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The only effective remedy for the fraud is to recognise a trust in favour of the sister, which the sister can enforce.
The previous paragraph shows how the constructive trust avoids privity problems:
normally only parties to agreements can rely on them. This should not concern us too much, as express trusts already constitute an exception to privity. If Andy transfers property to Brian on an express written trust for Carla, it has been clear from the incep-tion of trust law that Carla is able to claim under the trust.
It is sometimes argued that, absent any express written trust, it would be preferable for the third party to claim under the Contracts (Rights of Third Parties) Act 1999. It will be recalled that this Act enables third parties to enforce contract terms which are intended to be enforceable by them. It seems probable that a promise which gives rise to a con-structive trust will also trigger the 1999 Act (and vice versa). However, it remains neces-sary to rely on the constructive trust if there is no enforceable contract between transferor and transferee (most obviously because of lack of formalities).
So far, we have considered who can sue. Two other difficult questions will be con-sidered in Chapter 15, when we look at the use of constructive trusts to give effect to licences to use land. The first question relates to the nature of the promise by the purchaser. We will see that a promise to buy ‘subject to’ the rights of a third party does not necessarily mean that the purchaser promises to honour those rights. The second is whether the third party obtains a proprietary interest in the land.
The family home
The use of constructive trusts in the family home setting forms a large part of Chapter 9.
In this section, we will outline a simple example of how the constructive trust operates.
Let us suppose that Anna and Barry set up home together. They buy a house, Barry pro-viding £50,000, Anna £20,000 and a mortgage loan the remaining £180,000. There is a clear oral agreement between them that the legal title will be put in Anna’s name (she deals with most of their financial affairs), but that it is to be held on trust for both of them equally.
The courts will hold that there is a constructive trust to give effect to their common intention: it would be unconscionable for Anna to deny Barry any share after he has acted to his detriment by contributing to the purchase. This is different from the constructive trust categories considered above as the transferor (the person who sells to Anna) has not the slightest interest in who the beneficial owners should be. Resulting trust principles might seem relevant as regards Barry’s £50,000, but they would give Barry a share proportionate to his contribution. This is not what Anna and Barry intend, so we use a constructive trust to give them equal shares.
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The reasons for formality rulesThis chapter is full of details of writing and deeds requirements. We need to be clear why we have such rules. The background position is that formalities are not generally required
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by common law or equity. Contracts can be entered into (or varied) orally and property can be sold or given away without writing. It makes no difference how valuable the contract or object is. If I were to own a £500,000 yacht, I could make a present of it (or contract to sell it) without any need for writing.
There are good reasons for requiring deeds for land transfers: for example, they pro-vide certainty as to what is intended and limit the danger of entering into important transactions without giving them real thought. However, it must be remembered that formality requirements are themselves capable of causing injustice. Suppose that Rani is unaware of the law and simply signs a document transferring a house to her friend, Stephen, as a gift. Stephen takes possession of the house and begins to update the wiring and plumbing. A year later they quarrel and Rani seeks the return of the land on the basis that, without a deed, there was no effective transfer. If she succeeds, Stephen loses the house he has and the money spent in improving it. Does the injustice he suffers outweigh the benefits that the formality rules are intended to produce? In severe cases, the courts may be able to neutralise such unfortunate effects of formalities. For example, Stephen may well be able to rely on estoppel. This makes formality rules more acceptable, but it inevitably leads to greater complications in the law and uncertainty as to exactly when the courts will intervene.
Especially because formality rules can themselves cause problems, it is important to understand why they are thought to play a useful role. We now turn to the arguments most commonly advanced.
Justifications Avoiding fraud
The origins of our present rules lie in the Statute of Frauds 1677. The fraud contemplated is the false assertion that a transfer has been made or an obligation undertaken. In the above example this would be fraud by Stephen, if he had asserted a transfer by Rani which in fact had never taken place. If we require writing, then this risk is taken away (at least unless Stephen forged the document). Yet when the modern cases refer to fraud, it is usually the fraud of the person who tries to avoid an obligation by relying on failure to comply with formality requirements (fraud by Rani). There is little evidence in the modern law that obligations or dispositions are fraudulently asserted on a regular basis.
Property other than land can be sold orally and given away by simply handing it over:
there are few cases where sales or gifts have been fraudulently asserted.
