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Proprietary estoppel purchasers and mortgagees
Proprietary Estoppel, Purchasers And Mortgagees: An Alternative Approach
Case law (in particular, Ramsden v Dyson (1866) LR 1 HL 129, 170, per Lord Kingsdown, and Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd  QB 133, 151H-152A, per Oliver J) shows that, in determining whether or not proprietary estoppel operates in a case, the court will look for three elements:
(i) A believed that he had or was going to have a right in or over B's property;
(ii) B created or encouraged the belief; and
(iii) A acted in reliance on the belief.
If the doctrine does operate (and, being equitable, it requires clean hands: J Willis & Son v Willis  1 EGLR 62), A has an equity in the sense that he will normally be entitled to an order giving effect to his belief: the court recognises, or secures the creation or transfer of, the right in or over B's property, in the form it judges most appropriate.
A major point of uncertainty, however, concerns the effect of the doctrine on purchasers or mortgagees who take an interest in the land concerned before any order is made by the court. That the doctrine can and should be able to operate against these third parties is generally agreed. What has yet to be resolved is precisely how this is achieved. Recently, the Court of Appeal has twice acknowledged that this is an outstanding issue. In Lloyds Bank plc v Carrick  4 All ER 630, 642b-c, Morritt LJ stated:
“In the circumstances it is unnecessary to consider further the submission of counsel . . . to the effect that a proprietary estoppel cannot give rise to an interest in land capable of binding successors in title. This interesting argument will have to await another day, though it is hard to see how in this court it can surmount the hurdle constituted by the decision of this court in E R Ives Investments Ltd v High  2 QB 379.”
In Habermann v Koehler (1997) 73 P & CR 515, 522, Peter Gibson LJ said that the question
“whether the equity created by the proprietary estoppel against [the original owner] is a right within the meaning of [Land Registration Act] s 70(1)(g) . . . is a difficult one of major importance . . .”
Approaches Suggested So Far: Third Parties Bound By An Existing Equity
The assumption is normally made that the equity described above - the claimant's right to an order giving effect to his belief - arises as soon as the three elements of belief, encouragement and reliance are satisfied. The effect of proprietary estoppel on third party interests pre-dating the court order is, as a result, treated as turning on whether or not the third party is bound by that equity. Two explanations of how the third party can be bound in this way have been put forward.
(I) The Equity As A Proprietary Right
There is authority for the view that any estate or interest which the court recognises, or orders to be created or transferred, comes into existence or is transferred, in equity, when the equity arises. In Voyce v Voyce (1991) 62 P & CR 290, 294, the claimant was found to have been the equitable owner of the property concerned before the court order that the freehold be transferred to him. But this pre-court order equitable interest was relied on merely to explain how the legal owner might have acquired a prescriptive right to light over the property concerned. However, this does not necessarily mean that the pre-court order equitable interest is without significance when considering the effect of proprietary estoppel on third parties. It is arguable that this equitable interest allows the equity to qualify as a “mere equity”, in the sense of an equitable right which is neither a “full” equitable interest nor a personal equity but rather the lowest form of proprietary right in the hierarchy of such rights. The equity is treated in this way by Warburton 1991, Battersby 1991 and Baughen 1994.
Lord Upjohn in National Provincial Bank v Ainsworth  AC 1175, 1238, regarded a mere equity as a right which was “ancillary to or dependent upon” an existing equitable interest in land. If, as Voyce v Voyce suggests, the claimant who successfully relies on proprietary estoppel can have an interest in the property prior to the court order, then the estoppel equity might constitute a mere equity. The estoppel equity would look to be similar to the right to rectify a contract and conveyance, which was found to be a mere equity in Blacklocks v JB Developments (Godalming) Ltd  Ch 183. The plaintiffs were seen as having retained an equitable interest in the property mistakenly included in the contract and conveyance, and the right was linked to that interest in order to give it proprietary status as a mere equity, so allowing it to operate as an overriding interest under Land Registration Act 1925 s 70(1)(g). The estoppel equity would also resemble the right to have a conveyance set aside for fraud. This was treated as a mere equity in Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265 by Kitto and Menzies JJ, who made clear that in a priority dispute, with the purchase taking place before the hearing, it is the mere equity which needs to be taken into account, and not the interest in the property to which that equity gives rise.
