Podcast: the Good
Jeremy, Keith and Lucy, good friends at university, agreed after they graduated in 2009 to club together to buy a house in London. Malcolm, an uncle of Lucy, had recently moved into sheltered accommodation and offered to sell his house to her for £200,000, a price which represented a £25,000 discount on the market value at the time. The friends were delighted. Jeremy contributed £25,000 in cash and Keith contributed £25,000 that he obtained from his father, Freddy. The balance of the purchase price, £150,000, was raised by way of mortgage with Southern Rock Bank. At the bank’s insistence, the house was registered in the joint names of Jeremy, Keith and Lucy, with each of them undertaking joint and several liability for the mortgage repayments.
Malcolm hated life in sheltered accommodation, and in 2010 he moved back to the house, living in an extension that was built using some of the money he had received from the sale of the house in 2008. Keith initially objected to the arrangement, saying that the presence of an elderly man would cramp their lifestyles, but reluctantly accepted when Jeremy and Lucy insisted and pointed out that the extension would increase the value of the house.
Keith has suddenly disappeared without telling anyone he was leaving. The others have just discovered that some months ago Keith forged the signatures of Jeremy and Lucy on a mortgage in favour of Tealeaf Building Society to secure an advance of £250,000. Part of this money was used to redeem the mortgage in favour of Southern Rock Bank; the rest has vanished with Keith.
Jeremy, Lucy and Malcolm cannot afford to shoulder this unexpected debt and are fearful of losing the house.
Advise them as to their legal position.
Podcast: the Good
The transfer of legal title to J, K and L will mean that they are trustees of the legal title to the house, by virtue of a statutorily imposed trust of land, according to sections 34 and 36 of the LPA 1925. Co-ownership of the legal estate can only take the form of a joint tenancy (section 1(6) LPA). However beneficial ownership can exist as a joint tenancy or a tenancy in common. There does not appear to be any express declaration by the parties regarding their respective beneficial interests. It is therefore necessary to consider the nature of the arrangement in order to determine the allocation of beneficial ownership of the property, through the operation of implied trusts. If the arrangement is a commercial one, the doctrine of resulting trust is more likely to give effect to the presumed intention of the parties to acquire beneficial ownership in accordance with their respective financial contributions, unless there is evidence capable of rebutting the presumption (Laskar v Laskar). However it is submitted that the arrangement is a domestic rather than a commercial one, on the basis that J, K and L appear to have purchased the property for their private occupation, as opposed to buying it for business or investment purposes. (1) The question begins with a short, but informative introduction to the general area of law covered by the question. The Examiner knows what the candidate intends to do.
The question of beneficial ownership of the property must therefore be considered in the light of Stack v Dowden. The starting point based on the approach adopted by Baroness Hale in Stack, is a presumption that, in the domestic context, equity follows the law and therefore that beneficial ownership should follow the legal ownership. There is therefore a prima facie presumption that J, K and L are joint tenants in equity. The presumption is rebuttable if one party can establish that the parties intended beneficial ownership to differ from legal ownership, although Lady Hale was of the opinion that the presumption would only rarely be rebutted. (2) Case law is introduced early and the answer gives the leading case with some detail. Note that there is no re-telling of the facts, but an analysis of the point of law.
J and K may seek to rebut the presumption of joint beneficial ownership and claim a larger beneficial entitlement than L in order to reflect the fact that they made an additional £25,000 contribution to the purchase price.(3) The law is applied to the facts. No assumptions are made. On the other hand, Lucy might argue that the “discount” she was able to obtain for them was itself a contribution to the purchase price (see Mumford v Ashe).(4) The answer discusses possible alternatives, revealing a wide understanding. In fact, Lady Hale was clear in Stack that the presumption of beneficial joint ownership cannot be rebutted simply because one party made a larger financial contribution to the acquisition of the property than the other and held that the court’s task is to search for the result that the parties must, in light of their conduct, be taken to have intended. The burden will be on J and K to establish that there was a common intention that the beneficial interests would be different from their legal interests. In this regard, Lady Hale included a list of factors which would be relevant to determining the parties’ true intentions, which include the reasons why the property was acquired in joint names, how the acquisition was financed, the nature of the parties’ relationship and the way in which household expenses were discharged (see judgment at para. 69).(5) Where the question raises issues connected to a leading case, a discussion of the judgments, as opposed to a general discussion of the points it raises will always earn more marks.