The evidential function
Writing provides the best evidence of what the parties have agreed. The benefits of this are not limited to cases of fraud. There may be genuine uncertainty as to whether the parties had reached final agreement in a sale of land. Furthermore, the terms of an oral agreement or trust are likely to be shrouded in uncertainty. Putting them in writing will clarify exactly what was intended.
Consider an everyday contract for the sale of land. Without writing, the parties may be at odds as to when completion will take place, whether certain objects (whether or
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not fixtures) are included in the sale and whether the seller will be allowed to store surplus furniture on the land for a short period after sale.
The cautionary function
Many people believe, quite wrongly, that no liability can be incurred without writing.
This can lead to their undertaking obligations without much thought. Writing cannot guarantee that an appropriate amount of thought is devoted to the issue, but it helps to ensure that individuals appreciate that they are committing themselves. This becomes even stronger when we consider the requirements of deeds. The extra formality required (in particular, the need for a witness) renders it less likely that an obligation will be
‘accidentally’ undertaken. Indeed, it makes it more likely that a lawyer will be consulted, as the average person will not know how to create a deed. Having a lawyer limits the dangers of obligations being entered into without appreciating the consequences.
The channelling function
Formality requirements can help to ensure that the appropriate forms are used. This is most likely to apply if lawyers (or other professionals) are brought into the transaction.
Where standard forms are used, they are unlikely to be ambiguous and they will cover all the common questions and problems that may arise from the transaction. Non-lawyers are, in contrast, likely to use wording which is difficult to interpret or include technical legal terms without understanding their significance. Formality rules cannot force people to use lawyers (nor should they), but there are good reasons to encourage people to take professional advice in suitable cases.
Contracts to sell land provide a good example. Lawyers invariably use a standard form of contract which sets out to deal with the many problems that may arise on the sale of land. These cover a host of circumstances that the buyer and seller are unlikely to think about, including detailed timescales and procedures for completion. Using a standard form enables the lawyers to concentrate on special factors which the parties have agreed (for example, that the seller is able to remove rose bushes of sentimental value).
Are the justifications convincing?
Most of these justifications are persuasive: they are not silly points. Whether they are suf-ficiently convincing to justify our formality rules is another matter. Even when formality rules are not complied with, it is common for there to be no doubt that an obligation has been undertaken and what its terms are. This does not protect it from failure. As we have seen, many cases have revealed that formality rules are used to get out of disposi-tions and obligadisposi-tions that have been deliberately undertaken.
The system works because the courts are prepared to use constructive trusts and estoppels to avoid the worst effects of the formality rules. It may be thought unfortunate that the courts have had to develop these principles without any guidance from the legislation establishing formality requirements. This has led to much uncertainty and litigation as to exactly when the courts will intervene.
A more specific question is whether we can justify having special rules for land trans-actions: the justifications above are not couched in terms specific to land. One point is that land transactions are inherently complex, partly because more varied interests can
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exist in land than in other forms of property. This means that several of the justifications carry greater force as regards land.
A second point is that, for many individuals, their home is their most important asset (both financially and as regards its role in their lives). The cautionary function, in par-ticular, is very important in this respect. It may be true that some yachts and diamonds can be worth more than many small houses, but it would be wrong to overlook the significance of land, especially as a home.
A third point is that many land transactions can be undertaken without their being obvious from the land itself. In contrast, most sales and gifts of other objects are accom-panied by a change in possession of the objects. Especially where no change in posses-sion is involved (the wide range of interests in land makes this quite common), we can justify looking for some degree of corroboration from writing.
A final and rather different point is that modern land law is based on the entry of dis-positions and contracts on the register. This would be far more difficult to operate if trans-actions could be entered into orally: how could the land registry be sure that an interest is valid? We shall see in the following section that formalities are being overtaken by electronic entries on the register. As the registration system applies only to land, it inevitably follows that these new electronic ways of creating and dealing with interests are unique to land.
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Electronic conveyancingThe law on land registration was reformed by the Land Registration Act 2002, which will be studied in Chapter 10. A significant element of the reforms lies in the intro-duction of electronic registration (e-conveyancing). The new rules will apply to most land transactions: the word ‘conveyancing’ gives a misleadingly narrow impression.
