable interest. Typically, however, the common intention constructive trust arises out of an agreement to share an existing interest in land.
Proprietary estoppel the appropriate remedy
Concerns have been expressed, then, as to whether all aspects of the agreement in Herbert v Doyle could all be properly take effect as a common intention constructive trust. Were it not for section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989, Herbert v Doyle could have been dealt with as a proprietary estoppel claim; Mr. Herbert had encouraged his neighbours to believe that they would acquire an interest in land and they had relied on that assurance to their detriment. Since Yaxley v Gotts ([2000] Ch. 162), however, the courts have thought it necessary, in the case of some types of informal land bargain, to think only in terms of the common intention constructive trust. The saving for constructive trusts in section 2(5) has led to doubts as to whether there is any room for proprietary estoppel to work in relation to agreements concerning land.
Owen and Rees (Gwilim Owen and Osian Rees, ‘Section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989: a misconceived approach?’ [2011] Conv. 495) argue that this concern is misconceived. Proprietary estoppel is entirely independent of contract and proprietary estoppel claims do not engage section 2(1). Cases like Herbert v Doyle could more easily be dealt with as proprietary estoppel claims.
Michael Lower
Faculty of Law
The Chinese University of Hong Kong
