In its recent judgment in Erlam v Rahman, the Chancery Division illustrated the court’s approach to determining whether one spouse has a beneficial interest in a buy to let property registered in the sole name of the other spouse, in proceedings for final and interim charging orders.
Practitioners need to get the analysis right. Are you trying to prove the existence of a common intention constructive trust (that is, a beneficial interest arising from agreement between the spouses, which does not depend on proving contributions to the purchase price)? Or should you use a stricter resulting trust analysis (that is, the spouses’ interests match their individual contributions to the purchase price and outgoings, including the mortgage)?
Background
Private individuals living in Tower Hamlets (the claimants) successfully petitioned for the removal of Lutfur Rahman as mayor, on grounds including corruption, dishonesty and unlawful spiritual influence. The Election Court ordered Mr Rahman to pay their costs, with payment on account of £250,000. Mr Rahman did not pay.
The claimants obtained a final charging order over a property registered in Mr Rahman’s name, and interim charging orders over another property in his name and a further property in his wife’s name (Mrs Farid). She then claimed that she had her own beneficial interests in all three properties. Shortly before trial, Mr Rahman became bankrupt on his own petition. The court stayed the proceedings in relation to the properties for which only interim charging orders had been made, pursuant to sections 282 and 346 of the Insolvency Act 1986. The trial continued in relation to the property subject to a final charging order. Mrs Farid alleged that she had a 74% interest arising from a trust deed, based on contributions to the purchase price made by her or for her benefit. If Mrs Farid prevailed, only 26% of the equity in the property would be available to satisfy the payment on account, further reducing the costs recovery.
Legal framework
Stack v Dowden and Jones v Kernott established the framework for identifying the interests of spouses or life partners in property purchased as the family home. The starting point is the proprietorship register. If one party is the sole registered owner and the other party claims his or her own beneficial interest, the court adopts a two stage analysis. First, the claimant must show that there was an agreement that he or she should have a beneficial interest. Secondly, if such an agreement was made, unless the proportions are themselves agreed, the court may impute an intention that the claimant was to have a fair beneficial share, to be assessed in the light of all the circumstances. There is no presumption of applying the resulting trust analysis in the domestic context of the family home.
The common intention constructive trust has been applied to other property not used as a family home (see Capehorn v Harris). In Laskar v Laskar, however, the Court of Appeal doubted that the common intention constructive trust applied in such cases. A mother and daughter purchased the property in question as an investment. Lord Neuberger MR stated that a resulting trust analysis was appropriate because Stack v Dowden concerned the domestic consumer context and did not apply to property acquired for business purposes. As Chief Master Marsh observed in Erlam v Rahman, Laskar is curiously overlooked, not having been cited in Jones v Kernott or Capehorn v Harris.
Decision
Returning to the Erlam case, Chief Master Marsh held that the trust deed purported to give effect to the defendants’ contributions to the purchase price of the property and did not record a gift or disposition itself. It was therefore of very limited assistance. The court had to consider whether the factual position represented by the trust deed was correct. The Chief Master found that Mr Rahman bought the property as a buy to let, so that the resulting trust analysis applied. He rejected Mrs Farid’s evidence of contributions to the purchase price made by her or for her benefit. His conclusion was fortified by the absence of any evidence to suggest that the parties treated the property as a trust asset for Mrs Farid’s benefit as to 74%. Accordingly, Mr Rahman owned the entire beneficial interest in the property. If it had been necessary to do so, the Chief Master considered that there were grounds for concluding that the trust deed was a sham: Midland Bank v Wyatt, Swift Advances Plc v Ahmed and IRC v Hashmi.
Practical points
Both issues considered in Erlam (how to analyse the rights of spouses to property purchased for business purposes and registered in one person’s name, and whether to conclude that a trust deed between spouses is a sham, or “deed in the drawer”) give rise to notoriously difficult factual questions. These issues often arise in bankruptcy and repossession claims, not to mention disputes between wealthy individuals about the division of property on divorce or separation. Practitioners will be assisted by the court’s consideration of the legal principles, in particular the decision to follow the much neglected decision of Laskar. If the property was purchased for business purposes, such as letting, a resulting trust analysis may well be appropriate.
Whichever test one applies, the legal and evidential burdens are (at least initially) on the person alleging that the true position differs from the entry in the proprietorship register. Erlam demonstrates the critical importance of adducing sufficient evidence to prove that case. If the defendants had disclosed full and complete bank statements showing the origin of funds and the treatment of the rental revenues consistent with a trust relationship, the result may well have been different. Oral evidence will not make up for a dearth of documents, particularly in a case raising questions of personal credibility.
Where one is dealing with an alleged trust deed, it is relevant to consider whether the parties’ subsequent conduct is consistent with the existence of a trust. If spouses or partners claim the privileges of trust status, the least that they can do is demonstrate that they have conducted their affairs in accordance with trust principles.
