Quistclose trust

Property given for a specific purpose

Purpose fails

Huseyin Ali v Dinc

[2020] EWHC 3055 (Ch)

Summary

 The court held that the arrangement between Claimant (“C”) and the first defendant (“D1”) was sufficient to constitute a Quistclose trust. A Quistclose trust occurs where a property is given to someone for a specific purpose. If the purpose fails the property is held on trust for the transferor (Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHL 4) 

This meant that D1 held the properties on resulting trust for C, but with a power in D1 to use the properties for the agreed purpose of raising funds for C. That arrangement had failed and subject to certain qualifications, C was entitled to an order requiring D1 to re-transfer the properties back to him, and D1 and the second defendant (“D2”) to surrender the lease over one of the properties.

Facts

The claimant was the registered proprietor of two properties (No 19 and No 67). On 27 April 2016, the properties were transferred by C to D1 via signed transfer forms indicating the transfers were for nil consideration.

To enable the transfers to be registered, it was necessary to redeem an existing charge over No 19 in favour of Santander UK Plc securing a debt of approximately £67,500. Both C and D1 accept that D1 provided the funds for this.

Later that year, on 6 December 2016, D1 gifted to D2 (his brother) a 999-year lease of the first floor of No.67. On 2 March 2017, and D1 granted a charge to D3 over No.19 as security for a loan in the sum of £460,000. Both the Lease and the Charge were registered. On the evidence, the loan was used exclusively for D1’s and/or D2’s own purposes and benefit.

No.19 was C’s home, and he continued in occupation rent-free notwithstanding the transfer to D1 and the dispute before the court. No.67 was a rental property, split into two flats on the ground and first floors. In 2007, C granted a 999-year lease of the ground floor flat to a Mr Thompson for a premium of £295,000. C was still named as the landlord of the first floor flat, which was let to an assured shorthold tenant with C receiving the rent of c.£1,500pcm for himself notwithstanding the transfer to D1, the Lease to D2, and the dispute before the court.

C’s case was that the transfer of the Properties was subject to an oral agreement for sale at a price of £1.35 million (£750,000 for No.19 and £600,000 for No.67), made on 26 April 2016 (the day before the Properties were transferred to D1), and that, in addition, D1 would discharge the Santander Charge.

The Santander Charge was discharged, thus enabling the registration of No.19 in D1’s name, but C received no part of the £1.35 million. C’s primary claim was to recover the Properties, or the £1.35 million sale price on the basis that he was entitled to various declarations and injunctions in support of equitable proprietary in the properties. Further, or in the alternative, he claimed to be entitled to various personal remedies by way of restitution or equitable compensation.

D1 and D2 maintained that C suggested a plan by which C would gift the Properties to D1; D1 would then use the Properties to raise finance to give back to C. D1 alleged that C orally requested his assistance in raising finance that C needed. D1 and D2 denied C’s version of events, and all the legal consequences that followed, but advance no counterclaims. D3 claimed that even if C did have an equitable proprietary interest of any sort in No.19, it was postponed to D3’s subsequent registered charge.

Issues

  • Whether there was an enforceable contract between C and D1 or whether the C could enforce the terms of any resulting or constructive trust?
  • Whether, as D1 held the properties on resulting trust (or a constructive trust on the same terms) for C, whether C’s earlier interest took priority over the subsequent registered proprietary interests of D2's lease and D3's charge?

Decision

  1. On the evidence an arrangement or agreement between C and D1 had existed and was not an arrangement intended by either party to be by way of gift or binding in honour only. That arrangement – on both parties’ versions – was to involve the transfer of the properties from C to D1 and the payment of money by D1 to C.

Whatever its detail, the arrangement was not in writing but it could be inferred it was C and D1’s clear intention, understood by both, that the properties would be transferred by C to D1 for D1 to use exclusively for raising funds which were to be transferred to C.

