Summary

Although there were advantages in restricting the constructive trust described in Banner Homes Holdings Ltd (formerly Banner Homes Group Plc) v Luff Developments Ltd (No2) (2000) Ch 372 to family home property disputes, the reasoning in that case was firmly based on a common intention constructive trust and it remained binding in respect of commercial property disputes in the absence of Supreme Court authority to the contrary.

Facts

The appellant tenants (C) appealed against a decision ((2011) EWHC 803 (Ch), (2011) NPC 38) that the respondent landlords (J) had been entitled to operate a break clause in its lease of commercial premises. C and J had previously comprised a group whose interests included the ownership of commercial premises and the operation of an amusement arcade on the premises' ground floor. As part of an extensive demerger, J became the building's landlords from April 2009, while C held the tenancy of the ground floor. It had originally been intended that C would own both the building and the arcade, but that changed during negotiations in February 2009. The parties did not then agree as to the extent of the ground floor demise. Following demerger, J served notice on C under a break clause in the lease. C claimed that an agreement reached in February prevented J from doing so; further, because, during demerger negotiations, J had known that C had been unaware of the break clause, a constructive trust had arisen preventing its operation. The judge found that no agreement had been reached in February and that C had mistakenly overlooked the clause, meaning that no such trust had arisen. C argued that J held the freehold on constructive trust to give effect to the parties' common intention that C would remain as ground floor tenants, making it unconscionable for them to operate the clause; that trust was a common intention constructive trust based on the equity arising in Pallant v Morgan (1953) Ch 43 Ch D, as explained in Banner Homes Holdings Ltd (formerly Banner Homes Group Plc) v Luff Developments Ltd (No2) (2000) Ch 372 CA (Civ Div).

Held

(Etherton L.J. dissenting as to analysis of Banner Homes) (1) Banner Homes was firmly based on a common intention constructive trust, namely a constructive trust of the kind enunciated in Gissing v Gissing (1971) AC 886 HL, Gissing cited, Cobbe v Yeoman's Row Management Ltd (2008) UKHL 55, (2008) 1 WLR 1752 followed. Cases subsequent to Banner Homes might mean that common intention constructive trusts could be limited in future to family cases, but the position was not so clear as to make it possible for the Court of Appeal to hold that Banner Homes could not stand with higher authorities and to treat Banner Homes as not binding, Stack v Dowden (2007) UKHL 17, (2007) 2 AC 432 and Jones v Kernott (2011) UKSC 53, (2011) 3 WLR 1121 considered (see paras 122, 129-130 of judgment). Applying the requirements for a common intention constructive trust, the critical question was therefore whether J's conduct had been unconscionable, Banner Homes followed and Pallant applied. The judge had been right to conclude that J were not guilty of unconscionable conduct such as to raise an equity against them. The alleged constructive trust was one under which J were precluded from exercising the break clause so as to terminate C's right to remain on the ground floor. On the facts, the judge had rightly found that there had never been any assurance by J that the break clause would not be operated in that way. The problem that had arisen for C was not due to any unconscionable conduct on J's part but to C's own carelessness in not checking the terms of the lease. J had not known that C had been labouring under a misapprehension as to the terms of the lease, so their conduct could not have been unconscionable and the judge had been right to dismiss the claim (paras 109-113, 130-132). There were other insuperable difficulties in the way of a constructive trust based on the February discussions. The judge had been entitled on the facts to find that no agreement had been reached in February. The absence of agreement on critical parts of the commercial deal could show that there had never been a common intention to enter into a legal commitment: the parties' conduct showed that neither side had wished to commit themselves until agreement was reached on the extent of the demise of the ground floor; further, both sides had intended that all aspects of the demerger should be embodied later in formal contractual documentation (paras 98-108). (2) (Obiter) Banner Homes was invoked where parties had been in commercial negotiations over the acquisition of property but negotiations had failed so that there was no legally enforceable agreement. The advantage of Etherton L.J.'s reinterpretation of the case law was that it would restrict the number of cases in which Banner Homes could be used. That would be consistent with developments in the law of proprietary estoppel (para.133). (3) (Per Etherton L.J.) The Banner Homes constructive trust was not properly analysed as a common intention constructive trust. The authorities on common intention constructive trusts concerned disputes where a couple had purchased property as a family home. The jurisprudence in that area was driven by specific factual and policy considerations that had not applied to Banner Homes and did not apply in the instant case. Instead, the cases in which the Pallant equity was said to have arisen could be explained by the existence and breach of fiduciary duty. They could therefore be seen as cases where, pursuant to the constructive trust, the court deprived the defendant of the advantage obtained in breach of trust; on that basis, the instant appeal failed, Banner Homes and Pallant considered (paras 85-96).

Appeal dismissed