Gallarotti v Sebastianelli

Where parties agree to hold property in equal beneficial shares despite unequal initial contributions, the court must determine whether that agreement was intended to govern the circumstances that actually occurred. An agreement that one party would make larger mortgage payments to balance a modest disparity may not govern where the disparity proves substantial and the promised payments are not made. In that event, the parties’ financial contributions should be reflected in their beneficial shares, broadly rather than by exact accounting. Payments made for the parties’ joint benefit must be taken into account. The court must distinguish identifying a beneficial interest from determining its size and follow the logic of its findings about the agreement’s scope and conditions.

Two friends bought a flat, which was registered in Mr Sebastianelli’s sole name. Mr Sebastianelli made the larger cash contribution and paid the mortgage. The Central London County Court, before Miss Recorder Michaels QC, found an express agreement that the parties would have equal beneficial shares, qualified by an agreement that Mr Gallarotti would make larger mortgage payments to compensate for unequal contributions. Mr Gallarotti did not make the promised payments. The Recorder nevertheless held that the flat was held in equal shares. Mr Sebastianelli appealed. The central issue was whether the agreement applied to the substantially unequal contributions that actually occurred.

Appeal allowed. Lady Justice Arden gave the leading judgment, with Lord Justice Tomlinson and Lord Justice Davis agreeing.

1. The Recorder was entitled to find, on the oral evidence, that the parties had agreed to equal beneficial ownership. The court accepted the principles governing a common intention constructive trust. The court considers the parties’ conduct throughout their relationship and is not confined to their contributions to acquisition, as it would be in a resulting trust.
2. The agreement had to be read as a whole. It contemplated that Mr Gallarotti would make larger mortgage payments because the parties expected only a modest disparity in their initial contributions. The disparity that occurred was substantially greater, and Mr Gallarotti made no substantial mortgage contribution. The agreement therefore did not apply to the events that unfolded. The Recorder had failed to examine whether the condition for the equal-sharing agreement had occurred.
3. The parties’ course of conduct showed an intention that their financial contributions should be taken into account, but without requiring precise accounting. It was implausible that Mr Sebastianelli intended to make a substantial gift to Mr Gallarotti. Beneficial ownership should therefore reflect their contributions in substance. The court rejected giving full credit for the mortgage to Mr Sebastianelli while excluding payments made by Mr Gallarotti for their joint benefit.
4. The appropriate result was a 75 per cent share for Mr Sebastianelli and a 25 per cent share for Mr Gallarotti. The Recorder’s finding of equal shares was set aside and that finding was substituted.

The court also observed that the size of a beneficial share is a question of law. It criticised the excessive length of the first-instance judgment, stating that trial judges should distil relevant evidence, make findings where possible, and avoid unnecessary detail and extensive citation where matters are common ground.

1. Court of Appeal (Civil Division): In [2012] EWCA Civ 865, the appeal was allowed. The 50/50 beneficial ownership finding was set aside and replaced with a finding that Mr Sebastianelli held 75 per cent and Mr Gallarotti 25 per cent.
2. Central London County Court: Miss Recorder Michaels QC found that the flat was held on trust for the parties in equal shares.