Patel & Ors v Shah & Ors

LORD JUSTICE MUMMERY: The main issue on this appeal is whether the claim by Mr Hetul Patel and three others (the claimants) to beneficial interests in various properties bought at auction and vested in the names of the defendants was rightly dismissed on the ground of laches.

The appeal is by the claimants against the order of Mr Kevin Garnett QC (sitting as a deputy judge of the Chancery Division) dated 15th July 2004. In dismissing the claimants' action he ordered that cautions registered against eight properties listed in a schedule to the order should cease to have effect. He also ordered the claimants to pay the costs and refused permission to appeal.

The commercial properties in question were purchased in the names of one or more of the defendants between February 1989 and March 1990 in circumstances that gave rise to resulting trusts in favour of the claimants' predecessor in title, a company called Greetflow Ltd. The proceedings were not issued until 5th March 2002, by which time the claimants had realised that the properties in question had recovered from the effects of the property slump, which occurred soon after they had been acquired, and that the properties had now produced income and capital gains. Although the witnesses at the trial had some difficulty in recalling events which had taken place ten or more years previously and their recollection suffered as a result, the judge commented that minutes of most of the important meetings and arrangements had been kept and the documents available provided the most reliable evidence of what had taken place.

The general defence raised by the defendants and upheld by the deputy judge in respect of all the properties in question was that, by reason of laches, the claimants lost the right to enforce against the defendants their claims to beneficial interests in the relevant properties. Mr Hodge QC, appearing for the claimants, characterised the principal point on the appeal as whether the equitable defence of laches, which was developed by the court of equity in connection with discretionary equitable remedies, is also available as a defence in an action by beneficiaries against their trustees for the recovery of trust property.

On the appeal, for which permission was given by Jacob LJ, the claimants seek a declaration that five of the eight scheduled properties, alternatively two of the five properties, were held by the defendants as trustees for the claimants. (I mention in passing that the claimants do not appeal against an adverse ruling by the deputy judge in respect of remaining properties, which are referred to in the judgment as "the Disputed Properties". The defences in those particular cases arose out of particular transactions involving the transfer of, or an agreement to transfer, the beneficial interests in exchange for being relieved from any liability to contribute to shortfalls in mortgage repayments in respect of the properties.) The claimants also ask on the appeal for an order for sale and for an account of the defendants' dealings with the properties which are subject to the appeal.

The deputy judge summarised the factual background to the proceedings and the arrangements which had been made between the parties in paragraphs 2 and 3 of his judgment:

The deputy judge made further findings of fact relevant to the issue of laches. He found that the four claimants are successors in title of one of the original investors, Greetflow Ltd. By two deeds of assignment dated 10th August 1992 Greetflow assigned its beneficial interest to the claimants for the sum of £1. The principal assignment contained this recital:

The schedule to that assignment listed 11 properties, most of them being expressly stated to be subject to mortgage to a named bank or building society, though two of them were stated to be without a loan. The defendants were not informed of the assignments. The judge commented (paragraph 74 of his judgment) that no explanation was provided for this "which would seem to me to have been a natural thing to do unless perhaps it was appreciated that the assignees might come under onerous obligations." The judge rejected the claimants' evidence that the defendants had got to know about the assignments early in 1994.

On 14th September 1993 Greetflow was struck off the Register of Companies for failing to file accounts. It was duly dissolved. This fact was known to the claimants and the defendants. Greetflow was not restored to the Register until 2003 and only then was it done having regard to the nature of the claims made in the action.

The two properties which were purchased without the assistance of a mortgage were the subject of the claimants' alternative arguments on this appeal. The properties in question were 4/4A Northgate House, Market Street, Eckington, Derbyshire, which was sold in 1999 and in which Greetflow had a 1/7th interest, and 16 Fore Street, Saltash, in which Greetflow also had a 1/7th interest.

