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URL: http://www.bailii.org/uk/other/journals/WebJCLI/1996/issue4/todd4.html
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[1996] 4 Web JCLI">

Trusts of land and third parties

Paul Todd MA BCL,

Cardiff Law School
< [email protected]>

Copyright © 1996 Paul Todd.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary

It is difficult to argue that justice was done in Lloyds Bank plc v Carrick, The Times 13 March 1996, (1996) 146 NLJ 405. Mrs Carrick, who had paid her brother-in-law the full price for the long lease of a maisonette, and who had improved the property and gone into occupation, was unable to enforce her interest against a third party mortgagee, because she had not registered it as an estate contract under the Land Charges Act 1972. If the notice doctrine had applied, or if the land had been registered, the bank would have been bound. It would also have been bound if her brother-in-law had been a trustee, but the existence of the estate contract precluded the existence of either a trust or an interest by way of estoppel. Mrs. Carrick would therefore have been better off had she not had a contract at all.

Apart from registration of land charges, the case also raises issues as to the nature of interests arising under the first category in Lloyds Bank plc v Rosset [1991] 1 AC 107, whether arising under a constructive trust or by way of estoppel. The (unwritten) estate contract was made in 1982, but if the same facts were to occur today, it would be necessary also to consider the direct and indirect effects of the Law of Property (Miscellaneous Provisions) Act 1989, s 2.

Bibliography

The Facts

In 1982, after the death of her husband, Mrs Carrick had paid Ј19,000 to her brother- in-law, Mr Carrick, to purchase the long lease of the maisonette in which he lived. The Ј19,000 came from the sale of the house in which Mrs Carrick and her two children were living; she and her children moved into the maisonette, and Mr Carrick moved out to live elsewhere. Improvements were later made to the maisonette, at a cost of about Ј5,000, paid for by Mrs Carrick's father. However, legal title (which was unregistered) was never conveyed to Mrs Carrick, and in 1986 Mr Carrick (purporting to be beneficially entitled) charged the lease on the property to a bank as security for a loan. When the bank later sought possession, Mr Carrick argued that the held the maisonette on a bare trust for Mrs Carrick (who was therefore joined as second defendant), which was not registrable (or overreachable), and which therefore bound the bank on the notice doctrine.

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The Decision

The Court of Appeal held that Mrs Carrick's only interest in the property arose from an estate contract, which precluded the possibility of any other trust or estoppel interest, and that since the estate contract had not been registered as a C(iv) land charge, it was unenforceable against the bank.

Comparison between registered and unregistered land

The bank accepted that if Mrs Carrick had had any interest separate and distinct from the unregistered estate contract, that interest would have been binding on the bank, since the bank would have had constructive notice of it. Although Mr Carrick had certified that no persons other than he himself would occupy the maisonette, the bank failed to make any enquiries of her, and it was accepted that any enquiry of her would have revealed her interest. Indeed, the case would have fallen squarely within Vaughan Williams' dictum in Hunt v Luck [1902] 1 Ch 428, at p 433:

"... if a purchaser or a mortgagee has notice that the vendor or mortgagor is not in possession of the property, he must make inquiries of the person in possession ... and find out from him what his rights are, and if he does not choose to do that, then whatever title he acquires as purchaser or mortgagee will be subject to the title or right of the [person] in possession."

Mrs Carrick was in possession to the exclusion of her brother-in-law, and on the pre- 1926 notice doctrine, the bank would therefore have been bound.

Morritt LJ (who gave the only substantial judgment) was also of the view that had the land been registered, the bank would have been bound:

"In such a case the interest of Mrs Carrick, who was in possession of the Maisonette and of whom no enquiry had been made, would have been an overriding interest under s 70(1)(g) Land Registration Act 1925. As such it would have been binding on the bank."

