Property joint ventures gone wrong!
In good times when it seems that there is money to be made business men and women will often rush into actions they sometimes later regret. A classic situation is where an informal deal is made in relation to a property, perhaps owned by one party, for its development by the other, with some kind of sale / profit-sharing arrangement. However, the terms of the deal are not put into writing – or at least not sufficiently to comply with the provisions of s2 of the Law of Property (Miscellaneous Provisions) Act 1989. Things go wrong and the deal falls apart. The non-owning party, who has perhaps spent a lot of money and put a lot of effort into the development, wants to know whether or not he or she has acquired a share in the property or has some other remedy. Such was the case in Yeomans Row Management Ltd v Cobbe decided by the House of Lords  UKHL 55. What are the lessons to be learned?
We shall come to Cobbe shortly but first another similar situation where the court has held there to be a remedy - what is called the Pallant v Morgan trust (after Pallant v Morgan  Ch 43). The key facts (as set out in Cobbe) were as follows:
"In essence, A and B agreed, prior to an auction of land in which both were interested, that A would bid for the land, that B would refrain from bidding and that if A became the purchaser the land would be divided between them. A did become the purchaser but he and B failed to agree on the scheme and terms of the division. A then claimed to be entitled to retain the whole of the land."In that case Harman J the court declared that "the property is held by the defendant for himself and the plaintiff jointly, and if they still fail to agree on a division the property must be resold, either party being at liberty to bid, and the proceeds of sale divided equally after repaying to the defendant the £1,000 which he paid". There are thus situations where the court will hold that the parties are joint owners, by virtue of a trust, even though the legal formalities have not been complied with.
Yeomans v Cobbe
The first point to note is that in this case Yeomans Row Management Limited (“the property owner”) was already the owner of the property. Mr Cobbe, “a very experienced property developer” ("the developer"), reached agreement in principle to buy the property from the property owner after planning permission for a residential development had been obtained. The developer, at his own expense would do all the preliminary work for, and apply for, planning permission. If granted the property owner would then sell the developer the land for an agreed up-front price. The developer would then, again at his own expense, carry out the development in accordance with the planning permission, sell off the units and when the gross proceeds reached a pre-agreed limit any further proceeds would be divided equally between them. The problem was that none of this was in writing and thus the requirements of s2 of the 1989 Act were not satisfied; and we all know what that means. It was only when planning permission was obtained that the parties were to finalise and formalise the arrangements.
Nonetheless the developer spent a considerable amount of money in obtaining planning permission. As matters proceeded towards the grant or permission the property owner developed second thoughts about the terms of the deal and, immediately after permission was granted, upped the price. After some unsuccessful haggling the whole thing broke down. An outraged developer (at least I assume he was outraged) claimed that he had a share in the property based on proprietary estoppel. The trial judge and the Court of Appeal agreed. The property owner then appealed to the House of Lords – successfully. The developer was not entitled to a remedy based on an estoppel or one that was proprietary in character.
Their Lordships stated that, to be entitled to a remedy based on proprietary estoppel, the person seeking a remedy should have an expectation of a "certain interest in land". That was not the developer's expectation in this case. Indeed, what he expected was that following the grant of planning permission, he would enter into a formal contract with the property owner, and this depended on the remaining terms being successfully negotiated. The oral agreement between the developer and the property owner was contractually incomplete and lacked certainty as to its terms. As both the developer and the property owner were experienced in the property world, they knew that there was no legally binding contract and either party was free to discontinue negotiations without legal liability. The developer's belief, or expectation, was always speculative, and he was running a risk by proceeding without a written agreement.
As stated in the introduction, one of the situations where a constructive trust may arise is in the context of a joint venture relating to property, but here, the property owner had owned the property for some years before discussions began with the developer; and the property owner's unconscionable behaviour was not enough in the circumstances of the case to justify the developer's claim to have acquired a beneficial interest in the property.
That did not mean that the developer was completely without a remedy. The property owner was unjustly enriched by obtaining the value of the developer's services without paying for them. The developer was therefore entitled to a quantum meruit payment for his services in obtaining the planning permission on the basis that the property should be allowed to use the architect's plans on which the planning permission was based.
The speeches showed concerns about how proprietary estoppel claims have evolved, referring to "the risk of proprietary estoppel becoming unprincipled" and the need to apply the doctrine "in a disciplined and principled way". This decision means that the courts will now take a much stricter approach to proprietary estoppel claims.
And the lesson? Fairly obvious really ...
(For an article on whether proprietary estoppel - where it is found to exist - can be used to make an agreement enforceable that does not comply with s2 of the 1989 Act click here; and for the subsequent House of Lords case where a person was successful in obtaining a property by reason of proprietary estoppel click here).
Yeomans and s2 of the 1989 Act
In lYeomans Row Management Ltd v Cobbe, Lord Scott (at paragraph 29) expressed the view (obiter) that proprietary estoppel cannot be used to make enforceable an agreement that does not comply with s2 of the Law of Property (Miscellaneous Provisions) Act 1989. Lord Walker, the only other judge who gave a full judgment, said that it was not necessary or appropriate to consider the issue (para 93).
So what is the position?
