Charlotte John comments on the case of Gallarotti v Sebastianelli.
The Court of Appeal has recently considered the application of constructive trust principles to the scenario of a property purchase between friends. This is a common factual scenario and, whilst the judgment establishes no new point of trusts law, it is of interest as a guide to how the courts should approach the question of the beneficial ownership of property purchased between parties other than a couple cohabiting within a quasi-matrimonial/quasi-civil partnership relationship.
The parties had been friends since about 1988 and had previously lived together in a flat sharing arrangement. In 1997, they decided to pool their resources and to purchase a flat with the aid of a mortgage and a cash contribution from each of them. The total cost of acquisition was £188,287.44. Mr Sebastianelli made a cash contribution of £86,500.00 and Mr Gallarotti contributed £26,896.20. The property was transferred into Mr Sebastianelli’s sole name and he took out a mortgage for the balance of the purchase price. The Recorder at trial found that the parties had expressly agreed that they would each have a 50% interest in the flat, notwithstanding their unequal contributions, but that this agreement was qualified by a further agreement or rider. This further agreement provided that Mr Gallarotti would pay a larger proportion of the mortgage repayments. In the event, Mr Gallarotti did not make a larger proportion of the mortgage repayments; although he did make some other lesser payments for the parties’ joint benefit. The contributions that each party made, taking account of their cash contributions to the purchase price and Mr Sebastianelli’s mortgage repayments in the period April 2003 to September 2008, stood at approximately 75% on the part of Mr Sebastianelli and 25% on the part of Mr Gallarotti. The Recorder held at trial that the parties owned the property beneficially in equal shares, notwithstanding their unequal financial contributions.
The issue on appeal was whether or not the Recorder was right to conclude that the parties were beneficially entitled to the flat in equal shares. The Court of Appeal considered that this was essentially a question as to the proper inferences to be drawn from the evidence. Giving the lead judgment, Arden L.J concluded that the parties could not possibly have intended that the agreement as to equal shares should apply in circumstances where Mr Gallarotti had not made the promised contributions towards the mortgage. Whilst the Recorder was correct to proceed on the basis that, if there was an express agreement which applied in the circumstances which had arisen, the court would conclude that their beneficial interests were established by that agreement, the question still had to be asked as to whether or not the agreement applied in the events which had in fact occurred. Arden, L.J considered that the agreement reached, including the rider, indicated that the parties were concerned that their ultimate shares in the flat should, broadly speaking, represent their contributions to it. However, she considered that they did not intend that there should be any precise accounting exercise.
Accordingly, the Court of Appeal set aside the decision of the Recorder and substituted a finding that Mr Sebastianelli had a 75% share and Mr Gallarotti had a 25% share.
This case was decided upon constructive trust principles, whereby a trust arises by operation of law in circumstances where parties expressly, or through conduct, reach a common intention or agreement that beneficial ownership should be shared, but do not follow the necessary formalities to create an express trust of land, and where one of the parties relies to his or her detriment upon that agreement. Whereas only contributions to the acquisition of property will be taken into account in the case of a resulting trust, the common intention constructive trust allows the court to examine the conduct of the parties throughout their relationship. Arden L.J. comments that the constructive trust analysis is the more appropriate approach where the parties have incurred expenditure on the strength of their personal relationship and without an expectation of having to account for every item of expenditure, as they would have to do in the case of a true legal partnership. It was firmly established following the House of Lords decision in Stack v Dowden  UKHL 17 and the decision of the Supreme Court in Jones v Kernott  UKSC 53 that the respective financial contributions of the parties are only one consideration amongst many factors that may be relevant to determining their intentions as to beneficial ownership (see the non-exhaustive list set out by Baroness Hale at para. 69 of Stack v Dowden).
Prior to the decision in Jones v Kernott but after Stack v Dowden, Neuberger L.J. in Laskar v Laskar  EWCA Civ 347 (a joint names case) concluded that the presumption that beneficial ownership follows the legal title did not apply in the context of a property purchased between mother and daughter as an investment. In the absence of any express discussion concerning the shares that each party was to take, Neuberger L.J. considered it appropriate to fall back on a resulting trust type analysis in quantifying the parties’ respective beneficial interests in proportion to their contributions (albeit that he took account not only of the direct contributions at the time of acquisition but also of the ongoing mortgage payments). Neuberger L.J. declined to order a formal account to be taken of income and expenditure.
Whilst the Court of Appeal in Gallarotti considered that they were to apply constructive principles and did not suggest that they were applying a resulting trusts type approach to quantification, the case demonstrates, akin to the approach taken in Laskar, a readiness to focus on financial contributions in quantifying the beneficial interests of parties who are not in a familial relationship, but whose relationship falls short of a formal commercial arrangement.
In conclusion, both Gallarotti and Laskar indicate that, whilst a formal accounting exercise is likely to be eschewed in the context of property purchased between parties who are not formal business partners, financial contributions are likely to be the key consideration in quantifying the beneficial interests between parties who are not members of the same family unit.