Note on Chaudury v Yavuz: part two- the constructive trust issues

  Note on Chaudury v Yavuz: part two- the constructive trust issues

 The judge at first instance had, as an alternative, upheld the claim of C on a separate ground, outside the provisions of the Land Registration Act 2002. This ground was that Y had acquired No. 35 as a constructive trustee. The contract V and Y had entered into used the Standard Conditions of Sale 4^th edition. Condition 3.1 of this contract stated that the incumbrances subject to which the property was sold were those specified in the contract and those discoverable by inspection of the property before the contract. It was unarguable that the metal staircase was discoverable. Therefore, so the argument went, the right was binding on the conscience of V because of the terms on which he had bought the property.

A constructive trust has been imposed on a registered proprietor to protect the interest of a third party before.  In Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044 a new registered proprietor was made a constructive trustee of an unprotected estate contract in respect of part of the land because it had entered into a contract which was expressed to be subject to and with the benefit of the unprotected contract. Assurances were given by the purchaser prior to the contract that it would take all reasonable steps in its power to make sure that the interests of the plaintiffs were satisfied. Dillon J, in making the purchaser a constructive trustee, found that “the fraud on the part of the [purchaser] lies not just in relying on the legal rights conferred by an Act of Parliament, but in the [purchaser] reneging on a positive stipulation in favour of the plaintiffs in the bargain under which the [purchaser] acquired the land”.

Of course, constructive trusts in relation to purchasers of land have been developed considerably since 1982 and, in particular, after Ashburn Anstalt v Arnold [1989] Ch 1. The narrowing of the circumstances in that case in which a constructive trust will be imposed has meant that the owner of property will have to have conducted himself in such a way that his conscience is affected and so that it would be inequitable to allow him to deny the claimant an interest in the property. More recently this has been clarified in Lloyd v Dugdale [2001] EWCA Civ 1754 to require that the purchaser “has undertaken a new obligation, not otherwise existing, to give effect to the relevant encumbrance or prior interest”. Simply having notice of a right is insufficient. Further, taking land “subject to” existing rights is also insufficient because in many cases clauses of that nature will be inserted to protect the contractual position of the vendor, ie he or she cannot then be sued by the purchaser in respect of any adverse rights coming to light. There is also the possibility that in some cases the vendor wishes to protect itself against the holder of existing rights when the purchaser denies them and the vendor can seek an indemnity from the purchaser in the event of such denial. But in the latter case the reason why the holder of the rights cannot enforce them is precisely because he or she has not protected them by the entry of a notice in the way they should have done so an action of this type would be rare.

In the present case Lloyd LJ saw the wide ramifications of finding for the claimant. It would in effect mean that by the adoption of the general words of the Standard Conditions of Sale referred to above the purchaser was giving a new undertaking to be bound by all discoverable rights even where they could and should have been protected by the entry of a notice and where the holder was not in occupation. As in this case, equitable easements and proprietary estoppel rights would be two obvious groups of such claims.

What is needed therefore is some specific and express reference in the contract to the rights in question and an express provision requiring the purchaser to take the property subject to those rights. Those rights should already not be binding on the purchaser under the law and that is substance of the “new obligation, not otherwise existing” denial of which would be unconscionable. The incorporation of these general words was simply not a case of a new obligation being undertaken and therefore the claim failed and the appeal was allowed.