Where informal trust trumps legal title

The Court of Appeal (CoA) dismissed an appeal concerning the beneficial ownership of a family property portfolio, providing clarity on the nature and requirements of the acquisition constructive trust (ACT) and confirming the enforcement of informal trusts based on unconscionable conduct.

Facts:

Mr. and Mrs. Khan had six children, namely three sons, Muhammed, Ahmed, and Sarwar, and three daughters, Shalima, Farhana and Jennifer. Mr. Khan, who had built up a restaurant business, funded the acquisition of the properties from the 1980s, often acquiring them in the joint names of himself and Mrs. Khan, or later, in the names of his children, with Muhammed (the eldest son and defendant) ultimately holding the legal titles to the leasehold flats in three properties and the freehold of one, while Ahmed held the freeholds of the remaining three.
The family had generally used an informal approach, without documenting Mr. Khan’s intentions or involving lawyers. Mr. Khan died intestate in 2008. The claimants (the other five siblings) contended that Mr. Khan had intended for 7 Essex Grove to be held beneficially for the daughters and the other three properties to be held beneficially for the sons, arguing these intentions created constructive trusts. Muhammed claimed he was intended to be the sole beneficial owner.

The claimants also argued that they suffered detrimental reliance, citing Ahmed’s unpaid building work and Farhana giving up her matrimonial home interest to protect 7 Essex Grove during her divorce. The trial judge found for the claimants, concluding that Mr. Khan intended to create a family property portfolio and that Muhammed’s denial of the trusts was unconscionable, ordering the sale of the properties. Muhammed appealed this decision, challenging the judge’s findings on the existence of both an express trust and the specific ACTs (De Bruyne-type trusts) over the properties.

Decision:

The CoA dismissed Muhammed’s appeal against the consequential orders (Grounds 7 and 8), finding that the judge exercised her discretion appropriately, given the circumstances of the trial and the findings of fact. The Court affirmed the trial judge’s central finding that all of Muhammed’s interests in the properties were held subject to an ACT in favour of his siblings.

The Court rejected Muhammed’s argument that this type of trust requires proof of actual fraud or wrongful procurement. Lord Justice Miles clarified that the “fraud” referred to in precedent (such as Rochefoucauld) is merely “a shorthand label for unconscionable conduct” in equity.

The unconscionable act is the transferee (Muhammed) going back on the agreed basis of acquisition and denying the rights of the intended beneficiaries, which was not necessarily a dishonest intention at the time of the transfer.

The judge was entitled to deny Muhammed’s conduct of the sale due to his “unconscionable” denial of the trusts and his history of non-cooperation and hostility. Giving conduct to the claimants’ solicitors/trust corporation (CTC) was considered reasonable and appropriate in a hostile environment.

Implications:

The most important implication is the CoA’s clear endorsement and explanation of the De Bruyne principle, which gives rise to an ACT. This principle provides a powerful tool for enforcing non-written agreements concerning land, circumventing the formal requirements of Section 53(1)(b) of the LPA 1925.

The ruling confirms that the key to this trust is unconscionable conduct by the legal owner in denying the beneficial interests, and not necessarily “actual fraud” or a dishonest intention at the time of transfer. Crucially, the case reaffirms that this type of constructive trust does not require proof of detrimental reliance by the beneficiary (unlike a common intention constructive trust).