As those restrictions were sufficiently clear and certain the court was able to determine D1 had acted in breach of the restrictions as apart from the permitted use of the properties it was C, not D1, who was beneficially entitled to the properties under a resulting trust (or constructive trust) despite the transfer of legal title to D1.

Therefore, as a legal consequence of this arrangement between C and D1 it could be inferred there was a Quistclose trust; C understood and accepted that the properties would be used to raise all or some part of the funds that were required in order for D1 to pay C whatever sums were due under their arrangement. However, the arrangement between C and D1was void and unenforceable. Neither C nor D1 presented sufficient evidence to establish the truth of their own version of the arrangement between the parties. The only evidence of a contract of sale for £1.35 million was C’s own assertion. Without clear agreed terms, there could be no contract.

Further and even assuming the terms had been clear, an oral contract for the disposition of an interest in land was void unless in writing: s.2 of the Law of Property (Miscellaneous Provisions) Act 1989. Thus, the intended contract was not simply unenforceable; it was of no effect. Since the intended contract (whatever its terms) could not be enforced, given the want of writing, any remedies which depended on court enforcement of the contractual obligations undertaken by either side were also not available.

Consequently, even if C had been able to advance firm proof that there had been an oral contract for the sale of the property for £1.35 million, he could not enforce that contract, and in particular could not enforce payment of the purchase price for £1.35 million. In unwinding what had happened between the parties as a result of that void arrangement, or alternatively in enforcing the Quistclose trust that could be proved on the facts, C had established that D1 and D2 held their respective interests in the transferred properties on trust for C. Accordingly, and subject to the qualifications, C was entitled to an order requiring D1 to re-transfer the properties, and D1 and D2 to surrender the lease over No 67.

2. C was entitled to an order requiring D1 to surrender the lease. No.19 remained encumbered by D3’s registered security interest.  Whilst it followed that C was not entitled to an order requiring D1 to pay him £1.35 million by way of purchase price, the loss could not be left to lie where it fell. The intended transaction had to be unwound, and both sides put back in the position they were in before the deal was entered into but D2 and D3’s positions had to be considered.
There was force in the C’s unjust enrichment claim based on the argument that there was an intended contract that never materialized. Despite obiter comments in Mortgage Express v Lambert [2016] EWCA Civ 555, [2017] Ch. 93, s.26 of the Land Registration Act 2002 did not prevent a party from asserting a potentially overriding interest as against a registered disponee as s. 26 was directed at protecting the disponee’s legal title, not its priority.

If there was a Quistclose trust, D1 was acting perfectly properly in using the properties to acquire secured finance from D3, and to that extent C's interest in the properties was overreached. C could not complain about the fact that effecting the parties' intended purpose had delivered a valid and effective security interest to D3: that was an essential outcome of the parties' arrangement. It was immaterial for priority purposes that D1 had then been supposed pay those funds to C, pursuant to his fiduciary duties. That had been a breach of D1's duty to C, but it did not have any impact on D3 overrising interest.

If there was a Quistclose or constructive trust - because the claimant’s proprietary interest in the properties was held under a Quistclose trust or a resulting trust under the Westdeutsche analysis, D3’s charge was not subject to any overriding interest held by the claimant, but D2’s lease was subject to the claimant’s overriding interest.

If there was no Quistclose or constructive trust, but the C had an interest under a presumed resulting trust, the same priorities consequences would follow as per Credit and Mercantile Plc v Kaymuu Ltd [2015] EWCA Civ 655. In this case, there was no evidence that prescribed D1’s activities as an agent for the claimant. The C’s equitable interest in the properties was subject to D1’s use of them as security to raise the funds to be provided to C, and the C’s equitable interest was never intended to survive D1’s disposition in favour of D3, which was undertaken for the purpose of raising funds. Thus, the Cs interest was overreached by the disposition in favour of D3. Conversely, the C’s interest took priority over D2’s, notwithstanding the registration of D2’s interest, because D2’s interest was not acquired for valuable consideration, so was not protected by the Land Registration Act 2002

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