The case would have been similar to Bridges v Mees [1957] Ch 475, where a purchaser of a strip of land, who had paid for the land and gone into possession, was held by Harman J to have an overriding interest under s 70(1)(g), although legal title had not been conveyed to him. It would have been a clearer case than either Hodgson v Marks [1971] Ch 892, or Williams & Glyn's Bank Ltd v Boland [1981] AC 487, where (respectively) the vendor and the mortgagor were also in occupation. Obviously, if s 70(1)(g) represents an attempt to enact the notice doctrine, it is not surprising that a bank with constructive notice is bound under the section.

Any rational system of conveyancing must reach a compromise between the conflicting objectives of making conveyancing as simple and expeditious as possible, while at the same time protecting people with interests in the land. The compromise that has been adopted by the Land Registration Act is to require interests in land to be protected by notice or caution to be enforceable against purchasers and mortgagees, except for overriding interests, which remain enforceable whether or not they are so protected. The justification for some overriding interests is that they are legal interests, which prior to the enactment of the Land Registration Act 1925 bound the whole world. Here, the 1925 Act merely gave effect to the status quo ante, for example, providing for legal easements and profits under s 70(1)(a), rights acquired under the Limitation Acts under s 70(1)(f), and some leases under s 70(1)(k). It is less easy to justify making equitable interests overriding interests, but (for example) equitable easements come within s 70(1)(a), and interests of persons in actual occupation of the land come within s 70(1)(g). Possible justifications for s 70(1)(g) are that the interests of persons in actual occupation are likely to be created informally, in circumstances where they would not consider registering them, and that purchasers ought to be aware of anybody in occupation. It is not unreasonable, therefore, if they are bound in circumstances where they would also have been bound prior to 1925.

The compromise between the conflicting objectives, identified above, is therefore made possible by the existence of overriding interests. The Law Commission (Law Com No 158) has taken the view that the Land Registration Act leans too heavily in favour of those with interests in the land, and in 1987 suggested reform of the law. The following year (Law Com No 173), it published a Draft Land Registration Bill, clause 7(2) of which would have limited the scope of overriding interests, thereby giving greater protection to purchasers of registered land, and commensurably less to others with interests in the land. Even under these reforms, however, Mrs Carrick would have been protected, since the combined effect of clauses 7(2) and 9(7) would have been effectively to re-enact s 70(1)(g).

The position is, then, that under the pre-1925 law Mrs Carrick would have been protected, as she would have been under both the compromise enacted in the Land Registration Act 1925, and that proposed by the Law Commission. Yet under the Land Charges Act, she was unprotected. There is no obvious rationality at work here, and indeed there was no attempt at compromising between the twin objectives in the Land Charges Act, since the Land Charges Act never attempted to preserve anything remotely like the notice doctrine, with the result that many informally-created interests were unprotected. By s 2 of the Act, land charges have to be registered for protection, registration constituting actual notice (under s.198 of the Law of Property Act 1925), and the effect of non-registration depending on the class of charge concerned. Under the Land Charges Act 1972, s 4(6), estate contracts are rendered void (if not registered) against any purchaser, for money or money's worth, whether or not the purchaser has notice, or acts in good faith. An extreme example of this is the well-known case of Midland Bank Trust Co Ltd v Green [1981] AC 513, but the effect in Lloyds Bank v Carrick was to render irrelevant the bank's notice of Mrs Carrick's interest.

The Land Charges Act leans heavily in favour of purchasers and mortgagees, therefore. It is by no means clear that Morritt LJ was happy with this position, but he observed that:

"What is certain is that it must be for others to consider and for Parliament to decide whether this distinction between registered and unregistered land should continue, particularly as the system for the registration of incumbrances in the case of unregistered land is by no means complete as shown by Inwards v Baker [1965] 2 QB 29 [estoppel licence]; Ives v High [1967] 2 QB 379 and Shiloh Spinners Ltd v Harding [1973] AC 691 [restrictive interpretations of Class D(iii)]."

