Fairclough v Salmon

LORD JUSTICE MUMMERY: This is an adjourned application for permission to appeal, with the direction that the appeal is to follow immediately if we decide to grant permission. Mr John Salmon, who appears in person, wished to appeal from an order made by HHJ Levy QC on 19 April 2005. He declared that the parties were beneficially entitled to 50 per cent each of the leasehold title of the upper floor flat at 144A Wellesley Road, Chiswick (“the flat”). He also made orders for various payments to be made, and directed a transfer of the flat to Mr Salmon or, in default of the transfer of the beneficial interest to him, there was to be a sale of the flat with vacant possession.

In adjourning the application for permission to the full court by his order of 18 October 2005, Longmore LJ limited the points to be addressed to those that were raised by Mr Salmon in paragraphs 3 and 4 of his skeleton argument, plus a further point arising on the later acquisition by Mr Salmon, with a Miss Dwyer, of the freehold of the flat, along with the freehold reversion to another flat at the same address.

In order to understand the points argued by Mr Salmon and responded to by Mr Hutchings on behalf of the respondent, Miss Lynne Fairclough, it is necessary to outline the facts found by the judge, some of which are contested on this appeal by Mr Salmon. The flat was purchased on 14 June 1985. The transfer makes no mention of any declaration of the beneficial interests in the property.

On 8 October 1985 the property was registered in the joint names of Mr John Salmon, his brother Mr Richard Salmon, and the respondent, Miss Lynne Fairclough, with whom Mr John Salmon had formed a relationship while they were at university. At that time Mr John Salmon was living at Chiswick and Miss Fairclough was living in north London. The judge found that the three of them had orally agreed to buy the flat as an investment, and that they would use rental income from the flat to service mortgage payments and other outgoings. It was also orally agreed that each of them would contribute equally to the full cost of the purchase, and that they would be beneficially entitled to the flat in equal shares. Mr John Salmon would live in the flat. He would manage it. He would be responsible for outgoings which were not met by the rental income up to an amount which represented the notional rent of the part of the flat occupied by him. In fact, he has never paid any rent for his occupation, nor has he paid to either of the other two anything in respect of the rents received by him. And, as we shall see, the judge dismissed the part of the claim made by Miss Fairclough against him for an account of the rents that he had received. The judge found that it was also agreed that all three of them would contribute to major items of expenditure not met by the rental income of the flat.

The purchase price of the flat was £52,950. The purchase was financed partly by a loan of £47,500 from the Chelsea Building Society. As appears from the building society mortgage, all three of them were parties to it. The loan to all three of them was secured by an interest-only legal mortgage on the flat. There was also an endowment policy designed to repay the capital of the loan at the end of 25 years, in 2010. The policy was taken out with Legal & General by Mr John Salmon and Miss Fairclough. Initially, the interest payments under the mortgage were £423 per month. As to the remainder of the purchase price, the two brothers paid about £2,000 each in cash. Miss Fairclough paid about £1,000 plus a further £1,000 in March 1986, some of which was spent on the cost of a loft conversion within the flat and the rest on furnishings for the flat.

Mr John Salmon began to live in the flat. Rooms were rented out for £355 per month. In 1986 the loft was converted and Mr Richard Salmon began to live in the flat. Miss Fairclough has never lived in the flat. Later in 1986, Mr Richard Salmon decided to move out of the flat. He wanted to recover his investment in it. Mrs Salmon (Mr Richard Salmon and Mr John Salmon’s mother) agreed to make a loan of £11,000 in order to buy out Richard’s share. The £11,000 was paid to Mr Richard Salmon. The judge found as a fact that Mr John Salmon and Miss Lynne Fairclough agreed to be jointly responsible for the repayment of the £11,000 loan to Mrs Salmon. Mr Richard Salmon moved out in 1987, by which time the rent for the parts of the flat that were let out, including the converted loft room, amounted to £445 per month.