A case can, therefore, be made out for the proprietary estoppel equity being a mere equity. However, treating the equity in this way would cause major problems. First, and most importantly, it would mean third parties being routinely affected by the right. If the claimant were in “actual occupation” at the time the purchase or mortgage was completed, and the title to the land were registered, the equity, as a proprietary right, would automatically be an overriding interest under Land Registration Act 1925 s 70(1)(g). Blacklocks v JB Developments (Godalming) Ltd  Ch 183 is authority for a mere equity falling within the subsection. If the claimant were not in actual occupation, his right would, presumably, be a minor interest, which could be protected by an entry on the register. The result would be similar where the land was unregistered. Whilst the occupation, and hence the interest, would need to be reasonably discoverable before the purchaser or mortgagee had constructive notice (Law of Property Act 1925 s 199(1)(ii)(a)), the significance of this distinction is questionable since the decision in Kingsnorth Trust Co v Tizard  1 WLR 783. It is true that third parties are already at risk from beneficial interests under the Gissing v Gissing  AC 886 constructive trust since it is implicit in Williams & Glyn's Bank v Boland  AC 487, Midland Bank v Dobson  1 FLR 171 and Lloyds Bank v Rosset  1 AC 107 that the beneficial interest under this trust precedes the court order. However, the circumstances in which such beneficial interests occur are limited: there must be reliance on an expressed or implied common intention to share the beneficial ownership. In contrast, the belief involved in proprietary estoppel cases can be in any right in or over property. Above all, a purchaser or mortgagee can rely on overreaching to protect himself from beneficial interests under constructive and resulting trusts (Law of Property Act 1925, ss 2, 27; City of London Building Society v Flegg  AC 54, State Bank of India v Sood  1 All ER 169), but there is no reason to believe that a mere equity, arising by way of proprietary estoppel or otherwise, can ever be overreached. (Also, the days of the Gissing v Gissing trust may well be numbered, bearing in mind the extra-judicial comments of Lord Browne-Wilkinson 1996 and the review of cohabitants' property rights currently being undertaken, Law Com No 239, para 6.7ff.)
Secondly, there is the difficulty in dealing with cases where the court wishes to give effect to the claimant's belief by awarding the claimant a licence rather than a proprietary interest. The better view (Battersby 1991) is that licences are personal rights even when awarded by a court following a proprietary estoppel claim. If this is so, then it must follow that the equity can never be a mere equity in cases where the court later decides that the appropriate order is to award a licence, since at no point does the claimant have any interest in the land. Plimmer v Wellington Corporation (1884) 9 App Cas 699 is consistent with this. The Privy Council recognised that the licence in question was, by reason of proprietary estoppel, irrevocable and treated it as having been so prior to the hearing. The existence of this irrevocable licence prior to the hearing was judged to be enough for the appellants to be entitled to compensation under the Act concerned. True, compensation was payable under the Act to those with “any estate or interest in, to or out of the lands”, but the phrase was to be given a wide meaning and the court indicated that this licence was not to be regarded as an interest in land for all purposes (pp 714-715). The courts could no doubt always avoid the award of a licence where they wished to affect the third party: the claimant could be given a long lease determinable upon his death (as in Griffiths v Williams (1977) 248 EG 947) or a life interest under a trust (as suggested by Millett LJ in granting leave to appeal in Habermann v Koehler (1997) 73 P & CR 515) or some other interest in land roughly equivalent to the licence which would otherwise have been awarded. But such contortions ought not to be necessary.
(II) The Equity As A Personal Right Binding Third Parties By Way Of A Constructive Trust
Another view is that, following reliance on a misplaced belief, the claimant has merely a personal equity, in the sense that the right to an order giving effect to the belief can be asserted only against the landowner who encouraged the belief. The only proprietary rights to which estoppel can give rise originate in the order made by the court and are prospective (see Hayton 1990 and Ferguson 1993). However, it would be patently unfair if, as a result, purchasers and mortgagees could in all circumstances disregard the claimant's belief in the period between reliance and the hearing. The suggestion has, therefore, been made that the personal equity might affect third parties by a form of constructive trust (Hayton 1990, pp 373, 380ff; Hayton 1993, p 488; Glover and Todd 1995 in their explanation of E R Ives Investment v High  2 QB 379; and Gray 1994, pp 367-368). The trust involved came to light in the judgment of Lord Denning MR in Binion v Evans  Ch 359, a contractual licence case, and was referred to with approval by the Court of Appeal in Ashburn Anstalt v Arnold  1 Ch 1, 23D-H.
