Court of Appeal considers issues of indefeasibility, knowledge of trusts and volunteers

Zekry v Zekry [2020] VSCA 336

Introduction

This decision concerns a claim made by a son for declaratory relief with respect to an alleged equitable interest under a constructive trust in two properties (‘Hampton Park’ and ‘Roxburgh Park’) registered in his mother’s name. The decision contains a useful refresher of the principles applicable to common intention and joint venture constructive trusts.  It also addresses the interesting and important questions of:

1. an equitable beneficiary’s rights against a transferee of the property and the impact of the transferee being aware of, if not acknowledging, the trust; and
2. the law surrounding indefeasibility and volunteers.

The facts

The respondent mother and the appellant’s father, Samir, married in Egypt, where the appellant was born in 1971. The family arrived in Australia in 1986 and maintained a traditional Egyptian household in which Samir was the primary income-earner and the respondent cared for the family’s children.

The appellant ran a business with the appellant’s father selling new and refurbished power tools. In 2003, the appellant’s father purchased Hampton Park. It was the appellant’s evidence that he and his father both contributed to the purchase of Hampton Park for the purposes of running their business and using the property as storage. It was also the appellant’s evidence that a number of other properties were purchased in the intervening years by his father (also contributed to by him) as investments.

In 2017, following the father’s passing, the respondent purchased Roxburgh Park in order to live closer to her mother. Shortly prior to the purchase, and while the father was still alive, Hampton Park was transferred to the respondent. The appellant’s evidence was that the transfer occurred solely to improve the respondent’s creditworthiness and that there was a verbal agreement to transfer Hampton Park back to the appellant after settlement. The appellant also gave evidence that Roxburgh Park was funded from the proceeds of sale of the other properties that the appellant and the father owner together. The appellant’s father passed away shortly after the transfer and the parties fell into dispute.

Arguments and first instance decision

The appellant’s arguments as to the trust relationship between the parties was somewhat convoluted. He argued, both at first instance and on appeal, that there was originally a common intention between him and his father that his father would hold Hampton Park on trust for both of them in equal shares. He then argued that, at the time that Hampton Park was transferred to the respondent and the Respondent purchased Roxburgh Park, each of the respondent, the appellant and the father shared an intention that the appellant would reside in and own Hampton Park beneficially and that the respondent would own and live in Roxburgh Park.

To prove his financial contributions to the various properties in support of the alleged trust, the appellant tendered bank records purportedly evidencing payment of deposits and mortgage repayments. At first instance, however, McMillan J held that the evidence relied on by the appellant was insufficient to prove the trust relationship. Her Honour noted that the appellant did not produce any invoices, receipts, loan documents, tax records or other materials necessary to prove the relationship with his father and investments made. Further, her Honour held that the bank statements were not of any probative value by themselves because they failed to demonstrate any intention or joint endeavour.

Constructive trusts – principles

On appeal, the Court (in a joint decision of Tate, Kyrou and Niall JJA) revisited the well-known principles regarding common intention and joint venture constructive trusts. As to the former, the Court affirmed the test set out by the trial judge as requiring a claimant to prove the following:

1. an actual or inferred common intention of the parties as to the claimant’s beneficial interest in a property;
2. detrimental reliance on that common intention by the claimant; and
3. that it would be an equitable fraud on the claimant to deny his or her interest in the property.

As to the latter, the Court repeated the principles set out by the High Court in Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137 as requiring, broadly, a “pooling of resources in pursuit of a common endeavour, which comes to an end at a point where contributions do not reflect the legal title”. The principles applicable to both trusts are, now, well settled.

In terms of assessing on appeal the facts found by the trial judge, the Court considered itself entitled to conduct a “full review of the evidence given at first instance” and to reach its own view as to the facts and conclusions to draw from it. As always, the Court considered that it must take into account the advantages enjoyed by the trial judge in evaluating the credibility of witnesses, but not with respect to the inference to be drawn from the facts found.