In Herbert v Doyle  EWCA Civ 1095 Mr Herbert sought the transfer to himself of three car parking spaces owned by a dental practice that adjoined his property, in return for which he would transfer alternative car parking spaces. He had lengthy discussions with the dentists, and had carried out some work for them, but the agreement between the parties was oral and hence not compliant with s2 and therefore, unless s2(5) applied, (constructive trust) not legally binding.
Although Mr Herbert had relied to his detriment on the oral agreement (subsequently varied) in carrying out the building works, the judge held that no constructive trust had arisen in his favour because he had not completed the works.
Permission to appeal was refused by the CA. In coming to that conclusion detailed consideration was given to Yeomans Row Management Ltd v Cobbe. At para 57 Arden LJ said this about the discussion in Cobbe:
"There is a common thread running through the speeches of Lord Scott and Lord Walker. Applying what Lord Walker said in relation to proprietary estoppel also to constructive trust, that common thread is that, if the parties intend to make a formal agreement setting out the terms on which one or more of the parties is to acquire an interest in property, or, if further terms for that acquisition remain to be agreed between them so that the interest in property is not clearly identified, or if the parties did not expect their agreement to be immediately binding, neither party can rely on constructive trust as a means of enforcing their original agreement. In other words, at least in those situations, if their agreement (which does not comply with section 2(1)) is incomplete, they cannot utilise the doctrine of proprietary estoppel or the doctrine of constructive trust to make their agreement binding on the other party by virtue of section 2(5) of the 1989 Act."The point was not really therefore dealt with head on.
However, in Whittaker v Kinnear  EWHC 1479 (QB) the High Court did grapple directly with the issue. It was held that proprietary estoppel in a case involving the sale of land has survived the enactment of s2 Law of Property (Miscellaneous Provisions) Act 1989 despite Lord Scott’s dicta which suggested the contrary in Cobbe v Yeomans Row.
And, although Lord Neuberger in Thorner v Major drew a distinction between commercial cases (where it was less likely that an estoppel would be established) and domestic cases, it is the nature of the parties’ dealings, not the nature of the property, which determines whether a case is to be regarded as commercial or domestic.
C sold her house and adjacent agricultural land to a property developer (D) at an undervalue on the basis that she would be permitted to stay in the house for as long as she wanted and that she would share in the profits of development and in the absence of any such profits the house would be re-conveyed to her. This agreement was not written into the contract of sale and was not formalised.
D took out a mortgage on the land and when he defaulted the bank sought to terminate C’s occupancy of the house by a notice to quit. C defended the subsequent claim for possession on the basis that D’s representations on which she had relied to her detriment gave rise to a proprietary estoppel.
At first instance the District Judge said that the proprietary estoppel claim was defeated by s2 of the 1989 Act and held that the claim was therefore not “genuinely disputed on grounds which appear to be substantial” under CPR Rule 55.8. On appeal the case was argued also in the alternative on the basis of a constructive trust.
Allowing the appeal and setting the order for possession aside, the High Court held that there was no binding authority that a proprietary estoppel could not arise in a commercial transaction situation. The nature of the dealings between the parties had to be analysed in each case to establish whether there was a complete agreement (Herbert v Doyle  EWCA Civ 1095 cited) and whether that agreement gave rise to an expectation of a contract or an interest in immovable property, often for long term occupation in a home. (Yaxley v Gotts  Ch 162; Cobbe v Yeomans Row Management Limited  1 WLR 1752; Thorner v Major  1 WLR 776). The case was therefore remitted to the county court for those issues to be determined. The fact sensitivity of these cases was emphasised (paras 35 and 36).
This case provides a useful summary of the cases on the issue of proprietary estoppel and its use in the cases involving interests acquired in commercial and domestic situations. The obiter dicta of Lord Scott in Cobbe that: “proprietary estoppel cannot be prayed in aid in order to render enforceable an agreement that statute has declared to be void” were contrasted with the dicta of Beldam LJ in Yaxley v Gotts. Beldam LJ had been the Chairman of the Law Commission at the time of its working paper and report on Formalities for Contracts for Sales of Land on which the 1989 Act was based. He was therefore in a good position to state that the 1989 Act: “did not intend to affect the availability of the equitable remedies” including proprietary estoppel. (para 30).
This case held that although previous cases had drawn a distinction between commercial sale of land agreements and domestic agreements, there was no binding authority that s2 of the 1989 Act excluded a defence based on proprietary estoppel.
Oral agreement enforceable
Ghazaani v Rowshan
 EWHC 1922 (Ch)
The issue came up again in this case, in which the High Court held that despite the absence of a written contract an oral agreement was enforceable under the doctrine of proprietary estoppel and ordered the transfer of a property to the claimant.
In a convoluted set of facts C succeeded in establishing that the parties had entered into an agreement where:
(1) D would transfer a property he owned in Leeds to C for £100,000.
(2) C would then receive the rent from the sitting tenant in the Leeds property.
(3) C would transfer a property in Iran to D. This property was occupied by a tenant who had paid a deposit. C would repay the deposit to the tenant at the end of the lease.
