In HSBC v Dyche property was conveyed to Mr and Mrs Dyche in 1994. The property had belonged to Mrs Dyche’s parents, Mr and Mrs Collelldevall, who had lived there since 1976. In 1988 Mr Collelldevall was made bankrupt. At that time he and his wife owned the property as beneficial joint tenants. The bankruptcy had the effect of severing that beneficial joint tenancy. Following Mr Collelldevall’s bankruptcy his Trustee in Bankruptcy obtained, in 1992, an order for sale of the property which order was not enforced. The then mortgagee subsequently obtained a possession order in 1993. That order was also not enforced. Mr Collelldevall was discharged from his bankruptcy at some time in early 1994.

In January 1994 the property was transferred by Mr and Mrs Collelldevall to Mr and Mrs Dyche with the agreement of Mr Collelldevall’s Trustee in Bankruptcy (“the 1994 Transfer”). The mortgage outstanding at the time was discharged upon completion of the transfer. A sum was also paid the Mr Collelldevall’s Trustee in Bankruptcy, thereby increasing the dividend in the bankruptcy. The purchase price was set to meet the Collelldevall’s immediate financial needs and commitments and bore no relation to the actual value of the property which was, at that time, much more than the £25,000 apparently paid by Mr and Mrs Dyche.

At the time of the transaction Mr and Mrs Collelldevall were unable to secure a mortgage against the property in their own names as a result of his bankruptcy. Hence, it was argued, and accepted, that the Dyche’s acquired the property on their behalf. The Dyche’s obtained a mortgage of £17,000 from Lloyds Bank and Mr Dyche was said to have borrowed the balance of £8,000 from a friend. However, the judge accepted Mr Collelldevall’s evidence that it was he who had borrowed the £8,000 from a friend. There was an agreement that Mr and Mrs Collelldevall would pay Mr and Mrs Dyche in monthly installments amounts which corresponded with the amounts due under the Lloyds mortgage. The judge accepted that following the 1994 Transfer the property was held on constructive trust for the Collelldevalls.

Later in 1994 Mrs Collelldeval died and the judge accepted that her interest in the property passed to Mr Collelldeval under the right of survivorship. Whilst the bankruptcy had had the effect of severing the joint tenancy the judge concluded that the effect of the 1994 Transfer was to put the Collelldevalls, as far as possible, back into their pre-bankruptcy position. Thus it was concluded that the Dyches held the property on trust for the Collelldevalls as beneficial joint tenants.

In 1995 Lloyds Bank advanced more monies to the Dyches which sum was repaid with later borrowings from HSBC. Lloyds did not take a further charge against the property in respect of this advance. In 2002 the property was transferred into the sole name of Mrs Dyche by herself and her husband in connection with divorce proceedings (“the 2002 Transfer”). This was said to be pursuant to a court order under which Mrs Dyche had paid to her husband the sum of £5,000 (the only consideration which passed in relation to the 2002 Transfer). On the same date as the 2002 Transfer Mrs Dyche gave HSBC a first legal charge over the property in order to secure an advance against that property. In order to obtain the mortgage Mrs Dyche had provided HSBC with what purported to be an assured shorthold tenancy agreement naming herself as landlord and Mr Collelldevall as tenant. The judge accepted that Mr Collelldevall’s signature was a forgery. Mr Collelldevall knew nothing of this mortgage and had not authorised it. A further advance was acquired by Mrs Dyche under a second mortgage from HSBC in 2003.

Mr Collelldevall gave evidence that he knew the property was going to be transferred into Mrs Dyche’s sole name but that she had promised to transfer the property to him thereafter. The judge found that Mrs Dyche had clearly perpetrated a deception upon her father; she was unable to transfer the property so long as monies remained outstanding in respect of the HSBC mortgages. Mrs Dyche had, it was concluded, acted in breach of trust. Whilst it was not established that Mr Dyche had anything to do with the forgery of Mr Collelldevall’s signature on the tenancy agreement the judge concluded that he must have known that he too was acting in breach of trust in transferring the property to his wife in return for £5,000 given that the property was beneficially owned by Mr Collelldevall, pursuant to the agreement at the time of the 1994 transfer.