Although Lloyds Bank v Carrick is of interest in showing up the differences between the two systems of registration, however, and in this regard at any rate, demonstrating the irrationality of the Land Charges Act regime, this is not where the new law in the case is to be found. As long ago as 1951, Harman J had held (in Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901) that an unregistered estate contract did not bind a mortgagee of unregistered land, despite actual occupation by the owners of the equitable interest. Further, Mrs Carrick conceded that if her only interest in the maisonette was derived from an estate contract, then the bank would not be bound by it. The real issue was whether she could claim any alternative interest, and it is this aspect of the case which raises interesting, and new issues of conceptual analysis.

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Why no constructive trust?

Mrs Carrick argued that apart from the unregistered estate contract, she had an interest by way of trust or estoppel, which did not need to be registered under the Land Charges Act, and therefore bound the bank with notice. Morritt LJ rejected an argument that a bare trust could (apart from the contract) be inferred from the payment of the Ј19,000 alone, and it is difficult to argue with this conclusion. Payment of money, or at any rate direct contributions to the purchase price of a property, can lead to the inference that the provider of the money is to enjoy an interest in the property under Lord Bridge's second category in Lloyds Bank plc v Rosset [1991] 1 AC 107, at pp 132E-133A. The juristic basis can, since Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961, be described as a type (A) resulting trust. As Lord Browne-Wilkinson observed (at p 990g),

"...where A makes a voluntary payment to B or pays (wholly or in part) for the purchase of property which is vested either in B alone or in the joint names of A and B, there is a presumption that A did not intend to make a gift to B: the money or property is held on trust for A (if he is the sole provider of the money) or in the case of a joint purchase by A and B in shares proportionate to their contributions."

In Lloyds Bank v Carrick, however, Mrs Carrick's payment was not voluntary, since it was in consideration for conveyance of the leasehold estate, and it was not a contribution to the purchase by Mr Carrick of the lease, to which he already had title before commencing negotiations with Mrs Carrick. It is not surprising, therefore, that the payment of the Ј19,000 could only give rise to an interest under an estate contract, and not under an independent bare trust.

Mrs Carrick appeared to be on stronger grounds on the basis of the first category in Lloyds Bank plc v Rosset [1991] 1 AC 107, which depends on an agreement, arrangement or understanding between the parties, and detrimental reliance by the party claiming the interest, in order to give rise to a constructive trust or proprietary estoppel. Mr Carrick had said to Mrs Carrick: "Put [your present house] on the market and what you get from the net proceeds of sale you can pay to this property, which will become yours". She had relied on this promise to her detriment by selling her old house, paying Mr Carrick the Ј19,000, moving into the maisonette, and improving the property. The requirements for an interest therefore apparently existed, and had there been no estate contract, Mrs Carrick would almost certainly have succeeded, but Morritt LJ held that the existence of the estate contract prevented the implication or imposition of any further trust in her favour. This led to the curious result that Mrs Carrick was worse off, at least against the bank, with an enforceable estate contract than she would have been without.

Morritt LJ did not make clear his basis for this conclusion, but it seems correct in principle, since Mrs Carrick was already a beneficiary under a bare trust, by virtue of the estate contract. Mr Carrick could not therefore be a trustee under a Rosset trust, having already parted with the entire beneficial interest under the estate contract. Morritt LJ observed, citing what is still, at time of writing, the most recent edition of Megarry and Wade's textbook (Megarry and Wade 1984, at p 602) that normally "such trusteeship is of a peculiar kind because the vendor himself has a beneficial interest in the property". The nature of such trusts was also analysed by the House of Lords in Oughtred v IRC [1960] AC 206, where the ratio depended upon the purchaser (of shares) having something less than the full beneficial interest prior to the transfer of legal title. In Lloyds Bank plc v Carrick, however, the purchaser had paid the entire purchase price and gone into occupation, so that all that remained to do was to transfer the bare legal title. Morritt LJ (citing Bridges v Mees [1957] Ch 475) expressed the view that in these circumstances the vendor held on bare trust for the purchaser, which implies that Mrs Carrick had a full beneficial interest even prior to the conveyance.

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Why no estoppel?

