Frenkel v LA Micro Group (UK) Ltd and others

A specifically enforceable agreement for value to transfer an equitable interest can create a vendor–purchaser constructive trust even where the purchaser is the property's sole legal owner. The trust may arise only momentarily before the acquired equitable interest merges with the legal title. Its capacity to complete the transaction, rather than merely protect the purchaser pending completion, does not prevent its recognition.

As a constructive trust, it falls within section 53(2) of the Law of Property Act 1925 and displaces the writing requirement in section 53(1)(c). That writing requirement applies to equitable interests in personal property, including shares, as well as interests in land.

A company held a 51% beneficial interest in each of two shares in a private company. The shares' respective legal owners held the remaining beneficial interests. Under an oral restructuring agreement, the company agreed for value to give up its interests so that each legal owner would become the sole beneficial owner of his share.

After two trials and two appeals, the Court of Appeal held in [2023] EWCA Civ 214, reported at [2024] Ch 1, that the specifically enforceable agreement created a vendor–purchaser constructive trust. Section 53(2) of the Law of Property Act 1925 therefore displaced the writing requirement in section 53(1)(c).

The central issue was whether such a trust could arise where the purchaser was already the sole legal owner and acquisition of the remaining equitable interest would immediately cause all equitable interests to merge in the legal title.

1. The appeals were dismissed unanimously. Lord Briggs gave the judgment, with which Lord Hodge, Lord Sales, Lord Burrows and Lord Richards agreed. The oral 2010 agreement created a vendor–purchaser constructive trust over the company's 51% equitable interests. Section 53(2) of the Law of Property Act 1925 protected the creation and operation of that trust from section 53(1)(c).

2. A vendor–purchaser constructive trust arises from a specifically enforceable agreement for the sale of property. An interest in shares in a private company is sufficiently unique for specific performance. Once the consideration had been provided, the trust was in substance a bare trust for each purchaser. The doctrine does not depend upon an intended or necessary interval between contract and completion. Its purpose reflects the broader equitable objective of treating as done that which ought to be done, rather than merely providing interim protection.

3. The fact that each purchaser was already the sole legal owner did not prevent the trust from arising. In substance, the agreement conferred the vendor's 51% beneficial interest upon each purchaser. Descriptions such as surrender, release or destruction did not alter that substance. In equitable mechanics, the constructive trust first vested the interest in the purchaser; merger then concentrated the whole beneficial ownership in the purchaser's legal title.

4. The trust's momentary existence was legally effective. Abbey National Building Society v Cann and Southern Pacific Mortgages Ltd v Scott concerned whether an artificial temporal gap could be inserted within an indivisible acquisition-and-charge transaction. They supplied no reason to refuse recognition of a momentary constructive trust which was itself an essential part of the indivisible transaction. A contrary rule would produce arbitrary results depending on the location of legal title or the retention of a nominal equitable interest.

5. Section 53(1)(c) continues to govern gifts of equitable interests because equity neither assists a volunteer nor perfects an imperfect gift. Its operation is therefore not emptied of content by the vendor–purchaser constructive trust doctrine.

6. Permission was refused for the respondents' new argument that section 53(1)(c) applies only to interests in land. Its application to equitable interests in personal property, particularly shares, had been settled for more than half a century. The proposed ground no longer disclosed an arguable point of law.

1. United Kingdom Supreme Court: The appeals were dismissed unanimously. The Court upheld the conclusion that the oral agreement created a vendor–purchaser constructive trust and refused permission to argue that section 53(1)(c) of the Law of Property Act 1925 applies only to land.

2. Court of Appeal: In [2023] EWCA Civ 214, reported at [2024] Ch 1, the appellants succeeded in overturning the proprietary-estoppel finding. The respondents nevertheless prevailed on their notice because the specifically enforceable agreement created a constructive trust within section 53(2).

3. High Court, second trial: In [2022] EWHC 1304 (Ch), Judge Jarman found an implied contractual term disposing of the equitable interests, but held it ineffective under section 53(1)(c). He found for the respondents on proprietary estoppel.

4. Court of Appeal, first appeal: In [2021] EWCA Civ 1429, reported at [2022] 1 WLR 336, the court allowed the appeal from the first trial on legal grounds and remitted the claim for further factual findings.

5. High Court, first trial: In [2021] EWHC 140 (Ch), Judge Jarman declared that the individual respondents were the sole legal and beneficial owners of their respective shares because the company had disclaimed its beneficial interests.