The question for the court, therefore, was whether Mr Collelldevall’s beneficial interest in the property was overreached by HSBC’s interest under the terms of the mortgage(s). The judge reviewed the relevant provisions of the Law of Property Act 1925 (section 2(1)(ii) regarding the effect of a conveyance of land by trustees; section 205(1)(xxi) regarding the definition of a purchaser in good faith; and sections 2(1)(ii), 2(2) and 27, which require the conveyance to be made by at least two trustees) and, applying the law to the facts of the case, determined that the doctrine of overreaching did not here apply (for detailed analysis and reasoning see the judgment, paras [37] – [46]). It was held that Mr Collelldevall had a beneficial interest which overrode the registration of the HSBC mortgages pursuant to Paragraph 2, Schedule 3 to the Land Registration Act 2002.

The judge concluded that “HSBC could have avoided the present position by making inquiries of Mr Collelldevall, but, though a Letter of Consent was considered, they chose not to proceed down that route, as the documents appeared to be in order … By not making inquiries of Mr Collelldevall direct, they assumed the risk of the tenancy agreement turning out to be a forgery. The risk may have seemed remote, but has now come to pass, and HSBC misses out because of it”.

Once again, this is a clear reminder of the consequences of mortgage companies not making sufficient inquiries of propsective mortgagors where there is evidence that there is someone else occupying the property concerned. However, there is nothing in the facts to suggest that HSBC was or could have been aware that Mr Collelldevall and Mrs Dyche were related. On the face of it he was no more than a tenant with the benefit of an assured shorthold tenancy. It would have been plain from the nature of the tenancy agreement what rights Mr Collelldevall would or would not have had as a consequence of his shorthold tenancy. Without any reason to suspect that there was a familial relationship between Mrs Dyche and Mr Collelldevall this decision seems to suggest that any potential lender should make inquiries of shorthold tenants in order for their lending to be secure. This does, on the face of it, seem to be a particularly onerous obligation to impose upon all lenders, particularly given the recent increase in the acquisition of  ‘buy to let’ properties together with a tendency for property owners to switch their mortgages much more frequently, reflecting an inclination to always be in pursuit of the best deals on offer.

Postscript: For another view on this decision see here.

Ms Jones and Mr Kernott bought a property, 39 Badger Hall Avenue, in 1985 and the property was conveyed into their joint names. The purchase price was £30,000 of which £6,000 was contributed by Ms Jones. The remainder was financed by an interest only mortgage, supported by an endowment policy. The mortgage and endowment policy payments were shared between the couple. The following year a further loan of £2,000 was taken out against the property for the purpose of building an extension and this was built and paid for largely by Mr Kernott. This is estimated to have enhanced the value of the property by almost 50%, from £30,000 to £44,000. Ms Jones and Mr Kernott shared the household expenditure (including bills and mortgage repayments) until the couple split up and Mr Kernott moved out of the property in 1993 (some 8 years later). Thereafter, Ms Jones made all of the interest only mortgage payments together with the payments against the endowment policy and met all expenditure in relation to the upkeep of the property. There were two children of the relationship who remained with Ms Jones. Mr Kernott made little or no contribution to their maintenance and none had been sought by Ms Jones.

Some time after the relationship had ended a life insurance policy was cashed and the proceeds split between the parties. In part this was to enable Mr Kernott to purchase a property for himself which he did in 1996, acquiring 114 Stanley Road, which he then financed alone. It is undisputed that Ms Jones never acquired any interest in the Stanley Road property. It is also undisputed that until the couple split up and Mr Kernott moved out of the property in 1993, the beneficial shares in the property were owned equally. The question for the court was whether, following the couple’s separation in 1993, the beneficial shares in the property were altered. At first instance the judge held that they had altered and concluded that Ms Jones was entitled to a 90% beneficial interest in the property on the basis that it was “fair and just”.