In July 1988 the relationship between Mr John Salmon and Miss Lynne Fairclough ended. In 1989 negotiations began between them in order to establish, by agreement, their respective shares in the flat. The negotiations continued until 1991. In the course of them an agreement was reached. This is evidenced in two letters of March 1991. The agreement was that Mr John Salmon would buy out Miss Fairclough’s share for £14,250 plus the full value of the endowment policy, making a total of £15,500. That agreement was never carried out. The judge found as a fact that the amount that Miss Lynne Fairclough was to receive under the agreement was approximately 50 per cent of the net value according to the valuation that had been obtained, but less a discount agreed to by Miss Fairclough in order to get the matter over, so that they could get on with their lives.

Over the next 12 years there was very little contact between the parties. Mr John Salmon ceased to live in the flat full time by about 1994/1995, having acquired a property in France. The property continued to be let. Rent continued to be paid. The judge made no findings as to the amounts of rent received by Mr John Salmon, as he concluded that Mr John Salmon was entitled to keep any profits that he made from the lettings over and above the outgoings for payment of interest under the mortgage and maintenance costs. The mortgage interest continued to be paid, but in a reduced sum. In October 1997 Mr John Salmon negotiated the surrender of the policy. On 26 January 1998 Mr John Salmon and Miss Margaret Dwyer, who owned the lease of the ground floor flat, purchased from the landlord the freehold reversion to the leases of the two flats. They became owners of the freehold property at 144 Wellesley Road and were registered as proprietors of the freehold.

On 18 June 2004 Miss Fairclough issued proceedings against Mr John Salmon. His brother, Mr Richard Salmon, was also joined as a defendant, because his name was still on the proprietorship register and he was still a party to the building society mortgage. He has, however, taken no steps to defend the claim. I should mention that since the proceedings were issued, Mr John Salmon has spent money on refurbishing the flat, and Miss Fairclough accepts that she should contribute half of the cost of the major items of expenditure which he has incurred. The total amount found to have been spent was fixed by the judge at £12,000.

I now come to the rival cases presented by the parties at the trial. Miss Fairclough’s case was that she and Mr John Salmon were entitled to a half share each in the flat from the time when Mr Richard Salmon’s share was bought out. She says it was agreed that the flat would be held by the two of them in equal shares. This was evidenced by an agreement that Mr John Salmon and she would be liable jointly to repay the loan of £11,000 made by Mr John Salmon’s mother in order to buy out Mr Richard Salmon’s share. As for the mortgage, her case was that, in accordance with the original agreement, that had been serviced by the rental income from the flat.

Mr John Salmon’s case at the trial was that the beneficial ownership in the property was to be determined by the size of the direct contributions made to the purchase of the flat and, following what he claimed was the acquisition of Mr Richard Salmon’s share by him, he was entitled to 98 per cent of the equity; Miss Fairclough was entitled to only 2 per cent of the equity as a result of her very limited direct monetary contribution to the purchase price. He said that he had paid all the mortgage repayments, insurance and the maintenance costs from his own money. He also made the point that Miss Fairclough’s participation in the acquisition of the flat was only required when the two brothers found that they could not, on their own, obtain a mortgage. Her participation enabled them to obtain a mortgage to finance the purchase of the flat.

I now turn to the judgment given by the judge on the main issues. The judge said that he preferred the evidence of Miss Fairclough to that of Mr John Salmon. He found that the flat was equally owned on the terms of the oral agreement that she had alleged. He found that she was a party to the mortgage and that she was to pay an amount towards the money needed for the deposit on completion. He found that she paid, in total, about £2,000. He accepted her evidence that, under the agreement, Mr John Salmon was to live in the flat, manage it, collect the rents and use them to pay the mortgage interest; and he also accepted her evidence that, when outgoings were incurred, they were to be paid out of the rents received by him up to the amount of the notional rent attributable to his occupation of the flat.