Generally, this book contains little about the mechanics of how land is sold. Nevertheless, e-conveyancing will have a significant and growing impact on the rules discussed in this chapter. Indeed, it will be seen that most of them will simply disappear and the remain-der will apply only infrequently.
Before explaining what e-conveyancing involves, it is helpful to understand the current methods of transferring registered land. Suppose Vera is selling her house to William. At completion, Vera will execute a transfer of the land to William, who takes possession. William will send the transfer to the land registry to be registered. Once the land registry has checked that all is in order (it frequently isn’t), William will be registered as proprietor. Only at that stage does William obtain the legal title.
Under e-conveyancing, there will be no transfer document and no application to the land registry. Instead, Vera’s solicitor will directly instruct the land registry’s computer to enter William as the new proprietor (as we describe the holder of the registered title). A press on the return button of a computer will replace all the pre-2002 stages.
E-conveyancing is designed to speed and simplify the conveyancing process in a com-puterised age. It brings several welcome consequences, one being that it obliterates the
‘registration gap’ between completion and registration – this gap can at present cause real problems for purchasers.
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E-conveyancing represents a radical change in how conveyancing is conducted and how the registration system operates. It was described by the Law Commission as a
‘Conveyancing Revolution’.14Registered titles have been held in computerised forms for several years. By visiting the land registry website15 and entering your postcode you can see whether your home is registered. If it is (over 90 per cent are), then you can get a copy of the register for £4. However, implementation of the new scheme has required many changes to existing practices. One example is that technical flaws in document-ation are frequently discovered when a purchaser seeks to register a transfer. In future, problems will have to be sorted out in advance of completion.
If the seller’s solicitor will be changing ownership on the register, warning bells should be sounding regarding potential mistake or fraud. To limit the dangers, access to the register will be limited to members of the new land registry network, which all solicitors conveying land will need to join. Security controls will ensure that others cannot gain access. The details of internet security lie outside the scope of the present book, though one point might be noted. Those using e-conveyancing will need to have electronic sig-natures (a secure way of confirming the identity of the sender). Very few individuals have electronic signatures, which is why so much reliance is placed on the role of professional conveyancers.
In the years immediately after the 2002 Act, the initial stages consisted of designing the system, educating the legal profession and setting up the network. Pilot schemes are being undertaken before the system is rolled out nationally. Furthermore, there will be no single ‘big-bang’ commencement. The land registry has already introduced online facilities for a few specific transactions (discharge of repaid mortgages, for example), with a significant extension to electronic mortgages (e-charges) in 2009. As of 2009, it is anticipated that electronic transfers will be introduced in 2010 or 2011.
The long lead-time between the legislation in 2002 and the operation of e-conveyancing is one reason why the 2002 Act provides little detail. It is natural that procedures will evolve in the light of experience. At present, we can do little more than sketch the general outlines of the scheme: future statutory instruments will spell out more detail.
We can now turn to the three crucial statutory provisions.
Electronic Communications Act 2000
This legislation covers a very wide sphere of activities, of which land transactions form a small part. Section 8 will enable transactions to be carried out electronically, replacing requirements such as writing. A statutory instrument is planned to activate section 8 for contracts for the sale of land. This will remove the normal writing requirements imposed by the 1989 Act. The new electronic contract must have the electronic signature of each of the parties (or that of their lawyers) and contain all the terms of the contract.
It is rather odd that we have section 8 operating alongside the LRA provisions dis-cussed below; it would be more convenient to have all the e-conveyancing provisions
14 The title of Law Com No 271. The proposals are summarised in paras 2.41–2.68 and discussed in Part XIII.
15 http://www.landreg.gov.uk/
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together. It seems to be explained on the basis that section 8 (unlike LRA) applies to both registered and unregistered land.
Land Registration Act, section 91
Section 91 is the provision under which all other e-conveyancing will be introduced. It permits dispositions to be undertaken in electronic form, with electronic signatures being effective in the place of written signatures. The word ‘dispositions’ is broad, though it seems not to include contracts (hence the need for section 8 of the 2000 Act).
Section 91 will apply to such dispositions specified by a future statutory instrument, so we cannot be sure what will be covered. Most obviously, it will apply to charges and transfers of registered land. The creation of any kind of interest is a disposition, but in the early years e-conveyancing is most likely to apply to charges, transfers and leases. When a disposition is undertaken in electronic form, the normal requirements of writing and deeds become unnecessary. Here we begin to see the impact on the rules discussed earlier in this chapter: they become optional rather than compulsory for transactions to which e-conveyancing applies.