On appeal, Nicholas Strauss QC (sitting as a Deputy Judge of the High Court) reviewed the main authorities quite extensively. Unsurprisingly, he undertook a fairly lengthy analysis of the Oxley v Hiscock and Stack v Dowden decisions. On the facts Jones v Kernott was contextually more similar to Stack v Dowden given that the property with which the litigation was concerned had been conveyed into the joint names of the couple and the question for the court was whether the presumption of joint beneficial ownership in circumstances where there was joint legal ownership could be rebutted, as it had been in Stack v Dowden. The relevance of Oxley v Hiscock, despite being factually distinct because the property there had been conveyed into the sole name of one of the parties, was the extent to which the decision in Stack v Dowden had endorsed (to a large extent) the approach of the Court of Appeal in Oxley v Hiscock in respect of the proper approach to quantification of shares in the family home.

The starting point, according to Stack v Dowden, is that where property is conveyed into joint names there is a presumption that the beneficial shares are owned equally (in the absence of any express declaration to the contrary). Establishing that the shares are held other than equally will depend upon identifying a common intention that the shares should be so held; only in very unusual cases is this likely to be established according to the House of Lords in that case. The reality, of course, is that such a common intention is very unlikely to have ever been expressly stated and agreed upon; it will be for the court to look at the evidence and determine whether the facts speak to there having been such an intention. In so doing the courts will look at the whole of the parties’ conduct.

There is a fine distinction between inferring the intention of the parties from the facts and imputing their intention. This is a line which Lord Neuberger (dissenting as to the reasoning but not as to the result in Stack v Dowden, para [125]) thought ought not to be crossed. The former being the product of some objective analysis and the latter being essentially an invention of the court where no such intention could be identified from examining the parties’ actions and statements.

Of course, in Stack v Dowden the parties had never really had a domestic partnership in the financial sense, the finances having been kept separate throughout their relationship, whereas until the time Ms Jones and Mr Kernott separated there appears to have been a clear financial partnership between them. Even after Mr Kernott moved out of the property, until 2008 the Badger Hall Avenue property continued to be held under a beneficial joint tenancy, Mr Kernott serving a notice of severance of the joint tenancy in May of that year.

Given that the financial contributions of the parties to the property were clearly very different once Mr Kernott had left the property it is not at all surprising that Ms Jones should acquire a greater interest in the property, thus rebutting the presumption of beneficial joint ownership. However, the quantification in this case is open to question. On appeal Nicholas Strauss QC said that whilst he is not sure that he would have arrived at exactly the same result (in terms of the proportions apportioned to the parties) as the judge he did not think that the attribution of 90% of the property to Ms Jones was unjustifiable. On the facts it is clear that Mr Kernott had contributed far more than 10% to the purchase and increased value of the property. The fact that Ms Jones had paid all of the mortgage payments and household expenses once Mr Kernott had left the property is only to be expected; she also enjoyed the whole benefit of the property. A point which had been pursued on behalf of Ms Jones in the County Court was a suggestion that once Mr Kernott had acquired his own separate property he did not intend to have a subsisting interest in the Badger Hall Avenue property. This was not pursued on appeal. Also, it was clearly a feature of the case that Mr Kernott had made no payment for the maintenance of the children although Ms Jones had never pursued such contributions from him. It is, however, something which both the trial judge and the judge on appeal thought would be a legitimate consideration.

Nicholas Strauss QC recognised that the trial judge, in coming to the conclusion which he did, had attributed to the parties a common intention which they did not have, or at least did not express to each other. In other words, he had imputed to the parties an intention which was not apparent from their conduct. This, he said, was the right thing to do in this case. This, whilst being consistent with the approach advocated by the majority in Stack v Dowden, really is to be questioned. If the courts are entitled, in the absence of any evidence, and arguably in defiance of the evidence, to invent common intentions and graft those onto the minds of the litigating parties, we are left with a level of discretion which will provide unacceptably high levels of uncertainty when it comes to the quantification of shares in the family home upon the dissolution of relationships. It is precisely this sort of outcome which Lord Neuberger warned against in his dissenting speech in Stack v Dowden and he was right to be concerned; the rot is setting in.