Mrs Carrick alternatively argued that she was entitled to the benefit of a proprietary estoppel, having relied to her detriment (in respect of both the payment and the improvements) on Mr Carrick's representations that she either did or would own the property. Further, on the principles established in Inwards v Baker [1965] 2 QB 29 and ER Ives Investments Ltd v High [1967] 2 QB 379, this was capable of binding the bank as an interest in land. A difficulty that Morritt LJ found with this argument was that in Lloyds Bank plc v Rosset, Lord Bridge did not make clear whether he regarded the constructive trust and proprietary estoppel as distinct or interchangeable, and Morritt LJ, referring to Lord Oliver of Aylmerton in Austin v Keele (1987) 61 AJLR 605, at p 609, seemed inclined to the latter view, in which case the estoppel claim would fall for precisely the same reasons as the constructive trust claim. Professor Hayton has taken the same view (Hayton 1990, at p 376), but this is by no means clear from Lord Bridge's speech itself (see Ferguson 1993, at p 118). As co-author I have argued elsewhere (Glover and Todd 1995) that estoppels may arise in circumstances where constructive trust reasoning would be inappropriate, but I would also suggest that Lloyds Bank v Carrick is not one of them. Once it is accepted that Mrs Carrick had the entire beneficial interest under the estate contract, it is difficult to see how she could have acquired, independently of the estate contract, any additional equitable interest, whether under a trust or an estoppel. Morritt LJ did not rest on the interchangeability of the two concepts in Lord Bridge's speech, however, but went on to consider the merits of the estoppel claim. He was prepared to accept Oliver J's test in Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133, at pp 151H-152A, requiring only that 'it would be unconscionable for a party to be permitted to deny that which, knowingly or unknowingly, he has allowed or encouraged another to assume to his detriment', and did not think it fatal that all five probanda referred to by Fry J in Willmott v Barber (1880) 15 Ch D 96, at pp 105-106, had not been established. Nevertheless, he enumerated three reasons for rejecting Mrs Carrick's claim. First, because Mrs Carrick was already solely entitled in equity to the property, she was spending money on her own property, and following the Court of Appeal decision in Western Fish Products Ltd v Penwith DC [1981] 2 All ER 204, this could not come within the proprietary estoppel principle. Secondly, as against Mr Carrick, the representor, she had in fact got what he represented she would have, that is to say, an enforceable contract against him (albeit that he was in breach of that contract and also in breach of trust, in failing to account for the money raised on the security of the maisonette). Thirdly, any right arising from a proprietary estoppel could not exceed the extent of Mr Carrick's representation. That the contract was void against the bank was something that Parliament had decreed, because it had not been registered. It was not appropriate to use proprietary estoppel to give her, as against the bank, a right which Parliament had decreed she should not have. It is difficult to argue with Morritt LJ's conclusions on the estoppel issue. It meant, of course, that there was no need to consider whether a proprietary estoppel could give rise to an interest in land capable of binding successors in title, an interesting argument, in Morritt LJ's view, which "will have to await another day". Nonetheless, he seemed inclined to think that it could, following the Court of Appeal decision in ER Ives Investments Ltd v High [1967] 2 QB 379 (on which see further Glover and Todd 1995).

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Part performance

The estate contract, which was made in 1982, was unwritten, and enforceable only because of the part performance doctrine. Had the facts occurred (say) ten years later, it is arguable that the s 2 of the Law of Property (Miscellaneous) Provisions Act 1989 would have rendered the estate contract void. The argument cannot be regarded as conclusive, since its success would apparently allow Mr Carrick to use that statute as a cloak for fraud, and it is therefore not surprising that in Seggs v Biggs (1995) 71 P & CR 120, Neill LJ doubted (obiter, since on the facts, there was no act of part performance), whether the doctrine of part performance had been abolished by section 2(8) of the 1989 Act.