It was observed above that e-conveyancing will operate (as regards transfers) so as to pass ownership to the purchaser directly. This achieves more than replacing the present deed of transfer: the register is simultaneously changed so that the buyer is the registered proprietor. It may be best seen as a tripartite transaction involving buyer, seller and land registry. This is not obvious from the wording of section 91, which concentrates on making the electronic disposition as good as if it were by deed.
What happens if a solicitor (a member of the network) does not have authority to enter into a transaction? Suppose, for example, that a seller decides to pull out of a sale and informs his lawyer of this. The lawyer overlooks this and continues with the sale.
The example becomes more realistic if we add that the seller leaves the country for two months and cannot be contacted whilst abroad. The answer is that the 2002 Act confers full authority on the solicitor:16 the seller loses the land, though he could sue the solicitor. The reason for this is that the solicitor’s authority often could not be proved without writing and it is thought to be inconsistent with an e-conveyancing system for the purchaser to insist on seeing writing.
Indeed, the same protection applies even if the solicitor had never been instructed at all. Suppose that Mary is a registered proprietor who has rented land out and lives abroad; she has never wanted to sell. Norman plans to benefit from a fraud whereby the land is sold to Olive and the purchase money is diverted to him. He forges a letter of authorisation by Mary, asking her solicitor to transfer the land to Olive and pay the pro-ceeds to Norman. The letter requests the solicitor to direct any enquiries to Norman as Mary is abroad. The solicitor is taken in by this forged authorisation and in due course there is an electronic transfer to Olive, who is unaware of the fraud. Mary loses the land and has to be satisfied with compensation. This might be thought to be taking matters too far in the purchaser’s favour.
16 LRA, Sched 5, para 8.
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Land Registration Act 2002, section 93
The above provisions establish e-conveyancing as an option for those dealing with land.
However, it is intended that e-conveyancing shall become the only way of dealing with land. This is authorised by section 93, but it will not be implemented until e-conveyancing has become established, solicitors are used to operating it and any flaws in the system have been ironed out.
One form of compulsion may operate quite early: the network agreements entered into by solicitors may require all transactions to be undertaken electronically. This compulsion would operate, therefore, on solicitors rather than directly on landowners.
However, because nearly all land transactions are carried out by solicitors it would be effective to ensure that the great majority of transactions are carried out electronically.
The other and more formal compulsion will derive from LRA section 93. This provides that a disposition or contract ‘only has effect’ if created electronically and is communi-cated electronically to the land registry. There are three issues to consider: the scope of section 93, the effect of failure to use e-conveyancing and the effect of e-conveyancing on formality and other land law rules.
The scope of section 93
An initial point is that, unlike section 91, section 93 applies to contracts as well as dis-positions. As with section 91, a statutory instrument will identify exactly what is covered.
The list of interests will be especially crucial for section 93. It is easy to say that a trans-action may be undertaken electronically (section 91), but quite different to say that it must be so undertaken (section 93). Suppose the scope of electronic e-conveyancing is (eventually) set very wide. As regards section 91, this causes almost no problems should few people choose to use it for a particular type of transaction. However, failure to use e-conveyancing when section 93 applies is disastrous: we shall see that the transaction fails completely. Therefore, it would be both justified and sensible to specify a wider class of dispositions for section 91 than for section 93.
The legislation provides no clue as to what dispositions will be excluded from the operation of section 93. Just like e-conveyancing under section 91, it is likely to be intro-duced in phases, so that only more straightforward dispositions are covered initially.
In time, however, the expectation is that e-conveyancing will be compulsory for virtually all dispositions. Accordingly, we pose the negative question: what will be excluded?
The Law Commission has made suggestions.17However, there may well be nearly 20 years between their suggestions and the eventual implementation of section 93. It follows that some significant changes are likely. They list four categories:
(1) Rights not requiring express grant These include rights by estoppel, implied and prescriptive easements and adverse possession. As no writing is required to create such rights, it would be utterly unrealistic to require them to be created electronically and unjust to render them invalid. Indeed, some of them are created by the court
17 Law Com No 254, para 11.12.