Crossco No.4 UnLtd & Ors v Jolan Ltd & Ors

A Pallant v Morgan equity may arise from a pre-acquisition understanding under which one party acquires property and the other is to obtain an interest. It requires reliance conferring an advantage on the acquiring party or causing detriment to the other, and circumstances making departure from the understanding unconscionable. Banner Homes remained binding authority that this is a common intention constructive trust.

Commercial parties’ intention to defer legal commitment until formal written terms are agreed may defeat such a trust. A party’s unilateral mistake, unknown to and uninduced by the other party, does not make reliance on existing property or contractual rights unconscionable. Proprietary estoppel additionally requires a sufficiently certain expected interest, reasonable reliance and consequent detriment.

The appeal arose from a commercial demerger of a family-owned group. One side received the freehold of a building while the other retained an amusement arcade business conducted under an existing lease. Preliminary discussions contemplated continued occupation of part of the ground floor, but the parties did not agree its precise extent, the duration of occupation or the removal of the landlord’s break clause.

Morgan J dismissed claims based on contract, rectification, estoppel and constructive trust. The appellants appealed only the decisions on constructive trust and estoppel. They alleged that the freehold was subject to a Pallant v Morgan equity which prevented use of the break clause. The central questions were the juridical basis and requirements of that equity, and whether the respondents’ reliance on the break clause was unconscionable.

1. The appeal was dismissed unanimously. The majority, Arden and McFarlane LJJ, held that Banner Homes remained binding authority that the Pallant v Morgan equity rests on a common intention constructive trust. It was not open to the Court of Appeal to reinterpret that ratio as depending exclusively on fiduciary duty without a sufficiently clear intervention by the House of Lords or Supreme Court.

2. The constructive trust claim nevertheless failed. The original discussions did not settle the area or duration of the intended leasehold occupation. The parties’ subsequent dealings produced a different consensus under which the transfer remained subject to the existing lease. Both sides intended the outstanding commercial terms to be settled through formal written documentation. The absence of complete agreement is not invariably fatal, but it may show that commercial parties intended no legal commitment before further negotiations and documentation.

3. The respondents had given no express or implied assurance that the break clause would not be exercised. The appellants’ difficulty resulted from their own failure to examine the lease. The respondents neither induced that mistake nor knew that it had been made, and reasonably believed that the appellants knew the lease’s terms. Their reliance on the break clause was therefore not unconscionable.

4. Proprietary estoppel required an assurance, reasonable reliance and consequent detriment. It also required an expectation of a sufficiently certain interest in land. Those conditions were absent because the parties had never agreed the area or duration of the future leasehold interest. The same findings defeated promissory estoppel and estoppel by convention.

5. Etherton LJ considered that commercial Pallant v Morgan cases should instead be confined to circumstances involving breach of an existing fiduciary duty. Arden and McFarlane LJJ did not accept that this Court could replace the stated ratio of Banner Homes, although they acknowledged the attraction and policy advantages of Etherton LJ’s analysis.

1. Court of Appeal (Civil Division): The appeal was dismissed. The Court upheld Morgan J’s rejection of the constructive trust and estoppel claims.
2. High Court, Chancery Division: Morgan J dismissed the claims based on contract, rectification, estoppel and constructive trust. He also ordered termination of the lease under section 64 of the Landlord and Tenant Act 1954 without a new tenancy.