Constructive trusts and third party interests

Constructive trust arising because a purchaser of land has expressly agreed to take subject to the interest of a third party

One of the central objectives of land law is to determine whether a transferee of land is bound by third party interests in the land which were valid against the transferor. Where title to the land is registered, the equitable doctrine of notice has been replaced by a scheme of registration. Lesser interests must be protected by means of an entry on the register of the title to which they relate. If an interest is unprotected, a transferee for valuable consideration of the legal title will acquire the land free from it, unless it is an ‘overriding interest’ in which case it will bind the transferee irrespective.

However, it has been held that if a transferee of the land expressly agrees that he will honour the rights of a third party, he will be bound by those rights under a constructive trust even though it had not been properly protected on the register. This constructive trust prevents the purchaser taking advantage of his strict rights under the statute. Such a constructive trust was held to have arisen in Lyus v Prowsa Developments [1982] 1 WLR 1044. Mr and Mrs Lyus entered a contract to purchase a house which was built on a new estate. The developers subsequently went into liquidation and the bank which held a mortgage of the land sold it to another developer. This second developer agreed in the contract to take the land ‘subject to, but with the benefit of the contract made with Mr and Mrs Lyus.’ This developer subsequently sold the land to a third, who agreed to the same terms. The contract entered between the first developer and Mr and Mrs Lyus was an interest in land which should have been protected on the register as a minor interest. Even though it had not been protected appropriately, Dillon J held that the developers who had purchased the land were bound by it. They had expressly agreed to take subject to the interest and therefore a constructive trust was raised to ‘counter unconscionable conduct or fraud.’ Dillon J stressed that the agreement was not a general agreement to take the land subject to possible encumbrances but a positive stipulation in favour of a particular identified interest.

The operation of such constructive trust was further considered in Ashburn Anstalt v Arnold [1989] Ch 1. The Court of Appeal addressed, obiter, the question whether a purchaser could be bound by a constructive trust when he had expressly agreed to acquire land subject to a third party’s contractual licence. Citing Lyus v Prowsa Developments [1982] 1 WLR 1044, the court accepted that a constructive trust could arise in such circumstances, but stated that ‘the court will not impose a constructive trust unless it is satisfied that the conscience of the estate owner is affected.’ The mere fact that land was expressly said to be conveyed ‘subject to’ a contractual right would not suffice alone:

  • ‘We do not think it is desirable that constructive trusts of land should be imposed in reliance on inference from slander materials.’

It was suggested that other factors would be necessary to justify the imposition of a constructive trust, for example evidence that the purchaser paid a lower price for the land as a consequence of the express agreement to take subject to the interest. The essence of the constructive trust is the purchaser’s voluntary acceptance of obligations in favour of the third party.