Groveholt Ltd v Hughes & Anor

A constructive trust may exceptionally bind a purchaser of registered land to give effect to an unregistered third-party right. The purchaser’s conscience must be affected, ordinarily because the purchaser undertook a new obligation to give effect to that right. The obligation must be found in the bargain by which the purchaser acquired the land. General references to the vendor’s obligations are insufficient, particularly where the right could have been protected by registration. A constructive trust cannot place the claimant in a better position than against the original contractual counterparty. Specific performance also remains subject to the claimant’s performance of the essential contractual obligations.

Groveholt had acquired development land from Chelverton under an agreement referring to various obligations arising under earlier agreements between Mr Hughes and Chelverton. Mr Hughes claimed that Groveholt was obliged to re-transfer part of the land because the relevant planning consent had not been obtained within the contractual long-stop period.

The claim was advanced despite Mr Hughes’s failure to register his right to re-transfer under the Land Registration Act 1925. The counterclaim was considered after the court’s earlier judgment on Groveholt’s redemption claim, reported at [2012] EWHC 686 (Ch). The central issues were whether Groveholt had undertaken a new obligation capable of founding a constructive trust and whether Mr Hughes’s own breaches would prevent specific performance.

1. The counterclaim was dismissed. Groveholt was not obliged to re-transfer the Phase Two Residential Land to Mr Hughes.
2. The court adopted the principles stated by the Court of Appeal in Lloyd v Dugdale, namely that no general constructive trust arises merely because a purchaser acquired land subject to possible prior interests. The purchaser’s conscience must be affected, and the crucial question is whether the purchaser undertook a new obligation, not otherwise existing, to give effect to the relevant right (para. 15).
3. Lyus v Prowsa Developments Ltd was treated as lying at the outer edge of the circumstances in which a constructive trust may arise, particularly in light of the qualifications identified in Chaudhary v Yavuz (paras. 16–17). Even applying the approach in Lyus, Groveholt had undertaken no relevant obligation.
4. On the proper construction of the Chelverton/Groveholt agreement, the obligations assumed under clause 6.2 were to be performed as Chelverton’s agent, were limited to obligations owed to Sainsbury, and were temporary pending the Sainsbury Novation. They did not include the obligation owed by Chelverton to Mr Hughes to re-transfer the Phase Two Residential Land. Clause 7.1 addressed that obligation separately and contemplated a Hughes Novation, but imposed no present obligation on Groveholt to perform it (paras. 18–31).
5. In any event, Mr Hughes’s serious and prolonged refusal to release his charge over the Phase One Residential Land was a breach of an essential contractual obligation. He would therefore have been disentitled to specific performance. A constructive trust could not improve his position against Groveholt beyond the position he would have had against Chelverton (para. 33).
6. The court declined to decide whether Chelverton’s disclaimer in liquidation would terminate any constructive trust arising on the earlier transfer. It also expressed an inclination, without deciding, that the cross-rights wording was sufficiently certain for specific performance because reasonableness supplied an objective criterion (para. 34).