In Swiss Bank Corporation v Lloyds Bank Ltd  1 Ch 548, 571E-F, Browne-Wilkinson J, as he then was, explained:
“Suppose that P has contracted to allow Q to use some property owned by P. P then sells that property to R expressly subject to the terms of the contract between P and Q. There is some authority to suggest that R, by expressly agreeing to buy the property subject to Q's contractual rights is, as a constructive trustee, bound to give effect to those rights: see Binions v Evans . . . The fiduciary relationship is apparently created by R taking the property expressly subject to Q's rights.”
As is apparent from this tentative language, the constructive trust is far from straightforward. In particular, there is the abstruse nature of the beneficial interest involved. Gravells 1995, p 446, suggests that the term “constructive trust” might be being used in Binions v Evans as nothing more than a convenient label indicating that equitable assistance is available to prevent eviction. Characterising the trust as a “remedial constructive trust” does nothing to resolve this problem. It is also difficult to see how this form of trust can be squared with the doctrine of privity of contract. As recently as 1992, Browne-Wilkinson V-C in IDC Group v Clarke (1992) 8 EG 108 was forced to concede that “the law on constructive trusts in this area is not as yet entirely clear”. Furthermore, it is not obvious why the trust should be thought to have any relevance in proprietary estoppel cases. In Ashburn Anstalt v Arnold  1 Ch 1, 23G-H, Fox LJ (with whose judgment Neill and Bingham LJJ agreed) suggests that the constructive trust will only arise if the common intention of the vendor and purchaser was that the purchaser should be bound by the third party's personal right. His Lordship implies that it was crucial in Binions v Evans not only that the sale was expressly subject to the right, but that the purchaser paid a reduced price as a result and that if the purchaser had been able ignore the personal right the vendor would have faced liability. These circumstances allowed the inference of the necessary intention. However, in proprietary estoppel cases it is highly unlikely that there will be any question of the original owner facing contractual or other liability to the claimant if the new owner or the mortgagee acts inconsistently with the claimant's belief.
Binions v Evans was followed in Lyus v Prowsa Developments Ltd  1 WLR 1044, which is perhaps more pertinent to proprietary estoppel cases. This time it was apparently the very absence of potential liability on the mortagee vendor's part that gave rise to a constructive trust, the effect of which was that the purchaser was bound by the contract between the plaintiff and the mortgagor. The only explanation for the sale being made subject to the earlier contract was that the mortgagee vendor and the purchaser intended that the purchaser should give effect to the contract. Unfortunately, a satisfactory solution to the problem of proprietary estoppel and third parties is not to be found here. Leaving aside the generally critical response to the reasoning in the case (see Clarke 1982 and the articles cited therein), how often will the owner dispose of the property expressly subject to the claimant's equity? The owner may well say nothing about the claimant to the purchaser or mortgagee, failing to appreciate that the claimant can object to certain action. Moreover, there is no reason why the claimant's position should depend on what might have been agreed by the original owner and the purchaser or mortgagee.
An Alternative Approach: The Equity As A Right Operating Directly Against Third Parties
It is submitted that the assumption which underlies the approaches outlined above - that an equity arises automatically as soon as the encouraged belief is acted on - is erroneous. The purpose of equitable estoppel is to prevent the unconscionable exercise of legal rights. That this is as much the case for proprietary estoppel as promissory estoppel is apparent from the conclusion drawn by Oliver J in Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd  QB 133, 151H-152A, (emphasis added):
“[T]he more recent cases indicate, in my judgment, that the application of the Ramsden v Dyson (1866) LR 1 HL 129 principle . . . requires a very much broader approach [than that taken in Willmott v Barber (1880) 15 Ch D 96] which is directed . . . at ascertaining whether, in particular individual circumstances, it would be unconscionable for a party to be permitted to deny that which, knowingly, or unknowingly, he has allowed or encouraged another to assume to his detriment . . .”
This conclusion was recently approved by the Court of Appeal in Lloyds Bank v Carrick  4 All ER 630, 640c-f. So, not only must there be the elements of reliance on a belief created or encouraged by the legal owner, but also the assertion by the legal owner of his inconsistent rights must be inequitable. Presumably the equity arises once it would be unconscionable for these rights to be asserted, whether or not they are actually asserted at that point. In any event, the key point remains: the mere fact that the claimant has acted on the encouraged belief does not, of itself, bring the doctrine into operation.