In the case of the mortgaged properties the anticipated mortgage payments exceeded the reserved rents in many, though not all, cases. Where there was a shortfall the original understanding of the parties was that the defendants would meet the shortfall in the first instance. They would then recoup their expense out of the sale proceeds. The intention was that the parties would sell the properties that they had acquired quickly and would take a profit. After the property market crash in the early 1990s it was no longer possible for the parties to trade properties in the way in which they could contribute to the shortfall out of the proceeds of sale of properties as things went along. The investors decided to hold the properties for the longer term. The shortfalls were to be repaid by the investors meanwhile. In general, the investors, such as Greetflow, were called on by the defendants to pay shortfalls in the sums stated in short, unparticularised accounts of annual shortfalls which were attributable to each investor. The accounts were prepared on behalf of the defendants and supplied to the other investors. Greetflow failed to pay its contributions, presumably, the judge commented, because it was not able to do so. It dropped out of the picture. The result was that the defendants had to make up the shortfalls from their own assets in various ways, including selling one of their own prime properties in order to remain liquid. It was accepted that the investors had a personal obligation, up to the limit of their respective beneficial interests in the properties, to keep the defendant trustees indemnified against any liability to the mortgage lenders and thus contribute to any shortfalls.

The deputy judge rejected the defendants' contention that (a) there was an agreement that, when the defendants started to have to cover deficits in the mortgage instalments out of their own pockets for a substantial period, they would be entitled to charge the other investors interest; and (b) there was an agreement entitling the defendants to charge a management fee, which they alleged to be at the rate of 10% of the rental income from the properties.

In the case of Greetflow the defendants had to make up the balance of the arrears of contributions to the shortfall out of their own pockets. Greetflow's share, which had been assigned to the claimants in the circumstances I have described, was, the deputy judge held, treated as swallowed up by the arrears and assimilated into the defendants' interests in the properties.

The deputy judge concluded that there had been created a series of separate joint ventures, which he compared to the case of the partnership situation discussed in Lindley and Banks on Partnership, 18th ed, paragraph 23-20, in which one partner was left to do all the work while there was a loss and the other partner only came forward to claim a share when there was a profit. Paragraph 23-20 of Lindley reads as follows:

The deputy judge agreed with the description of the claimants' position which was suggested by Mr Hill, appearing for the defendants, as "a one-way bet". At the time of the property slump, when many of the properties were probably in negative equity and the rental income was insufficient to meet the mortgage instalments, the defendants took on the whole burden of keeping the properties afloat. The defendants were at risk if they defaulted on the mortgage repayments and the properties were repossessed. They were at risk if the properties were in negative equity. Neither Greetflow nor its successors, the claimants, did anything to meet their share of the burden. While recognising that the rental income was sufficient in some cases to meet the mortgage repayments, the judge's overall assessment of the situation was that:

The deputy judge added that, once Greetflow had been dissolved in September 1993, as the defendants were to discover soon afterwards, "the Defendants were entitled to consider, as they did, that its interests had been abandoned. Even before this date, Greetflow was doing nothing to contribute to any shortfalls." Further, no attempt was made by the claimants to tell the defendants about the assignment of Greetflow's interests to the claimants and no attempt was made later to explain their failure to do so.

The judge then turned to the statement in Lindley (quoted paragraph 14 above). He applied that statement of the doctrine of laches to the facts found by him in the following way:

What is wrong with this reasoning and the outcome on the facts found at trial (which are not challenged by the claimants on this appeal)?

Mr Hodge reminded the court that the claims are for the enforcement of admitted equitable property rights in the various properties purchased in the name of one or more of the defendants, but with contributions to the purchase price having been made by the claimants' predecessor, Greetflow.

There was therefore a resulting trust in respect of each of the separate properties. The defendants are the trustees and the claimants are now the beneficiaries. There was no dispute, he said, as to the existence or extent of the beneficial interests of the original investor, Greetflow, or as to the validity of the assignments that Greetflow had made of its beneficial interests to the claimants.

Mr Hodge submitted that the deputy judge wrongly applied the equitable defence of laches, which had been developed in relation to equitable discretionary remedies, to the different situation of a claim to the enforcement of admitted equitable property rights.

It is common ground that the claims are not statute-barred. No period of limitation is prescribed by the Limitation Act 1980 for an action by a beneficiary under a trust to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his own use (section 21(1)(b)). It was accepted that section 36 of the 1980 Act preserved equitable jurisdiction to refuse relief on grounds of acquiescence or otherwise and that that would include laches. Mr Hodge commented that the deputy judge had made no reference at all in his judgment to section 21(1) of the Limitation Act 1980 or to section 36 or to a number of the relevant authorities. The judge failed, Mr Hodge said, to focus on the nature of the claim against the trustees in possession of trust property by beneficiaries claiming a beneficial interest in it.