(4) C would pay D an equality payment of £75,000 the flat in Leeds being worth more than Iranian flat.
Every fact was disputed by D. Although C produced many court documents from Iran showing that he had transferred the Iranian property to D under the agreement, that he had paid the equality payment and sent cheques post-dated for the repayment of the deposit, D claimed that all these documents were forgeries or obtained through corruption. His case was that the property in Iran had not been transferred to him and he had not been paid the equality payment. D failed to transfer the Leeds property to C. C issued a claim for the transfer of the Leeds property to him based on proprietary estoppel/constructive trust.
His Honour Judge Behrens, sitting as a Judge of the High Court, set out the relevant principles of law relating to the dispute.
He quoted from “The Law of Real Property” by Megarry and Wade, 8th ed., at para. 16-001, where the principles of proprietary estoppel was set out as follows:
“An equity arises where – Law of Property (Miscellaneous Provisions) Act 1989, s2
(a) the owner of land (O) induces, encourages or allows the claimant (C) to believe that he has or will enjoy some right or benefit over O’s property;
(b) in reliance upon this belief, C acts to his detriment to the knowledge of O; and
(c) O then seeks to take unconscionable advantage of C by denying him the right or benefit which he expected to receive.”
One of the issues related to the fact that the parties’ discussions were oral and there was no document which satisfied s2 of the 1989 Act. He quoted the relevant parts of that section:
“2.(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each… Application to the facts
2.(5) nothing in this section affects the creation or operation of resulting, implied or constructive trusts.”
The Court then considered how the principles of constructive trust/proprietary estoppel applied in relation to a contract to transfer property which did not satisfy section 2. Citing Cobbe v Yeoman’s Row Management Ltd  1 WLR 1752 he said that despite the observations of Lord Scott, “it is probably still possible to have a proprietary estoppel in the case of a contract which does not satisfy s.2”. He went on to make the distinction between claims where the parties made an oral agreement which was intended eventually to result in a written contract, and those situations where there was never an intention to enter a written contract. In the former situation no claim for proprietary estoppel could be made, however in the latter case s.2 does not prevent an estoppel arising (see Herbert v Doyle  EWCA Civ 1095). He concluded that because C and D had been content to transfer the properties based on their oral agreement, there was never an intention to enter a written agreement.
The High Court found for C. It found for C on every relevant factual dispute and then concluded that it would be unconscionable for D to refuse to complete the transfer of the Leeds property to C in the exceptional circumstances of the case. The relief granted was discretionary and should be aimed at avoiding an unconscionable result. The appropriate relief was to put the parties in the position they would have been if the contract had been concluded according to the agreement. That meant that D must transfer the Leeds property to C.
D had also applied to cancel a unilateral notice that C had placed on the Leeds property. The judge held that a unilateral notice under S.116 Land Registration Act 2002 could be used to protect an equity arising by estoppel because this was an interest binding successors in title. Section 32 provided that such an interest could be protected by a unilateral notice.
Nature of representations
Purchase of reversionary leasehold interest
Kim v Chasewood Park Residents Limited
 EWCA Civ 239
The terms of a letter sent to tenants were not a clear representation for the purpose of inducing a purchase. No estoppel had therefore arisen in relation to the terms upon which a tenant would participate in the purchase of a reversionary interest.
T was a tenant of a long leasehold under which a ground rent of £100 (and rising) was payable. The owner of the reversionary leasehold interest wished to sell that interest. A collection of leaseholders, through a residents’ association, were considering purchasing the reversion through a company and approached T. In a letter they set out the benefits of obtaining the interest, which they said included “no ground rent to pay” and “the ability to extend their leasehold interests for a small fee”. This was at the early stages of the association’s consideration of the acquisition and they had mistakenly referred to the acquisition as one of the freehold, rather than of a reversionary leasehold interest.
T participated in the acquisition. On acquisition, a ground rent was levied in order to build up a fund to cover the expenditure of the company that had acquired the reversion. When T refused to pay the Company issued proceedings to recover the sums due.
T defended on the basis of promissory estoppel. This was based upon the statement that no ground rent would be paid; and that the statement regarding lease extensions, carried with it an implication that it would allow a new lease at a peppercorn rent.
The Judge found that T had not properly understood the transaction and consequently had not relied on those statements. Alternatively, that any estoppel was suspensory only and that the Company could, with notice, reinstate an obligation to pay ground rent. T appealed to the Court of Appeal.
Decision on appeal
After considering the type of representation that is needed to form a basis of estoppel,
being a clear and unambiguous one, Patten LJ said:
“It seems to me that the letter… did not promise anything. Even putting aside its obvious conditionality on the successful completion of the purchase, the fact that it was written well in advance of any possible acquisition and without the benefit of detailed knowledge of the financial position that would obtain once a purchase had taken place points overwhelmingly in my view to this being little more than a list of possible potential benefits rather than a guarantee or promise of what would be done.” The Court held that even if T had relied on the letter, it was not reasonable for T to have done so. Given the stage at which the letter was sent, it was not a clear and unambiguous statement. Further, given the reference to the acquisition of the freehold interest, T had not relied on the statements as to ground rent, she had believed she was getting a freehold interest.
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