The judge found that Miss Fairclough’s case was supported by what happened when Mr Richard Salmon was bought out. He found that Mr Richard Salmon’s share was calculated as one-third of the value of the flat at the time when he was bought out. That was how the sum of £11,000 had been arrived at. The flat was at that time valued at £80,000; the mortgage debt was still £47,500; the equity was £32,500; and Mr Richard Salmon’s direct financial contribution had been £2,000. The judge went on to find that, after Mr Richard Salmon’s share was bought out, the flat was held by the other two co-owners in equal shares. He found that this was borne out not only by what had been agreed between them at the time about joint responsibility for repaying Mrs Salmon’s loan, but also by what was agreed in the subsequent negotiations between the parties following the breakdown in their relationship.

As for the contributions towards the outgoings, the judge found that it was agreed that Mr Salmon was to balance the rents received against the mortgage payments. If there was a balance in his favour, he was to keep it. If there was a balance against him, he was to make it up, save for major items of expenditure mentioned earlier. The judge rejected the defence of laches, acquiescence and delay, there being no limitation period applying to an action for the recovery of the proceeds of trust property from a trustee or to a claim by a beneficiary against a trustee. As for the quantification of Miss Fairclough’s interest, the judge held that it was to be determined by taking the present value of the flat, deducting the amount due the building society and the amount due to Mr Salmon’s mother, and a further deduction in respect of the share which she accepted towards the cost of the recent expenditure on refurbishment.

Mr John Salmon does not want the flat to be sold. That is still his position. His preference was to buy out Miss Fairclough’s share. Accordingly, the judge directed that the beneficial interest in the flat be transferred to Miss Fairclough to Mr Salmon by 18 August 2005, on payment of the sum of £102,000, to which was added £10,000 on account of the costs of claim. Failing such a transfer, the flat was to be sold on the open market with vacant possession and the net proceeds of sale were to be applied as directed by the order.

I now come to the submissions made by Mr John Salmon on this appeal. As I have already mentioned, in accordance with the order of Longmore LJ, the grounds of appeal have been limited to these points: the original acquisition of the flat; the buy-out of Mr Richard Salmon; the written offer and acceptance reached in the negotiations between the parties in 1991; and the acquisition of the freehold reversion to the two flats at 144 Wellesley Road. Mr John Salmon was refused permission to appeal on grounds, originally set out in his notice, that he was not given a fair trial; that there were various procedural irregularities in the trial; that the judge was biased against him; and that the order that the judge made contravened Article 8 of the European Convention on Human Rights. Mr John Salmon told us that he was intending to pursue the human rights points in the court at Strasbourg.

At the forefront of his case at this hearing, Mr Salmon has put forward an argument about severance of the joint tenancy. He based this argument on the decision of this court in Burgess v Rawnsley [1975] Ch 429. That case is authority for the proposition that a joint beneficial tenancy may be severed and become a tenancy in common by reason of a course of dealing between the parties, such as, for example, an oral agreement reached between the joint tenants under which one of the joint tenants orally agrees to sell his or her share to the other joint tenant. Mr John Salmon’s argument was that such a severance had taken place in this case, and that the effect was that the size of the beneficial interests of himself and Miss Fairclough were crystallised or fixed and could not later be varied. He identified a number of points of time at which this severance had taken place. He first said it occurred when he moved into the flat, and when he was the only person in possession of it; alternatively, it occurred when the agreement was reached to buy out Mr Richard Salmon’s share; or thirdly, it occurred when an agreement was made between him and Miss Fairclough in their negotiations resulting in the offer and acceptance at the end of March 1991; or, finally, when he and Miss Dwyer acquired the freehold reversion on the flats.

In my judgment, the severance point is of no assistance to Mr John Salmon on this appeal. The reason is this: that Mr Hutchings accepts, correctly in my view, that the judge found that the oral agreement between the parties when they acquired the property was that they would hold it in equal shares. The words “in equal shares” are themselves words of severance. This means that from the very beginning, although these three were joint tenants in law, they were beneficial tenants in common in equity. The size of their shares was fixed by the agreement that they had made with one another that they were to be equal shares. What was relied on by Mr John Salmon as subsequent acts of severance are surplusage; the severance took place at the inception of their acquisition of the flat. In my judgment, the severance argument based on Burgess v Rawnsley does not add anything to the arguments available to Mr Salmon on this appeal.