Postscript

For another view on this decision, see here. See also a piece I wrote for the NLJ on this here.

In 1977 an appointment (“the 1977 Appointment”) under Clause 3 was duly exercised by deed. The 1977 Appointment provided, in the absence of any trust expressly created as described therein, for a series of gifts in default, each being to one person only (which would avoid the possibility of the Estate having to be broken up to share it amongst numerous parties) with successive gifts to another one person only. The material provision of the 1977 Appointment is as follows:

2. As from the date hereof the Trust Fund and the income thereof shall be held upon such trusts and with and subject to such powers and provisions (including discretionary trusts or powers vested in any person or persons) in favour of any one or more exclusive of the other or others of the children and remoter issue of the Settlor as the Trustees shall from time to time during the Trust Period (but during the life of the Settlor only with his consent in writing) by deed or deeds revocable or irrevocable appoint…

…In default of and subject to any such appointment the Trust Fund shall be held upon trust for the first or only son of Lucinda who shall attain the age of twenty five years during the Trust Period absolutely or if there is no such son of Lucinda then upon trust for the first or only daughter of Lucinda who shall attain the age of twenty five years during the Trust Period absolutely and if there is no such daughter of Lucinda then upon similar trusts for the first or only son or if there is no son for the first or only daughter of Sabina then for such son or daughter of Fiona or if there are no such sons or daughters then upon trust for such of Lucinda Sabina and Fiona as shall attain the age of twenty five years during the Trust Period absolutely and if more than one in equal shares but if none of them shall attain that age then upon trust for the survivor of the said daughters of the Settlor absolutely

The eldest son of Lucinda, Alexander Newall (the sixth defendant), will attain the age of twenty five in late October of this year. The question for the court was whether a gift in default to Alexander in accordance with the 1977 Appointment would render any overriding power to appoint impotent, thereby making a gift in default to Alexander absolute and indefeasible. In essence, the court was being asked whether a gift to Alexander in default of the trustees exercising their overriding power of appointment could subsequently be undone.

Sir John Lindsay, sitting as a High Court Judge, reviewed what little authority exists, none of which is precisely on point. He went to some lengths to make it clear that in such cases as these, context is vitally important. It was argued by the trustees that upon attaining the age of twenty five and in the absence of any earlier appointment, Alexander would acquire an indefeasible interest in the whole of the 1968 Settlement, the trustees retaining no power thereafter to revoke that default appointment and appoint elsewhere. Relying upon the dictum of Sir John Pennycuick V-C in Re Sharp’s Settlement Trusts [1973] 1 Ch 331, 338, where he stated

The word “absolute” in its ordinary use in legal language denotes complete beneficial ownership and dominion over property, and I should have thought it an entirely unnatural use of the word to apply it to an interest which can be destroyed at any time by the exercise of a power or the fulfilment of a condition with the consequence that the property must be retained by the trustees until the power or the condition is spent…

it was suggested that the use of the word “absolutely” in the default provision of the 1977 Appointment was indicative that the interest which anyone acquired under that default provision was to be indefeasible. However, for some of the defendants it was argued that in Re Sharp’s ST the Vice-Chanellor recognised the possibility of some contexts requiring a meaning other than that which he described as the natural one (see para [20]). Re Sharp’s ST was concerned with the proper interpretation of “absolutely” within section 31(2)(i)(b) of the Trustee Act 1925. The Vice-Chancellor had qualified his acceptance that the word “absolutely” should be given its natural meaning  by saying that it should be so “apart from [in] some larger context”.

In the present case it was noted that there was a possibility that some contexts would require a meaning to be attached to the word “absolutely” other than that which had been described in Re Sharp’s ST as being the natural one. Referring to a passage from Fearne, Contingent Remainders and Executory Devises, 10th ed (1844), vol 2, p30, Sir John Lindsay noted that the word “absolute” was considered there to have varying meanings, one of which when referring to “the quality of interest” means interest which comprises entire ownership and another which, when being used “with reference to the certainty of duration” of an interest, means indefeasible. It was also noted that the V-C’s reference to the word’s use “in ordinary use in legal language” was in the context of construing a statutory provision as to which the presumed intention of Parliament is relevant.

