(Court of Appeal; Pill, Moore-Bick and Etherton LJJ; 27 April 2009)
The property was in the joint names of the husband and wife. The property had been purchased for the wife to live in while the husband was working abroad, using a mortgage from the husband's employer plus joint funds from the sale of another property. When the employer went bust the husband signed a deed stating that the property belonged to the wife solely as her residence. Over 10 years later the claimant sued the husband for breach of contract, obtaining a freezing order against the husband. Subsequently, the husband and wife jointly obtained a mortgage, charging the property in order to obtain money for the husband's legal costs, and also for repairs to the property. The husband mistakenly believed that he could not fund his legal costs in any other way, because of the freezing order, and he communicated this mistaken understanding to the wife. The husband gave a personal covenant to support the mortgage. Later, the wife argued that she was the sole beneficial owner of the property, and that the husband had no interest in it; she repudiated the mortgage on the basis that it had been entered into on the basis of a misrepresentation by the husband, albeit an innocent one. The judge held the deed making the wife the sole beneficial owner had been valid, but that the act of charging the property had given rise to a constructive trust under which the husband and wife reverted to equal beneficial shares, notwithstanding the misrepresentation.
The judge had been entitled to conclude that there had been an agreement between the husband and wife that involved not only mortgaging the property, but also transferring to the husband half the beneficial interest in the property. The charging arrangement had involved substantial detriment to the husband, making him personally liable for the obligations and liabilities under the mortgage. Although the agreement had been made only because of the husband's innocent misrepresentation concerning the effect of the freezing order, the judge had been entitled, and correct, to find that a constructive trust arose in any event. The court would have refused rescission of the agreement, because it would not have been possible to restore the husband to the position he was in before execution of the mortgage. It would be an unusual case in which rescission for innocent misrepresentation would have been refused in respect of a concluded and binding agreement, but the same misrepresentation would be held to have prevented the creation of a common intention constructive trust.