Kinane v Mackie-Conteh

An agreement to create a charge over land is a contract for the disposition of an interest in land and ordinarily must comply with section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989. Section 53(1)(c) of the Law of Property Act 1925 applies only to the disposition of a subsisting equitable interest.

Section 2(5) nevertheless preserves a common-intention constructive trust. It may apply where the owner encourages another to believe that an agreed proprietary interest is valid, knowingly permits detrimental reliance, and would act unconscionably by denying the interest. The invalid agreement may evidence the parties’ common understanding, but its mere production is insufficient. A single act of substantial detrimental reliance can satisfy the doctrine.

The claimant lent £50,000 to a company managed by the defendant. The defendant and his wife signed a letter offering their home as security for repayment of £100,000. The claimant advanced the money after receiving the letter, but the loan was not repaid.

A deputy High Court judge declared that the claimant held an equitable charge and ordered the property to be sold. He held that the security agreement was unenforceable under section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989, but treated section 53(1)(c) of the Law of Property Act 1925 as sufficient to support the charge.

The defendant appealed. The claimant cross-appealed on the grounds that the facts created a constructive trust preserved by section 2(5) of the 1989 Act and that section 53(1)(a) of the 1925 Act applied. The central question was whether the security could be enforced despite non-compliance with section 2(1).

1. Appeal dismissed and cross-appeal allowed. The judge’s reliance on section 53(1)(c) of the Law of Property Act 1925 was erroneous, but the declaration of an equitable charge was upheld because the facts created a common-intention constructive trust preserved by section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989. Arden and Neuberger LJJ gave concurring reasons. Thorpe LJ agreed with both judgments.

2. Section 53(1)(c) applies only to the disposition of a subsisting equitable interest. The security agreement instead contemplated the creation of a new proprietary interest. It was an agreement to create a charge and therefore a contract for the disposition of an interest in land within section 2(1) of the 1989 Act. The decision in Murray v Guinness could not support the judge’s conclusion because the documents there purported to create immediate charges.

3. Section 2(5) expressly preserves the creation and operation of constructive trusts. The statutory formality policy must remain effective, so the subsection is not a general means of escaping section 2(1) whenever fairness appears to require it. Its language should receive neither an artificially wide nor an artificially narrow meaning.

4. A proprietary estoppel overlaps with a common-intention constructive trust where the parties have exchanged an agreement, arrangement or common understanding about an existing or intended proprietary interest, and the claimant has acted to his detriment in reliance upon it with the legal owner’s knowledge. Equity intervenes where repudiation of that common intention would be unconscionable.

5. The unenforceable agreement may be evidence that the owner encouraged the claimant to believe that the proprietary arrangement was valid and binding. Mere admission of that agreement is insufficient. The claimant must establish encouragement by words or conduct, detrimental reliance, the other elements of proprietary estoppel, and circumstances making repudiation unconscionable.

6. Those requirements were satisfied. The defendant supplied the signed security agreement knowing that the claimant required security before advancing the money. The claimant then made the loan in the belief that he had, or would receive, valid security. The absence of formal mortgage documentation and the fact that reliance consisted of a single act did not defeat the equity; that act had substantial and irreversible consequences.

7. The appropriate remedy was the promised proprietary security. The alternative argument under section 53(1)(a) did not arise and, having received no investigation at trial, could not properly be introduced on appeal.

• Court of Appeal (Civil Division): In [2005] EWCA Civ 45, dismissed the defendant’s appeal and allowed the claimant’s cross-appeal. It upheld the equitable charge on the basis of a constructive trust rather than section 53(1)(c) of the Law of Property Act 1925.
• High Court, Chancery Division: On 27 April 2004, a deputy High Court judge declared that the claimant was an equitable chargee for £100,000 and ordered sale of the property. The judge relied on section 53(1)(c) of the 1925 Act and did not determine the constructive-trust issue.