When statute meets equity

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Legal This report examines the first case that tests whether section 2 of the Law of Property Act 1989 negates an oral conveyancing agreement that would otherwise be valid under the doctrine of proprietary estoppel

Since the Law of Property (Miscellaneous Provisions) Act 1989 came into force, practitioners and lay people alike have been able to enter into contracts for the sale or other kind of disposal of land with virtual certainty as to the formalities required.

Some questions have inevitably arisen as to the proper interpretation of section 2 of the 1989 Act. For instance, can a course of correspondence ever be said to 'be made in writing and ... incorporating all the terms that the parties have expressly agreed'? Generally, however, the introduction of the section has clarified which factors validate any given contract – that is, when written agreements are considered.

Until recently, no court has considered the question whether section 2 prevents an oral agreement for the conveyance of land from being effective where the facts would otherwise give rise to an interest by virtue of the doctrine of proprietary estoppel.

While section 2 of the 1989 Act expressly states that it does not apply to, among other things, the creation or operation of constructive trusts, it does not refer either expressly or by reference to section 54 of the Law of Property Act 1925 to interests arising under the doctrine of proprietary estoppel.

The proprietary estoppel argument

The Court of Appeal has now considered this question in the case of Yaxley v Gotts (1990, 66201, Court of Appeal, 24 June 1999).

In that case, the claimant had in the county court established an interest by proprietary estoppel in the following way. Yaxley was a self-employed builder. He attempted to persuade Gotts senior, a friend, to lend him money for the purchase of a residential building converted into flats.

Gotts senior declined to make the loan, preferring, he said, to buy the building himself, but agreed that Yaxley would have the ground floor of the building for himself in return for renovating the other flats and managing the building for him.

In fact, the building was conveyed into the name of Gotts junior, without the knowledge of Yaxley, although Gotts junior was at the time aware of the terms of the agreement between his father and Yaxley.

Yaxley, in accordance with the agreement, renovated the other flats at a cost of about £10,000, and collected rents for all the flats. He paid these to Gotts senior, who then returned a proportion of the rents to Yaxley in respect of the ground floor flats.

Then Yaxley and Gotts senior fell out. Gotts senior excluded him from the building and Yaxley commenced proceedings.

The judge, whose findings on this point were not wholly clear, appeared to find that there was an oral agreement between Gotts senior and Yaxley – which Gotts junior was either aware of or party to – which gave rise to an equity to the extent of Yaxley's ownership of the ground floor. Gotts junior was directed to execute a lease in Yaxley's favour or to pay him an equivalent purchase price.

Their lordships determined [in Yaxley v Gotts] that entitlement to relief under the doctrine of proprietary estoppel was not necessarily invalidated by section 2 of the 1989 Act

Appeal to void agreement under section 2

The Gotts appealed on the basis that the oral agreement between the parties was void under section 2 of the Law of Property (Miscellaneous Provision) Act 1989, and that the judge was wrong to hold that Yaxley was entitled to ownership of the ground floor by virtue of the doctrine of proprietary estoppel. They claimed that the doctrine could not validate an agreement rendered void by section 2 of the 1989 Act.

Counsel for the appellants relied heavily upon the principle referred to in Halsbury's laws (4th edition) vol 16, paragraph 962, that 'the doctrine of estoppel may not be invoked to render valid a transaction that the legislature has, on grounds of general public policy, enacted is to be invalid'.

Support for this proposition was provided, it was submitted, from the 'tentative conclusion' in Goff & Jones (referred to by Lord Justice Robert Walker as 'a textbook of high authority'), that 'even if the purchaser can demonstrate that the vendor's conduct was so unconscionable that it would be inequitable for him to rely on the absence of writing, to order the conveyance of, or to declare him trustee of, the property is an inappropriate remedy in that it frustrates the policy underlying section 2(1) of the 1989 Act'.

The constructive trust connection

  Their lordships determined, however, that entitlement to relief under the doctrine of proprietary estoppel was not necessarily invalidated by section 2 of the 1989 Act.

One reason for this lies in the similarity of the doctrine of proprietary estoppel to the legal device of the constructive trust. In many cases, Lord Justice Robert Walker observed, the facts supporting a finding that a constructive trust arose equally supported a finding that the claimant has an entitlement under the proprietary estoppel.

It would be a nonsense if a finding on the constructive trust basis could result in the grant of a proprietary remedy to the claimant, where a finding on the proprietary estoppel basis could not.

Their lordships further concluded that on the facts of this case the grant of relief under the doctrine does not frustrate the policy underlying section 2(1) of the 1989 Act. In determining in any given case whether the underlying policy is frustrated, it would be necessary to consider the mischief at which the statute is directed.

The policy behind the section is outlined in the Law Commission Report which preceded the enactment of the 1989 Act. Lords Justice Bedlam and Clarke suggest that the report 'will be of the greatest possible assistance in deciding whether or not the principles of particular types of estoppel should be held contrary to the public policy underlying the Act'.

Since parliament had formed the view that the mischief at which the Act is aimed would not be encouraged by the imposition of a constructive trust, it must follow that the same should hold true of the doctrine of proprietary estoppel where the facts would equally well support a constructive trust.

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