28/04/2009

Constructive trust and misrepresentation

Qayyum v Hameed & Anor [2009] EWCA Civ 352 is a case with a complicated background – it originated in the collapse of BCCI, for heaven’s sake – but thankfully, the issues in this appeal were relatively straightforward, if novel.

In 1991 Mr & Mrs Qayyum jointly purchased a house. In July 1991, Mr Q declared in a deed that he held his interest on trust for Mrs Q absolutely and covenanted to execute a transfer if called upon to do so. The deed was not stamped, but apparently on the undertaking of Mrs Q’s solicitors to do so, this was not an issue.

In 2003, in litigation against Mr Quayyum, which was BCCI related, Mr Hameed obtained a freezing Order over Mr Q’s assets, including his interest in the property. In June 2004, Mr & Mrs Q applied to Nationwide BS for a mortgage of £200,000. This was in part to pay Mr Q’s legal fees and in part to cover works and service charges on the property. Mr Q believed, wrongly, that the freezing order prevented him from paying legal costs out of his existing, frozen, assets and this is what he told Mrs Q. They agreed to restore Mr Q as joint beneficial owner of the property, to avoid breaching the freezing order. In September 2004, the charge was executed and both Mr & Mrs Q were covenantors.

In June 2005, after success in his litigation, Mr Hameed obtained an interim charging order against Mr Q’s beneficial interest in the property. In related proceedings, Mr Q relied on the 2004 agreement to include half the property amongst his assets.

IN July 2005, Mr & Mrs Q agreed that between themselves, the mortgage would be treated as being against her share of the property. Also at this time Mrs Q informed her solicitors she no longer relied on the 1991 deed.

When Mr Hameed applied to make the charging order final, Mrs Q’s solicitors wrote saying that Mr Q no longer owned 50% of the interest in the property and that she would contest his interest on the basis of money she had spent on improvements (s.37 MPPA 1970), and on the basis that her agreement to his having a share was due to a mistaken belief based on Mr Q’s representations about the freezing order.

The charging order for $1,115,396 was made final in February 2006 and, following Mr Q’s bankruptcy, Mr Hameed obtained a charging order against Mrs Q’s interest in the property for £20K. Mr Hameed then applied for an order for sale and a declaration of the beneficial interests of Mr and Mrs Q in the property.

At first hearing, the Court found that the 1991 deed was valid, but that when Mr Q acted on the 2004 agreement by entering the mortgage, it gave rise to a constructive trust of equal shares. This was despite the misrepresentation. There was no subsequent agreement to revert to the 1991 deed, but even if there had been it would not have satisfied the requirements of a constructive trust as it had not been acted upon. The expenditure on improvements by Mrs Q was not substantial and so the MPPA s.37 claim failed.

On appeal, with only Mrs Q represented and Mr Hameed in person, Mrs Q’s argument was that:
1. The court would not give effect to the 2004 agreement because it was procured by misrepresentation.
2. There was no evidence that Mr Q had acted to his detriment in reliance on the 2004 agreement.
3 There was no detriment to Mr Q in entering the mortgage agreement, or it was negligible.

At hearing, Mrs Q also sought permission to argue that if a constructive trust arose from the 2004 agreement, there was a subsequent oral agreement in late 2005 transferring the beneficial interest to Mrs Q alone.

The Court of Appeal held:

1. On detriment, there was no obligation on Mr Q to enter the mortgage agreement, which he did on the basis of the 2004 agreement. Although Mrs Q may have agreed to take on the liability for servicing the mortgage, in September 2004, Mr Q was making himself personally liable under the mortgage agreement, so there was clear detriment. It would be unconscionable to leave him with that liability but without the benefit of the property interest.

2. On misrepresentation, there was no authority on whether an agreement induced by innocent misrepresentation could give rise to a common intention constructive trust. But it was clear that, in a contractual setting, this was not a misrepresentation that would have led to rescission, as the Court could not restore the parties to their former positions, in view of the mortgage liability. Mrs Q’s argument that the Court should be more flexible in cases where the court is being asked to recognise a right that, but for the court’s recognition, would not exist fell, as on constructive trust, the trust comes into existence prior to the commencement of proceedings and the court merely declares its existence as a subsisting property right, unlike an order for specific performance. Stack v Dowden applied – the court is searching for the parties’ intention, not for the result the court considers fair.

The principled approach would be to consider the approach of equity if there had been a claim for rescission of an agreement immediately after the date on which the trust was said to have arisen. On that basis it would be an unusual case where the court would refuse rescission for innocent misrepresentation on a binding agreement, but at the same time allow the misrepresentation to prevent the creation of a constructive trust.

3. On the new ground of appeal, the judge below had held that there was no 2005 agreement sufficient to reverse the 2004 agreement. The evidence presented gave no reason to overturn that decision, given the varied and varying assertions of Mrs Q about this period.

Appeal dismissed.

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts.

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