The position, in my judgment, on the findings of the judge is that there existed, from the very moment that this property was acquired, a constructive trust arising out of the oral agreement that the judge found the three had made that they would hold this property in equal shares. On his findings of fact the judge was entitles to reject Mr John Salmon’s case that the beneficial interests were limited to the amounts of the cash contributions. The cash contributions, taken together with the fact that all three of them entered into the mortgage and were jointly liable to the building society to repay the loan, were consistent with the judge’s finding that there was an oral agreement that they would hold this flat in equal shares from the beginning.

I would deal now with another point made by Mr John Salmon by reference to authority. He cited the case of Carlton v Goodman [2002] 2 FLR 259 as an example of a case where a person did not necessarily acquire an equal beneficial interest in a property by reason of becoming a joint mortgagor of the property for the purposes of enabling money to be raised to purchase it. He said, as I have already indicated, that Miss Fairclough had never made a substantial contribution to the acquisition of this property; all that the two brothers wanted was her signature to the mortgage so that they could get money to buy the property for themselves. He emphasised again that Miss Fairclough had never, ever, lived in the property. Only the two brothers had lived there.

In my view, Carlton v Goodman does not assist Mr John Salmon. That was, on the facts of the case, a resulting trust case; that is, one where the trust arises, not by reason of an agreement between the parties, but by reason of the contributions that the parties have directly or indirectly made to the acquisition of the property. In this case, as Mr Hutchings rightly emphasised, there was a constructive trust. It could not be an express enforceable trust, because it was not in writing, but the Law of Property Act expressly provides that the fact that an agreement relating to property is not in writing does not prevent the existence of a constructive trust. So, this was a case where the beneficial interests arose from express oral agreement, not from the size of the contributions directly made by contributions to the deposit or indirectly made by participating in a mortgage financing the purchase of the property. In my view, Carlton v Goodman is a distinguishable case and does not assist the argument against the existence of equal beneficial shares.

Mr John Salmon’s next point was that he had an overriding interest in the property. He relied on Williams & Glyn’s Bank Ltd v Boland [1981] AC 487, saying that as he had an overriding interest – that is, his occupation of the property – he should not be ordered out of possession at the insistence of Miss Fairclough. I mention this point now only to deal with it briefly; overriding interests do not come into this case. Overriding interests are concerned with a situation in which a third party – that is, a mortgagee or transferee of the property – finds that someone is in occupation of it and the question arises as to whether their occupation is binding on the purchaser of the property. As Scott Baker LJ pointed out to the court in argument, and as Mr John Salmon agreed, this is a dispute between the co-owners. Third parties do not come into this case. No question arises about the binding nature of overriding interests on purchasers or mortgagees of property.

I deal next with the arguments that Mr John Salmon presented about the buying-out of Mr Richard Salmon’s interest. He said that their mother’s intention in making the loan of £11,000 was only that Mr John Salmon should benefit from the loan, not that both he and Miss Fairclough should benefit from the loan. It was, he said in his oral argument, natural to keep this property within the family. It was only natural that, if his brother Richard wished to sell his share, it should be sold to him alone and not to him and Miss Fairclough. So, he said, he was to become the beneficial owner of Mr Richard Salmon’s one-third share in the flat, in which he continued to live, but in which Miss Fairclough never live. The split in beneficial ownership should not be, as Miss Fairclough contends, fifty-fifty; it should be two-thirds to him and one-third to her.