In our case, the parties were forced to acquire the house as joint legal owners in order to obtain the mortgage, the nature of their relationship was merely one of friendship and it appears likely that they maintained separate bank accounts and allocated household expenses individually. One of the parties also made a significantly lesser financial contribution than the others, but this might be counteracted by a contribution in kind. In Stack the presumption was rebutted after finding that the parties had never pooled their resources, took separate responsibility for the household expenses and one party made a significantly larger financial contribution than the other, despite the lengthy cohabitation of the parties. It is therefore submitted that the presumption is also likely to be rebutted in our case, where the case for rebuttal appears to be more persuasive than in Stack. Therefore J and K may be entitled to a larger share of the beneficial ownership than L. However the legal status of the reduced purchase price of the house is important in assessing beneficial ownership of the property. The £25,000 reduced price may have been a gift to L, in which case it may constitute a direct financial contribution to the purchase price by L (Ashe) and reduce the likelihood of J and K being able to rebut the presumption of beneficial joint tenancy, or at least render quantification of the tenancy in common likely to be in equal shares. AS for M, he would not have a beneficial interest in the property if the £25,000 is deemed to be a gift to L.
Alternatively, the £25,000 may be regarded as a direct contribution to the acquisition of the house by M. The contribution by M may be considered to be a commercial arrangement on the basis that M did not intend to live in the house and may have regarded the acquisition of the property as an investment. The fact that L and M have a family relationship will not by itself put the transaction within the domestic context, as demonstrated by Laskar v Laskar. If the arrangement is a commercial one there will be a presumption of a resulting trust whereby M will be presumed to have acquired a beneficial interest in accordance with his direct financial contribution. In Farrar v Farrars Ltd the Court of Appeal held that a sale by a person to himself is no sale at all (see also HSBC v Dyche), therefore M would be unable to acquire legal ownership of the property. However by virtue of the operation of implied trusts M will still be able to acquire a beneficial share in the ownership of the property. Note, however, that the erection of the extension to the property by M was not a contribution to the acquisition of the property; therefore it will not give rise to a presumption of a resulting trust. Thus, if the original contribution merely gives rise to a resulting trust the contribution made via the extension will not be relevant to determining M’s beneficial entitlement to the property.
If, contrary to the above, M’s contribution to the purchase price was a domestic arrangement (e.g. the property was not rented and did not provide any income for M), it is submitted that the property may have been brought to provide a home for a member of the family and potentially for himself in the future. If it could be established that the arrangement was a domestic one, the direct contribution to the acquisition of the house would readily justify the presumption of a common intention constructive trust according to Rosset, in the absence of evidence of the parties’ intentions to the contrary. Once a constructive trust has established that M has a beneficial interest, Stack determines that quantification of the interest is to be determined by reference to what the parties must be taken to have intended in light of their conduct (but cf. Jones v Kernott where the Court of Appeal took a more limited view). (6) Notice how conflicting case law is discussed, not ignored. Therefore the construction of the extension will be able to be taken into account during quantification and is likely to increase the size of M’s beneficial entitlement to the property.
On balance, it is my view that the contribution to the original purchase price was in fact more akin to the domestic context than the commercial one. It is also submitted that the contribution is unlikely to be considered a gift because of the significant size of the sum and the relatively modest financial position of M. Therefore the extension will be relevant to the quantification of M’s beneficial interest.
