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Borrower had 100% legal ownership, but 0% beneficial interest

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02/09/2019

When a relationship breaks down, the question often arises whether a party whose name is not on the deeds to a property nevertheless owns a share. Today the issue arises not only between couples whose relationships have ended, but also often between friends, family members, business partners and others, who have shared living or working space on all sorts of informal, quasi-legal arrangements, perhaps with a view to stepping on to the property ladder, or getting a business off the ground. The recent case of Tahir v Faizi [1] highlights that, even where the law is clear, individual informal arrangements can have interesting and unexpected results.

What does the law say?

The law is relatively clear…

  • In a domestic arrangement, “…the starting point where there is sole legal ownership is sole beneficial ownership…The onus is upon the person seeking to show that the beneficial ownership is different from the legal ownership. So in sole ownership cases it is upon the non-owner to show that he has any interest at all.[2]. That means that the party who is not named as legal owner has to demonstrate, somehow, that he or she is nevertheless entitled to a share.
  • Where there is an express declaration of trust, that is generally conclusive as to beneficial ownership.
  • Where there is no express declaration, a claimant must adduce evidence of an implied trust or, more specifically, a ‘common intention constructive trust’, to establish his or her beneficial interest.
  • In 2015, in the Capehorn v Harris [3] case, the Court of Appeal provided welcome, practical clarification of a two-stage to determine the existence, and extent, of a common intention constructive trust in personal/domestic relationship cases:
    • First, the claimant must show that there was an actual agreement that he or she should have a beneficial interest in the property (even if there was no agreement as to the precise extent of that interest). The Court of Appeal confirmed that, whilst an agreement can be inferred by conduct, nevertheless it does actually have to exist – the court is not entitled to impute an agreement or any intention of the parties to agree.
    • Second, the claimant must establish the extent of its interest. In the absence of agreement as to the extent of the interest, the court may impute an intention that the person was to have a fair beneficial share in the asset and may assess the quantum of that fair share in view of all the circumstances of the case. The Court of Appeal was careful to explain that it is only at this second stage of the test that the court has any ability to impute an intention of the parties, and to assess the value of the claimant’s share accordingly.
  • In the context of commercial or other sharing arrangements where a property has been purchased not as a home but with the primary purpose being investment, a resulting trust analysis may apply instead [4]. In those circumstances, any beneficial ownership may be quantified by reference to the parties’ respective contributions to the purchase price (or otherwise/subsequently to the value of the property).

What happens in practice?

…However, in practice, cases are rarely clear cut at all.

For example, the High Court recently found itself faced with a case which did not fit neatly into either the personal or the commercial context. Mr Tahir and Mr Faizi had met through a mutual friend. Mr Tahir purchased a property with the assistance of an interest-only mortgage and was registered as full legal owner in November 2006. Mr Faizi moved into the property shortly thereafter and made payments to Mr Tahir and to the mortgage lender direct. By 2015, however, Mr Faizi had stopped making any payments and a dispute had arisen as to ownership. Mr Tahir’s case was that he was full legal owner; Mr Faizi was his tenant; and he sought possession. Mr Faizi’s case was that the property was only ever purchased with the intention that it would be transferred to him when his immigration status so allowed; that he was full beneficial owner; and he sought a declaration under section 14 (2) (b) of the Trusts of Land and Appointment of Trustees Act 1996. Cases such as this, in which friends enter into quasi-commercial arrangements, are very common indeed.

In this case, as the context was not domestic per se, the court could not find that a constructive trust had arisen and it could not apply the Stack v Dowden and Capehorn v Harris approach. The court found that the facts were not entirely inconsistent with the existence of a resulting trust and so almost by default, it concluded that the intention at the time of purchase was that Mr Faizi would assume responsibility for all payments and that legal title was only meant to remain with Mr Tahir on a temporary basis. Despite being the registered legal owner, therefore, Mr Tahir held 0% of the beneficial ownership, but instead held the property as a trustee for Mr Faizi only. (As a trustee Mr Tahir was entitled to be indemnified in respect of any expenses, mortgage payments, etc. that he had made in relation to the property, but the court directed that legal ownership of the property should be transferred to Mr Faizi.)

Comment and practical advice

In any economic downturn people increasingly look to purchase, share and invest in properties in ever more wide-ranging and varying circumstances. As relationships and familial and business arrangements come to an end or change over time, it is likely that the courts will continue to encounter beneficial ownership disputes pursuant to myriad different arrangements and so the law may continue to be honed and clarified, which can only assist. In the meantime, the best advice is for parties to record their intentions at the outset of any such arrangement in writing – and ideally by way of a formal deed of trust. Remember the old adage: a stitch in time saves nine. In attempting to avoid any formal legal process or documentation, Mr Tahir and Mr Faizi ended up having to resolve the matter via litigation, which of course entails additional costs and risk. Taking the time to seek specialist advice, and to document business arrangements in formal, written contracts or deeds, can minimise the scope for dispute and/or can assist with the timely and cost-effective resolution of any disputes which do nevertheless arise.

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[1] [2019] EWHC 1627 (QB)
[2] Stack v Dowden [2007] UKHL 17, para. 10
[3] [2015] EWCA Civ 955
[4] Laskar v Laskar ([2008] EWCA Civ 347

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