It is clear from the documents referred to by the judge and by Mr Hutchings that the judge was entitled to find that, although Mrs Salmon may have thought that her loan was only to her son, legally there was a responsibility on both her son, Mr John Salmon, and Miss Fairclough to repay the loan. There was ample evidence before the judge to entitle him to conclude that an agreement was reached between Mr John Salmon and Miss Fairclough to that effect. I have taken note of Mrs Salmon’s letters expressing her view that she was only lending the money for her son to acquire her other son’s third share. But it is also clear from the pleadings, from evidence given by Miss Fairclough, and from some of the evidence given by Mr John Salmon himself at the trial, that the judge was entitled to conclude that both he and Miss Fairclough jointly assumed responsibility to repay the £11,000. In those circumstances the judge was right to conclude that, after Mr Richard Salmon was bought out, the flat was held by Miss Lynne Fairclough and Mr John Salmon as tenants in common in equal shares.

I come to the negotiations. It is now accepted, though it was originally contested by Mr John Salmon, that there was an offer and acceptance in relation to his buying out Miss Fairclough’s share in the flat. It is clear from the letters in the appellant’s bundle that an agreement was reached on the basis of a valuation of the leasehold interest of the flat at the time of the negotiations. The two letters, which evidence an agreement in writing, are the letter written by Miss Fairclough dated 24 March 1991 and the reply by Mr John Salmon of 27 March 1991, in which he acknowledges her letter and says that he is prepared to accept the two conditions which she stipulates in her letter, and says that he wishes to proceed quickly and would she forward a copy of the survey. That agreement, as I have already mentioned, was never performed.

Mr John Salmon had two points about the agreement. The first was that he said the judge was wrong in finding that the agreement in 1991 reinforced his analysis of what happened when Mr Richard Salmon was bought out in 1986. He said the figure agreed upon in 1991 did not, as the judge thought, reflect an agreement that they had equal shares. It was closer to them having shares one-third in Miss Fairclough and two-thirds in him. So he disputed the fifty-fifty split. In my judgment this is a hopeless point. It is clear from the documents that we have seen that the basis of the negotiations between the parties was that they would be entitled to a fifty-fifty split of the beneficial ownership. It is also clear that, in order to reach a compromise, Miss Fairclough was willing to accept a sum less than her strict fifty-fifty entitlement. That is clear from the letter which she wrote.

Mr John Salmon had a second point about the agreement. He said that Miss Fairclough should be held to the agreement of 1991. He said that that was a written agreement which ought to be treated as a constructive trust of the property in place of the original constructive trust arising from the oral agreement. He said she should not be allowed to revert to the original oral agreement, which the judge had found established on the evidence. In my view, this argument is unsound. As Mr Hutchings pointed out, there was no evidence that Mr John Salmon had in any way relied upon the agreement reached in 1991, in circumstances that were apt to create a constructive trust. There was no reliance, let alone detrimental reliance, that gave rise to a constructive trust in equity. Also, as was pointed out by Mr Hutchings, the agreement was, in any event, void for want of compliance with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. I reject the argument that in some way the original constructive trust, which arose on the acquisition of the property in 1985, had been displaced by a new constructive trust, giving Miss Fairclough a smaller interest under the terms of the agreement than she received under the terms of the original constructive trust.

I move to the acquisition of the freehold. In my view, this has nothing to do with the issues in this case. Mr John Salmon submitted that the acquisition of the freehold brought about a severance of the interests in equity, so that they became beneficial tenants in common then. I have already disposed of that point. I have made it clear that these parties were beneficial tenants in common from the very moment that they acquired the property, and subsequent acts of severance could not arise; they were superfluous, and could have no effect on the size of their beneficial interests. The only possible relevance of the acquisition of the freehold interest in 144 Wellesley Road is in relation to a claim that Miss Fairclough has never made. As I pointed out to Mr John Salmon during argument, the law laid down in this court, in the case of Protheroe v Protheroe [1968] 1 WLR, 519, is that, if a person who holds a leasehold as a trustee gets in the freehold reversion, then the freehold reversion belongs to the trust and cannot be taken by the trustee as property for himself. That principle has been affirmed in later cases. I only mention it in order to say that it is irrelevant to the issues in this case, because Miss Fairclough has never advanced a claim that she was entitled to any interest in the freehold reversion to this flat, and even if she were to do so now, it is too late. The freehold reversion point is of no assistance to Mr John Salmon’s case. It is of no assistance or relevance to the claims that have been advanced by Miss Fairclough.