As for an action to recover trust property from the trustees, the authorities, he submitted, show that such a claim cannot be defeated by the defence of laches. He cited Mills v Drewitt (1855) 20 Beav 632, at page 638, which was relied on by Mr Brunyate in his work Limitation of Actions in Equity (1932) on page 234 as authority for the proposition that:

In other words, a beneficiary cannot be divested of his beneficial interest in the capital of the trust by the operation of the doctrine of laches.

Mr Hodge went on to submit that this was a matter within the exclusive jurisdiction (as distinct from the auxiliary jurisdiction) of courts of equity, and that a denial of equitable relief on the grounds of laches would in effect deprive the claimant of all relief. Equity, he said, was particularly reluctant to refuse a beneficiary relief on the grounds of delay or laches: see Spry on the Principles of Equitable Remedies (6th ed. 2001) at pages 437-438.

Such an extreme step was not justified in the case of claims in respect of properties vested in the defendants in trust for the claimants. The lapse of time had had, he said, no adverse effect on the ability to defend the claims. Any prejudice to the defendants could be sufficiently prevented and justice done between the parties by refusing the claimants an account of the rents and profits of the properties, and by limiting the relief granted to an account of the claimants' beneficial interests in the capital value of the properties or the proceeds of sale in the case of those which had been sold.

Mr Hodge made separate submissions in respect of the two unmortgaged properties. He submitted that, although the judge had pointed out in several passages in his judgment that they were unmortgaged, he had wrongly applied the defence of laches to those properties. It was wrong to treat those properties in the same way as the properties in respect of which the defendants had had to put their hands in their pockets in order to meet the liabilities of the mortgages on them. He said the "one-way bet" slogan attached by the judge to the properties subject to mortgages was inapplicable to these two properties. In respect of them there could be no risk of negative equity for the defendants to shoulder while awaiting the eventual outcome of fluctuations in the property market.

Mr Hodge referred in detail to a number of authorities. For reasons stated later in this judgment, it is not necessary to analyse the cases in the same detail. Knight v Bowyer (1858) 2 De G & J 421, at 443, was cited for the proposition that the doctrine of laches and delay did not apply to an express trust, save possibly where there was a release or abandonment by the beneficiary and that was capable of being presumed from the facts of the case. The overriding duty of the trustee was to apply the trust property according to the trusts. He cited the case of Bright v Legerton (1860) 29 Beav 606, at 615 and 616, to the same effect. In re Cross (1882) 20 Ch D 109 was cited as an example of the application of laches and delay to a claim against a trustee, not for the recovery of trust property, but for breach of trust.

Mr Hodge also cited two Australian cases. In Hourigan v Trustees Executors and Agency Co Ltd (1934) 51 CLR 619, particularly at 650, it was stated that the defence of laches may be raised in answer to a claim by a beneficiary of an express trust where there had been acquiescence or "gross laches". Orr v Ford (1989) 167 CLC 316 was also cited, particularly for the passage in the judgment of Deane J at page 341 that ordinarily the laches of a beneficiary would not make it inequitable or unreasonable to grant relief in proceedings for the enforcement of an express trust in relation to property in the possession of the trustee.

I do not doubt that, in the general run of claims by a beneficiary against a trustee for the recovery of a beneficial interest in trust property, Mr Hodge's analysis is apposite. The key question is whether it applies to the trusts affecting the properties in this case, bearing in mind that these trusts arose, and are sought to be enforced, in a commercial context, not in the donative context of orthodox inter vivos and testamentary trusts, in which a beneficiary is not expected by anyone to do anything other than to receive the gift.

As I have indicated, the deputy judge applied the principle stated by Lord Lindley in paragraph 23-20 in Lindley and Banks on Partnership, 18th ed. That principle is stated in a commercial setting: that of a partnership, the carrying on of a business with a view to profit. The deputy judge said it was applicable with equal force to the series of joint ventures of the kind undertaken between Greetflow and the defendants.