Baroness Hale in Stack expressly recognised that whatever the parties’ intentions may have been at the time of acquisition, these may have changed following the construction of an extension to the property and a common intention may have arisen for beneficial entitlement to differ from what it was originally. M may therefore be able to establish that a common intention trust arose at the time of the extension under which he was intended to acquire beneficial ownership. It remains unclear following the decision in Stack whether an indirect financial contribution such as the extension to the house will constitute a sufficient basis from which to infer a common intention. Lord Bridge in Rosset was of the opinion that nothing less than a direct financial contribution would be sufficient but there are dicta in Stack from Lord Walker indicating that the law has moved on from this position (see also Abbott v Abbott)
However decisions following Stack have adopted a strict approach to what will constitute sufficient conduct to merit the inference of common intention. The court in James v Thomas for example held that the cohabitant’s labour which contributed to the improvements of the house was wholly explicable on other grounds, because of the nature of the relationship between the parties and therefore determined that she had no beneficial interest. It is submitted that the court in our case may distinguish James and be more willing to conclude that there is a sufficient basis for the inference of a common intention constructive trust, on the basis that there is no suggestion the extension was built in furtherance of the parties’ relationship. Sir Peter Gibson in Morris v Morris spoke in terms of conduct which could only be explained on the footing that the claimant believed they were acquiring an interest in the land. In our case it may be considered that the only rational explanation for M’s financing and building the extension to the property was on the basis that he believed he was acquiring a beneficial interest in the land and therefore found an inference of common intention. However Stack is clear that the intention must be common to all of the parties in order to establish a constructive trust. The reluctance of K to allow M to move in and his reluctant acquiescence based only upon his belief of the increased value of the house for the legal owners, may rebut the presumption of a common intention that M should acquire beneficial ownership by virtue of his indirect financial contribution, even if this can be established to be sufficient.
The legal effect of the forgery of J and L’s signatures in order to obtain the mortgage must now be considered. The forgery means that the intended legal charge to the Building Society will be incapable of creating a legal mortgage (First National Bank v Achampong). K does not have the power to convey legal title to the whole estate without the agreement of all the legal owners. The attempted mortgage is however capable of creating a mortgage of K’s equitable interest in the property (section 63(1) LPA and Bankers Trust Co v Namdar). K’s equitable share in the property will therefore provide security for the additional money which K has retained for himself after repaying the original mortgage. K alone will be responsible for repaying this additional sum. If J, K and L were held to be joint tenants in equity previously, which it is submitted is unlikely anyway, the equitable mortgage would certainly have the effect of severing the joint tenancy in respect of K, whilst J and L would remain joint tenants (Achampong). (7) Once again, the application of the law to the facts is analysed in some detail and, importantly, supported by references to case law.
The operation of subrogation will mean that the Tealeaf Building Society (T), as a third party, who has paid off the original mortgage, will be presumed unless the contrary appears, to intend that the mortgage shall be kept alive for their own benefit (Ghana Commercial Bank v Chandiram, Equity & Home Loans v Prestridge)). It is therefore submitted that J and L will be liable for the repayment of the original debt to Tealeaf Building Society, although not for the additional amount that was kept by Keith once the mortgage had been discharged. The operation of subrogation will mean that T will have the same priority of title as the original mortgagee and will be referred to as the mortgagee in discussion of the priorities of the parties.
The relative priorities of each of the parties with a beneficial interest in the property must now be considered because T will only be able to take possession in respect of any person over whom it has priority - taking possession will be important if T is to realise the full value from the sale of the house in the event of default. T is unable – in the absence of a legal charge – to secure possession and sale as of right, so it will have to apply under section 14 TOLATA 1996 as a “person interest”. In respect of such an application, the court must consider the factors listed in s.15 of the Act and may well order sale (Bank of Ireland v Bell), although it is possible that they might postpone sale in the light of the use still being made of the property by the other co-owners (Mortgage Corporation v Shaire). (8) The answer is detailed, not general. Empty statements are avoided.
In conclusion, J, K and L were the original legal and beneficial owners of the property and it appears that they were tenants in common in equity owing to the rebuttal of the presumption of joint tenancy in the domestic context by virtue of the facts of their relationship. It appears that M also had a beneficial interest on acquisition of the house by virtue of a common intention constructive trust or alternatively possibly following the construction of the extension to the property. By virtue of the forged mortgage, T has a mortgage over K’s equitable share of the property to the extent of the surplus money following repayment of the original mortgage. By virtue of subrogation T will also be entitled to repayment of the original mortgage from J, L and M which will be secured on the property. T will have to apply for an order for sale, although the balance of authority suggests that such an order will be granted. (9) The answer reaches a conclusion and the Examiner knows that the candidate has good understanding of this area of the law. Even if the precise details of the answer are wrong, the answer reveals that this is a candidate who has come to grips with the topic.