It was not submitted that Re Sharp’s ST was binding upon the court in this case and the court felt free to arrive at a different conclusion as to the proper interpretation of the word “absolute” should a “larger context” so require. It was argued for the defendants that the power contained in Clause 3 of the 1968 settlement was an overriding power, this power having been exercised in 1977 in the execution of the Deed of Appointment. However, the power exercised in 1977 was not expressed to be irrevocable, the power therein having been described as being exercisable “from time to time during the Trust Period…by deed or deeds revocable or irrevocable”. The Trust Period runs from the date of settlement for 80 years, the conventional period for a trust. Hence, at the date of this litigation there is still a considerable proportion of the trust period still left to run. It was further noted that there is no provision that the power shall not, in whole or in part, be thereafter exercisable if an interest under the trusts in default of appointment has become vested.

Most importantly, however, Sir John Lindsay identified that the default trusts of Clause 3 are exactly that – default trusts. They are in default of and subject to any valid appointment made by the trustees during the Trust Period. There is nothing which provides that any further appointment, subsequent to any vesting of trust property in default, should not take effect in relation to that particular property. It was concluded that the appointors should not be taken to have lost the power to make further appointments, even in the context of property which has vested under the exercise of powers authorised by Clause 3, unless the ability of the appointors to do so is excluded by express provision or necessary implication, neither of which was be found in the present case.

The result is that if the trustees do not make any appointment under the 1977 Appointment, in late October of this year Alexander Newall will acquire a vested interest in the property of the 1968 Settlement. Despite this, if the trustees consider it proper at some later date to make some alternative appointment, thereby defeating the interest which Alexander will acquire later this year, they may, apparently, freely do so.

So, what is a “dog-leg” claim? It is a claim by a beneficiary under a trust against the directors of a private trust company which is trustee of the trust. Why not sue the trust company? Very good point, but if they have no assets or insurance, it would be a pointless exercise. So what’s the problem with suing the directors? Separate legal personality, in short. All companies are independent legal entities and it is only in very rare circumstances that the corporate veil will be pierced, this not being one of them. Directors owe a duty to their company and shareholders, but the remedy for any breach lies with the company or the shareholders (in some circumstances at least, too complicated to recite here). So, why doesn’t the company sue the directors? This was a private trust company, established for the purposes of managing family trusts. Many of the directors are family members or friends. One disgruntled beneficiary (also a family member) cannot compel the company to sue its own directors if it doesn’t want to.

The concept of a “dog-leg” claim is a bit ingenious. The idea is that the directors of the trust company owe a duty to the trust company and in the event that the directors breach that duty the right of action which is vested in the trustee company becomes the property of the trust itself. Therefore, in the event of the trust company refusing or failing to bring an action against the directors, the beneficiaries may do so.

There is very little authority on this type of claim and what little there is seems to point to a “dog-leg” claim being a non-starter. It is quite understandable given that to allow such a claim would appear to offend the rule that the company is the appropriate defendant. However, the case does identify a problem in relation to the liability of trustees who act in breach of trust but are to all intents and purposes untouchable in any meaningful way.

Postscript: For a full case commentary on this case see the Denning Law Journal, 2009; full text available from Hein online

We recognise the Re Denley type trust which has tenuous links to human beneficiaries and has thus been saved from falling foul of the beneficiary principle. Also, we have entertained the Quistclose Trust which is a further example of a trust for a purpose which is not concerned with human beneficiaries. In this latter context, however, justification for the existence of such a trust has been sought by its proponents by construing it as an orthodox example of a resulting trust. However, the recent High Court judgment in Cooper v PRG Powerhouse & Others recognises the Quistclose Trust for what it really is; a purpose trust. It’s too late now. The door is ajar.