Formulations of proprietary estoppel often fail to mention unconscionability as a distinct requirement and refer to detrimental reliance instead (see, eg, Re Basham  1 WLR 1498, 1503H, but note also Lord Denning MR in Greasley v Cooke  1 WLR 1306, 1311F-1312A). This is not altogether surprising. Dunn LJ in Watts v Storey  Court of Appeal Transcript 319 (Burn 1992, pp 575-576) stated:
“It is difficult to envisage circumstances in which it would be inequitable for the party giving an assurance alleged to give rise to a proprietary estoppel [to go back on that assurance] . . . unless the person to whom the assurance was given had suffered some prejudice or detriment.”
However, there is no reason why the issue of unconscionable conduct should be limited to a question of whether the claimant has incurred expenditure or would otherwise suffer loss if effect were not given to his belief. With respect, it has to be doubted whether Dunn LJ was right, earlier in the case, to agree with the suggestion that:
“[I]t matters not whether one talks in terms of detriment or whether one talks in terms of it being unjust or inequitable for the party giving the assurance to go back on it.”
The better view must be that proprietary estoppel takes into account not only any detriment which the claimant might suffer but all the circumstances of the case. This was the view taken by Nicholls LJ, as he then was, in Voyce v Voyce (1991) 62 P & CR 290, 296:
“A person may so conduct himself that it would be manifestly inequitable for him subsequently to be heard to assert his legal rights. His own conduct may preclude him from later asserting his strict legal rights against another who has acted in reliance on such conduct. The extent to which he is precluded or estopped depends on all the circumstances. Regard must be had to the subject-matter of the dispute, what was said and done by the parties at the time and what has happened since.”
If the equity arises as is now being suggested, then in some cases it will be an intermittent right. Periods when it would be unconscionable for the legal owner to assert his rights might be interspersed with periods when it would not be unconscionable to assert them. This could be the result of changes in the legal owner's situation or that of the claimant. Also, the effect of the equity will often fluctuate, in the sense that the order a court would make to satisfy the equity at one point is not necessarily the same as the order it would made at a later stage. So, in Crabb v Arun District Council  1 Ch 179, 189G-190A, 199D-F, the Court of Appeal made clear that had they been called upon to satisfy the equity several years earlier they would have ordered the plaintiff to pay something for the easement which they were recognising. The defendants' subsequent conduct, however, meant that compensation was no longer payable. The equity is, therefore, a right whose nature bears a strong resemblance to the “deserted wife's equity” considered in National Provincial Bank v Ainsworth  AC 1175; in particular, 1247E-1248A, per Lord Wilberforce. It will be recalled how the House of Lords refused to treat the wife's rights as proprietary rights. The conclusion must be that, similarly, the proprietary estoppel equity cannot be classified as any form of proprietary right. Moreover, once proper account is taken of the fact that proprietary estoppel exists to prevent the unconscionable assertion of legal rights, the solution to the third party problem almost suggests itself. If the third party's assertion of his legal rights can be said to be unconscionable, and the essential limiting factors of belief, encouragement and reliance are there, surely an equity can arise directly against that third party. Equity cannot be so inflexible as to be unable to respond in this way simply because the claimant's belief was originally created or encouraged by a predecessor in title (or the mortgagor, where the assertion is by the mortgagee).
An important element in determining whether or not the third party's conduct was unconscionable ought to be the state of that third party's knowledge when he acquired his interest. Support for this can be found in considering recipients of property disposed of in breach of trust. Whilst the ability to assert beneficial ownership in that property against the recipient depends on “notice” (unless, of course, the property is registered land), the recipient will only be fixed with the personal liability of a constructive trustee to compensate the trust for loss if his conscience is affected and, crucially for present purposes, this is determined by the state of his “knowledge”. Having reached this conclusion in Re Montagu's Settlement  1 Ch 264, Megarry V-C added that, for this purpose, knowledge was not confined to actual knowledge, but included knowledge that would have been acquired but for shutting one's eyes to the obvious, or wilfully and recklessly failing to make such inquiries as a reasonable and honest man would make. The approach adopted by Megarry V-C looks to have been approved by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington BC  AC 669, 707D. (Arguably, a person who assists in a disposition of property in breach of trust is personally liable in the same circumstances: in Royal Brunei Airlines v Tan  2 AC 379, where the Privy Council identified dishonesty as the crucial element in accessory liability, it is noticeable that all the situations cited as ones in which dishonesty would be found (p 389F-G) involved knowledge of the sort required of recipients of trust property.) In the not dissimilar situation of a third party receiving property in which another person has been encouraged to believe he has rights, it makes sense for the equitable notion of unconscionable conduct to be determined in a similar way.
