Appeal court denies mortgage borrower interest in property
A recent High Court appeali once again highlights the tension between the desirability of bringing certainty to property transactions by imposing formal requirements and the need to protect people from unintended legal consequences arising from informal relationships.
The property purchase
Mr Faizi and Mr Tahir met through a mutual friend in 2006. By autumn of that year, they were in discussions regarding the purchase of 3 Sutton Gardens, Luton (“the Property”). Mr Tahir purchased the Property on 24 November 2006 for £219,000 with the assistance of an interest-only mortgage of £208,265. He was registered as legal owner on 27 November 2006.
Mr Faizi moved into the Property with his family shortly after completion. He paid Mr Tahir more or less regular sums of money from 2006 to 2015. When Mr Tahir was in Uganda from 2007 to 2010, Mr Faizi agreed to make payments to the mortgagor, Oakwood Homeloans Limited (“Oakwood”), direct. He did so sporadically and some payments were missed.
In the autumn of 2007, Mr Faizi applied for planning permission to renovate and extend the Property, which was granted on 28 January 2008. He did not undertake all the work permitted but converted the garage into an office.
Oakwood obtained a possession order against Mr Tahir on 15 September 2008. This was not enforced, and Mr Tahir applied to set the order aside on 31 August 2016.
By 2015 Mr Faizi stopped paying any sums to Mr Tahir or Oakwood, and a dispute had arisen between Mr Faizi and Mr Tahir as to ownership of the Property. This led to Mr Faizi issuing a claim for an order under section 14(2)(b) of the Trusts of Land and Appointment of Trustees Act 1996 declaring him to be the beneficial owner of the Property. On 3 January 2017 Mr Tahir issued a possession claim against Mr Faizi. The two claims were dealt with together.
It was Mr Faizi’s case that, in their discussions in the autumn of 2006, Mr Tahir agreed to purchase the Property in his name and to transfer legal title to Mr Faizi at a future date. This was because Mr Faizi was unable to obtain a mortgage and purchase the Property in his own name due to his immigration status at the time. Mr Faizi paid the deposit for the purchase of the Property and associated expenses and agreed to meet the monthly mortgage instalment payments and undertake and pay for any works to improve the Property.
Mr Tahir denied that he purchased the Property for Mr Faizi but claimed that he bought it to assist his wife’s application for a visa to reside in the UK. His case was that Mr Faizi was his tenant and that any payments by Mr Faizi to him were rental payments and any payments by Mr Faizi to Oakwood were in lieu of rent.
The first instance decision
After considering the evidence, the judge made a declaration that Mr Tahir held the Property on trust for Mr Faizi, who was entitled to 100% beneficial interest (subject to reimbursing Mr Tahir for mortgage payments made by him since 2015). He also dismissed Mr Tahir’s possession claim.
Mr Tahir appealed on two grounds: (i) the judge had placed too much reliance on the evidence of Mr Faizi; and, (ii) the judge was wrong to find that an informally and vaguely expressed oral agreement could give rise to a real property transfer or beneficial interest.
His Honour Mr Justice Murray, who heard the appeal, firmly rejected the first ground of appeal citing the observation of Lloyd LJ in Cook v Thomas  EWCA Civ 227 that: “…an appellate court can hardly ever overturn primary findings of fact by a trial judge who has seen the witnesses give evidence in a case in which credibility was in issue.” He did not accept that the trial judge in this case had made findings of fact unsupported by the evidence or reached a decision on the basis of the evidence that no reasonable judge could have reached.
The analysis of the second ground was less straightforward and required a consideration of the proper legal basis for Mr Faizi’s beneficial interest in the Property. It is a formal requirement for a trust of land to be evidenced by signed writing that is intended to give certainty to property transactions.
However, it is not an absolute requirement and “does not affect the creation or operation of resulting, implied or constructive trusts” (section 53(2)). This saving provision allows the court a degree of flexibility in deciding cases where the beneficial interest in a property is at issue and there is no trust document. Whilst this can help to prevent undue hardship arising from a failure to evidence a declaration of trust in signed writing, it comes at the price of certainty. This is why a large body of case law has developed in this area as the court has grappled with a multitude of different sets of facts to consider in each case whether a trust subsists and, if so, the extent of the claimant’s interest under the trust.
In the domestic setting, there is a presumption that the equity in the property is held in accordance with the legal title. In other words, if the property is in joint names, there will be joint beneficial ownership; if it is in one person’s name, that person will be the sole beneficial owner. This presumption can be rebutted if it can be shown that the parties intended their beneficial interests to be different to their legal interests and in what way.ii Where the presumption is successfully rebutted, the court will make a finding that the property is subject to a constructive trust. Each case turns on its own facts, and the court will need to try to ascertain the parties’ shared intentions in light of their whole course of conduct in relation to the property. This means that the court can look at a very wide range of factors when deciding what percentage of the equity is held by each party, not just the financial contributions made by each.
In the commercial setting, for example where the property is purchased as an investment, there is no initial presumption that the beneficial ownership follows the legal ownership. Instead, the court will have most regard to the financial contributions made by the parties to the purchase price because this is most likely to reflect the intention of the parties in the commercial context. There will therefore be a rebuttable presumption that the legal owner holds the property on resulting trust for the benefit of those who contributed to the purchase price in shares equivalent to their contributions.
The case involving Mr Faizi and Mr Tahir did not fall neatly into either the domestic or the commercial category. The Property was neither purchased for them both to live in nor as an investment.
The appeal Court dismissed the appeal agreeing with the trial judge that the Property was held on trust for the sole benefit of Mr Faizi. It concluded that the intention of Mr Faizi and Mr Tahir when the Property was purchased was that Mr Faizi assume all responsibility for the mortgage payments. Mr Tahir’s involvement was only intended to be temporary and legal title was meant to be transferred to Mr Faizi when possible, although this had not happened by the time of trial. Importantly, as trustee, Mr Tahir was entitled to be indemnified out of the Property for any expenses he incurred in relation to it, including mortgage payments that he had made since 2015.
Whilst this decision appears consistent with settled law, it does show how hard it can be to distinguish between the different, informal interests allowed by equity. The quantification of beneficial interests should be easier in relation to a resulting trust than a constructive trust because it should simply involve working out the amounts contributed to the purchase price by the beneficial owners but, as this case shows, the task can be made more difficult where the property is purchased with mortgage finance.
It may then be necessary to look at the wider context to try to ascertain what the parties’ intentions were when the property was acquired, which may not seem very different (though still not quite as broad) as the quantification of interests under a common intention constructive trust.
i Tahir v Faizi  EWHC 1627 (QB)
ii Stack v Dowden  UKHL 17