Constructive Trusts

Sophie Price

Property rights are not always clear-cut. Sometimes, a person who does not legally own a property could be entitled to benefit from it, depending on the circumstances. This could be because the person contributed towards the mortgage or purchase price, or perhaps they contributed in some other way, such as renovating the property or the payment of utility bills. Unlike other types of trust, constructive trusts are inferred by the court, rather than by the express intentions of the parties.

What is a constructive trust?

A constructive trust arises by operation of the law where it would be unconscionable for a person (A) who holds an asset to deny the beneficial interest of another person (B) in the asset.

For example, a constructive trust may arise where:

• (A) holds funds that he knows have been paid to him by mistake.
• (A) holds an asset that he has obtained by means of fraud.
• (A) and another person (B) share a common intention that (B) should have a beneficial interest in an asset, and (B) has acted to his detriment on the basis of that intention. This is known as a common intention constructive trust and is often argued in disputes about the ownership of property occupied by cohabitees.

Common intention constructive trusts

Common intention constructive trusts are a particular type of constructive trust, as noted above. The circumstances of the parties invariably differ to some degree but, a typical situation could , involve a couple moving into a property together which is held in only one of their names,; and the other person contributes by paying half of the mortgage and bills every month – only to find that when the relationship ends, the person holding the legal title claims to own the property outright.

Generally, when one person legally owns a property, it’s presumed they own the entire beneficial interest in the property as well. The starting position is that “equity follows the law”. However, the court may set aside this presumption if it is can be shown, on the balance of probabilities, that there was a “common intention” that the beneficial ownership was to differ from the legal ownership. Common intention is usually inferred from the conduct of the parties involved, and it is for the party asserting to have a beneficial interest in the property to prove.

The following factors would be relevant to the court’s finding as to a constructive trust:

• How the parties arranged their finances; for example, did the couple have separate bank accounts or joint accounts?
• Did the party asserting a beneficial interest contribute to the purchase price or mortgage payments; or did they make some other form of contribution?
• What was the intention regarding the property and what can be inferred from the conduct and any conversations had at the time of purchase and subsequently throughout the period of ownership?

The example of the cohabiting couple is a classic case where the courts could  deem that each party is entitled to a share in the property, according to their contributions, because they acted with the assumption that the other party intended them to have a share, and it would be unconscionable to deny that party a share in the property .

What Is the difference between a resulting trust and a constructive trust?

A resulting trust is a type of trust imposed by law. The function of the trust is to return the beneficial ownership in the trust property (whatever form that may take) back to the settlor, the person who created the trust. This would occur where, for example, the settlor of an express trust fails to tell the trustees what to do with the trust property (or part of it). For example, (A) sets up a discretionary trust for the benefit of their siblings but does not say what is to happen to the trust fund once their siblings have died. If the siblings died, there would be assets still held on trust. The trust assets would therefore be held on a resulting trust for (A) as the settlor or (A)’s estate if (A) has also died.

What happens if we’re in a dispute about property ownership?

The first step is to seek legal advice from a suitably qualified trust lawyer. Issues surrounding ownership shares can often be resolved through negotiation or mediation.

If discussions break down, it may be necessary to issue a claim pursuant to the Trusts of Land and Appointment of Trustees Act 1996 (“TOLATA”). TOLATA is a piece of legislation that deals with (among other matters) disputes relating to the ownership of properties, and it gives the court  power to change the ownership shares in a property, including ordering the sale of the property and the distribution of the proceeds.