Receipt of property subject to an undertaking in the domestic context

It is well-established that where property is received subject to an undertaking, this may give rise to a trust. This post will critique two recent domestic cases where such a transfer occurred: in Archibald v Alexander, a constructive trust was found by the court. In Solomon v McCarthy, no constructive trust was found. It will be argued that the reasoning in each case is inconsistent with the principles recognised by the Court of Appeal in De Bruyne v De Bruyne. In that earlier case, shares were transferred to a husband on the basis of his promise to settle those shares on trust for his children. A constructive trust in favour of the children arose on the appointment of those shares. The shares were accordingly unavailable for distribution in ancillary relief proceedings between the husband and his wife.

In Archibald, the mother of three children purchased a property in the joint names of herself and one of her daughters. This was on the footing that the property would be held for the mother for life and upon her death it would be held by her daughter on trust for all three of the children in equal shares. It was held by Fancourt J, affirming a judgment from the Central London County Court, that a constructive trust came into existence on the basis of a direct application of De Bruyne. However, Fancourt J’s judgment suggests that the trust will only arise if the transferee is the gratuitous recipient of property. For example, it is stated at [37] that: “Although the facts and context in De Bruyne were of course different, the essential facts were substantially the same, namely that property had been transferred to a volunteer on the basis of his promise to hold it on certain terms, and would not otherwise have been so transferred.”

It is not clear why the transferee must take the property gratuitously. The principle whereby a trust is imposed upon receipt of property subject to an undertaking is often traced back to Rochefoucauld v Boustead [1897] 1 Ch 196. In that case, land in Ceylon was owned subject to a mortgage. The mortgagees sued to enforce their security and the land was sold at auction. Prior to purchasing the land, the purchaser agreed with the previous owner that he would purchase the land as trustee for her. The Court of Appeal held that a trust was imposed notwithstanding a lack of compliance with formality requirements because it would constitute a fraud for the purchaser to deny the trust and take the land absolutely.  As explained by Patten LJ in De Bruyne, cases such as Rochefoucauld “do not depend on some form of detrimental reliance in order to re-balance the equities between competing claimants for the property. They concentrate instead on the circumstances in which the transferee came to acquire the property in order to provide the justification for the imposition of a trust… It is not necessary in such cases to show that the property was acquired by actual fraud (although the principle would apply equally in such cases). The concept of fraud in equity is much wider and can extend to unconscionable or inequitable conduct in the form of a denial or refusal to carry out the agreement to hold the property for the benefit of the third party which was the only basis upon which the property was transferred. This is sufficient in itself to create the fiduciary obligation and to require the imposition of a constructive trust.”

There is disagreement among commentators as to whether these trusts are express trusts or constructive trusts. As can be seen from the extract above, Patten LJ clearly subscribes to the constructive trust classification, which represents the prevailing view in the case law. Patten LJ’s view is supported by McFarlane, who has put forward a justification for the imposition of a trust in cases where property is received sub conditione. He opines that such trusts are justified by the fact of the transferee’s undertaking and its role in the transferee’s acquisition of the property. A constructive trust will be valid where the transferee agrees to confer a new property right upon receipt of the property and thereby acquires an advantage which assists in the acquisition of the property, so that it can be said that the transferee’s receipt of that property is coloured by his undertaking. As Patten LJ put it, a constructive trust is imposed to the effect of the terms upon which it was acquired. There is no principled reason why a paying transferee who makes an undertaking to the transferor should not be bound in the same way.

The notion of gratuitousness would also add unnecessary confusion in the scenario where the undertaking is given by the transferee to someone other than the transferor. In Neale v Willis [1968] 19 P & CR 836, for example, a husband received money from his mother-in-law on the condition that the subsequently purchased property would be conveyed into the joint names of himself and his wife. A constructive trust was found to that effect. The husband was certainly the gratuitous recipient of the money but not of the property. If gratuitous receipt was a requirement for the trust then it is hard to see why a trust in favour of the wife should be preferred to a trust in favour of the mother-in-law. Instead, the broader principle encapsulated in De Bruyne supports a constructive trust which brings into effect the terms of the agreement.

In Solomon, a husband in financial difficulties transferred property to his wife so that his creditors could not get it. HHJ Matthews, sitting in the Bristol County Court, preferred the husband’s evidence that the property was to be held by his wife on trust for his three sons. However, it was decided that, due to a failure to comply with formality requirements, the property was held not on a constructive trust for the sons, but instead on a resulting trust for the father.

HHJ Matthews stated at [43] that: “Overall, I am satisfied that the claimant took the property on trust rather than by way of beneficial sale or gift. The question therefore is how far it can be established who were the beneficiaries of the trust. It is clear law that, where A conveys to B on trust for A, this can be proved without the need for signed writing complying with the Law of Property Act 1925, section 53(1)(b), because otherwise the statute would be used as an instrument of fraud: see eg Re Duke of Marlborough [1894] 2 Ch 133, Rochefoucauld v Boustead [1897] 1 Ch 196, CA. So, a fortiori, the existence of a trust itself can be so established. The problem is whether, where A conveys to B on trust for C, the trust for C can be established without compliance with the statute. In my judgment it cannot. It is not necessary to enforce such a trust in order to defeat a fraud by A. It is only necessary that there be a trust rather than an absolute gift. And to allow the trust for C to be enforced would leave the statutory requirement without effective scope.”

It is submitted that this reasoning is deficient for two reasons. Firstly, HHJ Matthews’ decision is inconsistent with the binding authority of De Bruyne and does not discuss that decision. The facts of Solomon fit the ratio of De Bruyne in the same way as Archibald. A constructive trust may arise as a result of the circumstances of a transfer. By virtue of section 53(2) of the Law of Property Act 1925, this trust is not required to be evidenced in writing. HHJ Matthews does not address De Bruyne and defers to the express trust classification of Rochefoucauld (supported by eg Swadling) without explanation.

Secondly, as a matter of principle, it is hard to see why the distinction drawn by HHJ Matthews should make a difference. Whether the agreement is to hold on trust for the transferor or for someone else, denying that agreement would be unconscionable and where the transferee receives an advantage in acquiring the property a trust can be validly imposed. It follows that equity should respond by enforcing the terms of the agreement. It is right to question whether Rochefoucauld drives a coach and horses through the statutory formality requirements. Adopting the view that the trust is a valid constructive trust obviates this dilemma as constructive trusts need not be in writing.

In conclusion, the two recent cases discussed here are inconsistent (in different ways) with the justification underpinning De Bruyne. Although the eventual decision in Archibald is correct, there is no need for a gratuitous transfer. The factual matrix in Solomon is sufficient for the imposition of a constructive trust and HHJ Matthews should have so found. Ultimately, the courts should not veer away from a straightforward application of De Bruyne, as it provides a clear principle on which the courts’ intervention can be based.

__________

How to cite this blog post (Harvard style) 

Foy, A. (2020). Receipt of property subject to an undertaking in the domestic context. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2020/08/receipt-property-subject-undertaking-domestic (Accessed [date]).