That argument is beyond the scope of this note, however, and if we accept, for present purposes, that the 1989 statute has the effect today of rendering unwritten estate contracts void, and abolishing (in this context) the part performance doctrine, then the arguments in the case, against the Rosset constructive trust, lose much of their force. Mr Carrick would not hold the property on bare trust under the estate contract, and there would be no reason for not construing a constructive trust. The facts could indeed hardly be stronger. Both parties would have intended a trust to arise, albeit under an estate contract which was void. An unwritten declaration of trust normally requires writing, but Mrs Carrick's detrimental reliance would render the trust a constructive trust which would come within s 53(2) of the Law of Property Act 1925. It follows, then, that since the Rosset constructive trust would not need to be registered, Mrs Carrick would actually be better off today, because of the tightening up of the formality requirements.

If the estate contract had been unenforceable, the estoppel reasoning in Carrick would also not have applied. Mrs Carrick would not (in the absence of the bare trust) have been spending money on her own property, so the case would have been distinguishable from Western Fish. Further, even as against Mr Carrick, she would no longer have had an enforceable contract, and Morritt LJ accepted that his estoppel reasoning would not necessarily apply where there was no enforceable contract at all, for example "because the agreement was not in writing as now required by the Law of Property (Miscellaneous Provisions) Act 1989." On estoppel reasoning also, therefore, on the (admittedly not clearly valid) assumption that proprietary estoppels can bind third parties, Mrs Carrick would also be better off today, because of the tightening up of the formality requirements.

If these arguments are correct, however, then they suggest a general method of avoiding the formality provisions of the 1989 Act, since a Rosset constructive trust, or estoppel, could be used whenever an unwritten estate contract had been relied on by one of the parties to his or her detriment (since there would always be a representation by the legal owner of the property). Further, the doctrine based on Lloyds Bank v Rosset, which like part performance is a fraud-based doctrine, would be similar in its effect to the part performance doctrine, which the Act was intended to abolish.

It may be objected that this would be to fly in the face of the intention of the legislature, but this is not necessarily the case. The Law of Property (Miscellaneous Provisions) Act 1989 was a response to a report of the Law Commission (Law Com No 164), which was worried primarily about the apparent extensions to the doctrine, and the uncertainty created, by the House of Lords decision in Steadman v Steadman [1976] AC 576. They took the view, however (Law Com No 164, at p 3), that whereas (in the light of Steadman v Steadman) the part performance doctrine was a blunt instrument for doing justice despite non-compliance with statutory formalities, equity had developed more flexible ways (especially via estoppel) of dealing with the position if the formalities were not observed. This suggests that the Law Commission (and hence, presumably, the legislature) were quite prepared to allow for the possibility that unwritten estate contracts could continue to be enforceable, where it would be inequitable to allow the other party to rely on the new formalities provision.

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Conclusion

Occasionally very important cases, such as Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961, are reported within a fortnight or so of the actual decision. Six months after the decision in Lloyds Bank v Carrick, it remains unreported in full (although a full transcript can now be found on LEXIS). Yet this is a case which raises fundamental issues on the effect of non-registration of land charges, and the nature of equitable interests arising under estate contracts, and under the first category in Lloyds Bank plc v Rosset. It also suggests a method of bringing back something very like the part performance doctrine, by the back door. The law reporters have indeed, I would suggest, overlooked a decision of fundamental importance.

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Bibliography

Ferguson, P (1993) 'Constructive Trusts - A Note of Caution' 109 Law Quarterly Review 114.

Glover, N and Todd, P (1995) 'Occupation for Life: Satisfying the Equity' [1995] 5 Web Journal of Current Legal Issues

Hayton, D (1990) 'Equitable Rights of Cohabitees' Conveyancer 370.

Law Commission No 158 (1987) Property Law: Third Report on Land Registration (London: HMSO).

Law Commission No 164 (1987) Formalities for Contracts for Sale etc of Land (London: HMSO).

Law Commission No 173 (1988) Property Law: Fourth Report on Land Registration (London: HMSO).

Megarry, RM and Wade, HWR (1984) The Law of Real Property, 5th ed. (London: Stevens & Sons Ltd).

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