Kahrmann v Harrison-Morgan

An express common intention constructive trust may arise in a commercial relationship. Where parties expressly agree defined beneficial shares in property to be acquired, and one relies on that agreement to his detriment, equity may attach to the property or contractual right when acquired.

The formal requirements for land contracts do not prevent that result. Section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989 preserves constructive trusts, including those concerning future-acquired property. A beneficiary may trace the equitable interest into sale proceeds. A recipient who had notice, or was put on inquiry and failed reasonably to investigate, cannot rely on the defence of bona fide purchase without notice.

Dr Kahrmann and Mr Hawkins agreed that they would share equally the benefits of enfranchising and selling two London properties. After Dr Kahrmann died intestate, the properties were sold. The respondent received approximately £2.2 million from the proceeds, while the estate received none.

At first instance, the High Court held that the arrangements gave the estate only a contractual right to a share of profit, not a proprietary interest, and dismissed its claim: [2018] EWHC 1904 (Ch). The administrator appealed. The central issue was whether the agreements gave rise to an express common intention constructive trust whose proceeds could be traced into the respondent’s payment.

1. Appeal allowed unanimously. Henderson LJ, with whom King and Floyd LJJ agreed, held that the estate had a 50% beneficial interest in each enfranchisement transaction and could trace that interest into the £2.2 million received by the respondent.

2. The judge’s findings that the Wilton Crescent arrangement was merely contractual, and that the earlier agreement concerning the mews property had been varied to the same effect, could not stand. A right to share equally in net sale proceeds was compatible with, and was a normal incident of, equal beneficial ownership. The agreements were expressly intended to be read together and should therefore have equivalent proprietary effect.

3. The agreements gave rise to express common intention constructive trusts. Although the freeholds were future property when the agreements were made, Dr Kahrmann relied on the agreed arrangements to his detriment. When the relevant freehold or enfranchisement contract was acquired, equity attached to it. Such a constructive trust is available in a commercial setting where there is an express, immediately binding agreement on defined beneficial ownership.

4. Section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 could not defeat the claim. Even assuming that the agreements were land contracts which did not meet its formal requirements, section 2(5) expressly preserved the creation and operation of constructive trusts. That saving was not confined so as to exclude future-acquired property.

5. The estate’s equitable interests could be traced from the statutory and contractual enfranchisement rights into the freeholds and then into the sale proceeds. The respondent had sufficient knowledge to be put on inquiry before the sale agreement and had actual notice of the estate’s claim before giving vacant possession and receiving payment. She was therefore not a bona fide purchaser for value without notice. The sale agreement’s express machinery for vacant possession also prevented the £2.2 million from being characterised as consideration payable under a separate collateral contract.

6. The respondent was declared liable in principle to account to the estate for the sums received, with interest and consequential matters to be addressed by written submissions.

• Court of Appeal (Civil Division): Allowed the administrator’s appeal and held that the estate could trace its 50% beneficial interest into the respondent’s payment: [2019] EWCA Civ 2094.
• High Court, Chancery Division: Dismissed the estate’s claim on the basis that the agreements gave it no proprietary interest in the properties: [2018] EWHC 1904 (Ch).