In my view, the legal principles which govern this case are well-established by the authorities cited by Mr Hutchings. They are these. Miss Fairclough is entitled to rely on the express oral agreement that was made between the parties when the property was acquired. She is entitled to rely on the express or inferred common intentions that have been acted and relied upon by these parties and on their relevant conduct, in order to establish the existence of a constructive trust affecting property acquired by the three of them, and the extent of their beneficial interests in it. This principle was established in order to prevent one party from denying another party’s beneficial interest in the property, where it would be inequitable or unconscionable to do so. As to the findings of primary fact the judge was entitled, contrary to what has been submitted to us by Mr John Salmon, to prefer the oral evidence given by Miss Fairclough when there was a conflict between her evidence and that of Mr John Salmon about the terms agreed between the parties when the flat was purchased, and as to what was agreed between them when Mr Richard Salmon’s interest was bought out.

To put the matter beyond all doubt, I would summarise the legal position in this case, applying the legal principles which I have mentioned to the facts which the judge has found. Firstly, the legal title to the flat was held by Mr John Salmon, Mr Richard Salmon and Miss Fairclough upon trust for themselves in equal shares. They made roughly equal contributions to it, in accordance with the oral agreement that they had made. They were equally liable to the building society on the mortgage that was raised on the property to finance its purchase. They were all investing in this flat.

Secondly, Mr Richard Salmon was bought out in 1987 using the money lent by his mother for that purpose. The effect of his being bought out was that he ceased to have a one-third beneficial interest in the flat. His one-third beneficial interest was acquired not just by Mr John Salmon, but also by Miss Fairclough, with the help of the £11,000 loan made by Mrs Salmon for that purpose. The £11,000 was one third of the value of the equity in the flat at that time. There was evidence from the documents, from the pleadings, and from the evidence, and from Miss Fairclough herself, from which it could be found that Miss Fairclough and Mr John Salmon agreed that they would acquire Mr Richard Salmon’s share and that they would be jointly responsible for repaying the loam to Mr Salmon. This meant that from then on the flat was held by Mr John Salmon and Miss Fairclough on trust for themselves in equal shares as tenants in common.

Thirdly, the position in respect of equal beneficial ownership of the flat between those parties was acknowledged by, but not altered by, the written agreement reached in March 1991, which was never implemented by Mr Salmon but was not relied on him either. That agreement was that he would buy out Miss Fairclough’s share at half the valuation of the flat, taking into account the discount I have mentioned. That agreement did not give rise to any alteration in the beneficial interests and no new constructive trust arose from it. The agreement was reached between them simply to give effect to the termination of the trust which had existed since the flat was acquired.

Fourthly, and finally, nothing that has happened since then has varied the terms of the trust arising on the acquisition of the flat. The acquisition of the freehold did not vary or terminate the trust which affected the leasehold interest. The most that could be argued, as I have mentioned, is that the freehold interest acquired by Mr John Salmon was held on trust for Miss Fairclough, but no such claim has been advanced.

I should mention finally that Mr John Salmon has made claims before the judge, repeated in this court, that the beneficial interests are affected by the amount of time, labour and expense which he has put into the maintenance and refurbishment of the flat. As pointed out by Mr Hutchings, however, most of the documentary evidence relating to expenditure concerns what was done after these proceedings started and not before. The judge took that expenditure into account, quantified it at £12,000, and Miss Fairclough is willing that £6,000 should be debited to her interest in the flat in recognition of the refurbishment that was done. The expenditure does not, however, affect the size of the beneficial interests.

For all these reasons I would refuse permission to appeal in this case. I do not think there is any real prospect of this appeal succeeding. Far from being wrong, the judge’s order was right. There was ample evidence to support his findings of fact. He correctly applied equitable principles to determine the rights and interests of the parties. I would refuse permission to appeal. The appeal is dismissed.

LORD JUSTICE SCOTT BAKER: I agree.

SIR CHARLES MANTELL: I also agree.