Furthermore, the Barclays Bank v O'Brien  1 AC 180 line of cases can be read as an example of equity operating against a third party (a mortgagee) to prevent enforcement of its legal rights when this would be unconscionable as a result of that party's state of knowledge. In considering the right of an unduly influenced spouse (or similar claimant) to have the mortgage set aside as against her, Lord Browne-Wilkinson appears to reason in terms of that right being a mere equity. The mortgagee is affected through its notice of an existing proprietary right. But, as Dixon and Harpum 1994 and Battersby 1995b argue, this reasoning is inappropriate and it is better to treat the mortgagee as being affected through its knowledge of the husband's impropriety, that knowledge implicating the mortgagee in the impropriety.
Much of the proprietary estoppel case law can be read as consistent with this third approach. A good example is the leading case of E R Ives Investment v High  2 QB 379. The particulars of sale informed the plaintiffs that the sale was subject to the right of owners of the adjoining property to pass over the yard of the property being sold. The plaintiffs' solicitors asked how this right had arisen but the vendors' solicitors were unable to say, and matters were simply left at that. The subsequent conveyance was expressly subject to the right. The plaintiffs, therefore, had the type of knowledge referred to in Re Montagu's Settlement. Indeed, Lord Denning MR said that the plaintiffs took with “the most express knowledge and notice of the right” and Danckwerts LJ referred to their “full knowledge of the situation” (pp 395B and 400A respectively). They might not have had actual knowledge that the neighbour, the defendant, had built a garage in reliance on an agreement that he should have this right of way, but they apparently failed to take the obvious and rudimentary step of speaking to the defendant before buying the property. In the circumstances, this was a wilful and reckless failure to make the inquiries a reasonable and honest man would have made. It could be said that a fresh equity arose against the plaintiffs.
This alternative approach could go some way to explain the suggestion in Re Sharpe  1 WLR 219, 226G, that “express notice” might be required before a third party was affected (assuming that this really was a proprietary estoppel case, see pp 223B-224A). Also, in seeking to reconcile early case law with this approach it is important to remember that until well into the second half of the nineteenth century constructive notice tended to be seen as requiring an element of impropriety, rather than mere carelessness (Jones v Smith (1841) 1 Hare 43, 55-56), and so was indistinguishable from what might be termed “constructive knowledge” today. So the fact that early cases might refer to a purchaser or mortgagee being bound as a result of having “notice” of an equity (eg, Unity Joint Stock Banking v King (1858) 25 Beav 72, 80) is not necessarily inconsistent with the approach being advocated here. In any event, there is Duke of Beaufort v Patrick (1853) 17 Beav 60, 78, where, in holding that the doctrine operated against those claiming under the will of a purchaser, Romilly MR refers to the “knowledge” of the purchaser.
The third party's knowledge could, therefore, properly be considered in every case. If he knew of the belief, encouragement and reliance when he took his interest, this would almost certainly make later disregard of the claimant's belief unconscionable; if he had no such knowledge, this would be one point in his favour. This is not, however, to argue for the state of the third party's knowledge being the sole determinant of conscionableness. The court should also be able to consider factors such as the present respective circumstances of the claimant and third party. This was treated as an important factor in Sledmore v Dalby (1996) 72 P & CR 196 (Milne 1997), although it led to the claimant being awarded, in effect, an expired licence rather than preventing an equity arising in the first place. And the court might want to look at the claimant's behaviour and, in particular, whether he knew of the proposed transaction and impliedly consented to the interest of the purchaser or mortgagee taking priority over his equity. If so, this could weigh against him in his assertion that the purchaser or mortgagee was acting unconscionably in later acting inconsistently with that belief. This would allow for the operation in proprietary estoppel cases of the approach adopted in Bristol and West Building Society v Henning  1 WLR 778 and Paddington Building Society v Mendelsohn (1985) 50 P & CR 244, cases concerning the Gissing v Gissing  AC 886 constructive trust.
There can be no doubt that the doctrine of proprietary estoppel is becoming increasingly important in English law. This is demonstrated by the suggestion that proprietary estoppel should be adopted to determine disputes over the formerly-shared home between ex-cohabitants in preference to the Gissing v Gissing constructive trust (notably, Browne-Wilkinson 1996). As the significance of the doctrine grows, so must the need to resolve the position of pre-judgment purchasers and mortgagees. The modern emphasis on the prevention of unconscionable conduct as the basis of the doctrine, seen in cases such as Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd  QB 133, suggests that dealing with the third party problem ought to involve consideration of the conscionableness or otherwise of that party's conduct. The approach advocated in this article meets this requirement, as well as avoiding the problems associated with the other two approaches.
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