The principle formulated by Lord Lindley was in relation to the profits of a partnership where one partner has left the other to do all the work. It does not in terms, as Mr Hodge was quick to point out, apply to a claim to a beneficial interest in the capital of the partnership, or to a beneficial interest in the capital and property held in trust for the purposes of the partnership. There is, however, in my judgment a wider principle, which embraces the defences of laches and delay, and can be invoked in answer to claims which are made to equitable interests in property arising in circumstances affecting the sale and purchase of property. I refer to the principle formulated by Aldous LJ on the Frawley v Neill [2000] CP Reports 20. Aldous LJ (with whose judgment Ward and Swinton Thomas LJJ agreed) stated, having discussed instances of the doctrines of laches, acquiescence and estoppel, the following principle:

The effect of conduct by the claimants, which may properly be described as unconscionable, is to release a defendant trustee from the equitable trust obligation, which binds his conscience as the holder of the legal title for the benefit of others. In the case of an ordinary trust by way of gift to trustees for the benefit of the beneficiaries, where the beneficiary is not required or expected to do more than receive what has been given for his benefit, it will obviously be extremely rare for laches and delay on the part of the beneficiary to make it unconscionable for that beneficiary to assert his claim to the beneficial interest, or for the trustee to claim that he has been released from the equitable obligations that bind his conscience.

The general commercial setting of the particular facts of this case make it, in my view, a different kind of case from that of a beneficiary under a gift trust. As Lord Justice Keene pointed out in the course of argument, the persons investing in the purchase of the various properties held from time to time by the defendants were in substance trading in land. They were buying and selling properties with a view to making a quick profit. It was a collaborative commercial venture, in which those participating in it were expected to work together in making their contributions to achieve the aim of the joint ventures, the aim in the case of each acquisition being the same. The creation of resulting trusts arising on the purchases by the defendants of properties in their name, with contributions made by predecessors of the claimants and others, was, as Mr Justice Sullivan pointed out in oral argument, not the aim of the joint ventures. The trusts were a by-product or incidental equitable consequence, a vehicle for accomplishing the commercial aim.

In respect of each relevant property, the beneficiary/investor was bound to contribute to any shortfalls arising if the available trust property was insufficient to meet the obligations incurred in that joint venture. This was recognised by Mr Hodge's acceptance that the defendants, who had paid shortfalls out of their own pockets, were entitled to be personally indemnified by the claimants in respect of such payments, to the extent of the beneficiary's beneficial interest in the trust property.

There were shortfalls in the case of the mortgaged properties. The reserved rents were not in all cases sufficient to fund the mortgage interest payments. There was a risk that, if the shortfalls could not be funded, the mortgagees would realise their securities when the properties were in negative equity. The defendant trustees had to fund the claimants' share of the shortfall and bear that part of the risk of negative equity.

What of the conduct of the claimants and their predecessor in title? Until the risk had passed away, the claimants had been lying low. They did not inform the defendant trustees of the assignments of the interests in August 1992. They did not alert the defendants to any claim made by them until 2000, when they discovered that the funds had produced income and capital gains.

In my judgment, the deputy judge was right to regard the conduct of the claimants as conduct on which he was entitled to dismiss the claim as unconscionable and barred by laches. The fact that the claimants were seeking to recover capital beneficial interest from the defendants as trustees does not, in my view, make it any the less unconscionable. Nor does the fact that two of the properties were never in mortgage. Those two properties were treated in the same way as the mortgaged properties. As was pointed out by Mr Hill, appearing for the defendants, they were comprised in the schedule to the assignment of the beneficial interest to the claimants. The unmortgaged properties and the mortgaged properties were all embraced in the overarching intention of the investors (claimants and defendants) that there was a joint commercial venture affecting all of the properties.

In my judgment, the venture ceased to be joint, as it was originally intended, when, as a result of Greetflow assigning its interest to the claimants and then being struck off and dissolved, no further contributions were made to the joint venture. Everything was left for the defendants to deal with, including financing shortfalls from their own pockets. The claimants and their predecessors had departed from the commercial arrangements. They had ceased to bear any of the risk or the expense. Such conduct on their part falls within the principle stated in Frawley v Neill, as well as the principle applicable to partnerships enunciated by Lord Lindley.

The defendants were released from their equitable obligations to the claimants in the circumstances of this case, both as to capital and to income, and in respect of unmortgaged as well as mortgaged properties.

For these reasons, I would dismiss this appeal.

LORD JUSTICE KEENE: I agree.

MR JUSTICE SULLIVAN: I also agree.