Decision on appeal and issues with indefeasibility

The Court disagreed with the findings of the trial judge that the evidence did not support a trust relationship. In particular, the Court accepted the appellant’s evidence that he and his father were engaged in a joint endeavour with respect to the acquisition, improvement and use of Hampton Park (and another property).  The Court also accepted that it would have been unconscionable for the father, while he was the registered proprietor, to assert complete equitable ownership in respect of that property. This conclusion was reached having regard to the circumstances which surrounded the purchase of those properties, the fact of the father’s sole ownership, and the bank statements – which the Court accepted evidenced regular contributions to the properties and could be inferred as being for the purposes of the joint venture and of probative value accordingly. The Court did not accept that the evidence proved a trust with respect to Roxburgh Park and two other preceding properties which were canvassed in the proceeding.

Having found that Hampton Park was held by the appellant’s father on trust for the appellant (as to 50%), the Court was required to consider the consequence of Hampton Park being transferred to the respondent in 2017. As the registered proprietor of Hampton Park, the respondent holds the property free from any unregistered interests under s 42 of the Transfer of Land Act 1958 (Vic) (this not being a case where fraud was pleaded). In those circumstances, the Court was required to find a means by which the respondent’s title might be affected by the previous interest, noting also that this was not a case of knowing receipt of trust property (with Barnes v Addy not, as a rule, applying to interests in land).

In holding the respondent bound, the Court accepted a line of principle deriving from Bahr v Nicolay (1988) 164 CLR 604 by which a registered proprietor can be bound by a constructive trust through “some form of acknowledgement of the unregistered interests, or an agreement or undertaking to act in accordance with it, from which the registered proprietor later resiles”. The Court held in this respect that the context in which a person becomes registered proprietor, including whether he or she did so as a volunteer, will be relevant to an assessment of whether a subsequent denial of an earlier interest would be unconscionable. Here, because the respondent was at least generally aware of the appellant’s and father’s joint venture; because she took the benefit of the agreement (in order to be able to acquire Roxburgh Park); and because there was nothing to suggest that the transfer of legal title in Hampton Park was intended to affect or alter the existing beneficial ownership, the Court held that it was unconscionable for the respondent to retain Hampton Park without accounting to the appellant for his 50% share.

Points of note

There are two points of legal significance arising from this decision. The first is the circumstances in which a subsequent owner, otherwise enjoying indefeasible title, might take title subject to an earlier equitable interest even without an express acknowledgement of that interest. The Court appears to have been minded to adopt a holistic and ‘conscience-based’ examination of the circumstances in which the respondent took title to Hampton Park and, despite finding no express acknowledgment of the appellant’s interest, was prepared to find that the respondent was aware of it and was bound by it. This is, at the very least, a ‘soft’ expansion of the rights of equitable interest holders as against subsequent legal owners and the doctrine considered by the High Court in Bahr v Nicolay (1988) 164 CLR 604, which was a case where there was an express and written acknowledgement of the earlier interest.

The second point of legal significance is that the despite the Court of Appeal’s comments about the “relevance” of the subsequent owner being a volunteer in assessing whether his or her conscience is bound, the Court appeared to depart from the rule previously accepted in Victoria in King v Smail [1958] VR 273, affirmed in Rasmussen v Rasmussen [1995] 1 VR 613 (and in many first instance decisions since), that volunteers take title subject to prior equities in the land. In doing so, the Court (implicitly) endorsed the NSW position in Bogdanovic v Koteff (1988) 12 NSWLR 472 and (expressly) the obiter by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [198] that indefeasibility attaches to land, whether or not the titleholder is a volunteer or acquired the property for value (with or without notice). Interestingly, the Court did not explain the rationale for the change or appear to acknowledge the existing conflict in the law, or the apparent change it effected – but, it being a clear statement of principle, it will likely have significant implications for those seeking to assert claims against subsequent volunteer owners in Victoria in the future.