What is a constructive trust?
Unfortunately, an all-encompassing definition is not possible, and constructive trusts have variously been criticised as “a vague dust-heap” and “a rag-bag of instances having little in common”.
Generally speaking, however, a constructive trust is a trust which is imposed by court order in circumstances where a person cannot in good conscience retain the full beneficial title to the property in question.
In other words, the court focuses on considerations of ‘unconscionability’ when deciding whether or not to impose a trust. If person A holds the legal title but it is unconscionable for them to do so, the court will declare they hold some/all of the property on trust for person B – and the court will do so regardless of the fact that person A never intended a trust to arise.
This is different to the two other main categories of trusts: express trusts and resulting trusts.
Express trusts are (as the name suggests) created by an express intention. The settlor of the trust either declares that the property is held for the benefit of others, or transfers the property to a third party to hold on trust for the benefit of others.
Resulting trusts involve a “presumption” that a trust exists by virtue of the nature of a transaction. A classic example being where person A provides the funds to purchase property but places the title in the name of person B. There is a presumed resulting trust that person B holds the property on trust for person A. (Note that there are relevant modifying/superseding statutes which apply now to the law of resulting trusts). But this presumption can be overcome by evidence to the contrary – for example that person A intended to gift the property to person B.
• Classic example: Muschinski v Dodds (1985) 160 CLR 583
Ms Muschinski and Mr Dodds sought to buy a property in Picton.
Ownership was agreed as tenants-in-common in equal shares.
Ms Muschinski contributed nearly the entire purchase price. Dodds in turn had indicated he would make ‘contributions’ and run the property as an arts and crafts centre.
Regrettably, Mr Dodds did not live up to his word.
Ms Muschinski had no claim for an express trust over Mr Dodds’ half share. Similarly, Ms Muschinski had no claim for a resulting trust over Mr Dodds’ half share – whilst she paid for it, is was clear that she intended that Mr Dodds keep that half share.
In the circumstances, however, it was held to be entirely unconscionable for Mr Dodds to retain the beneficial interest in that property.
A constructive trust was imposed in favour of Ms Muschinski, and Ms Muschinski could then ‘collapse’ the trust and have the property put her name.
• New case: Nguyen v Nguyen (2019) NSW ConvR ¶56-406
In 2001, a brother and sister entered an oral agreement to purchase a property in Terrigal.
The property was purchased purely in the brother’s name.
The brother contended ‘that the parties agreed, at the time of its purchase, that he would be both the legal and beneficial owner of the Terrigal Property and that, after the purchase, he would rent the property to his sister for $250 per week’.
The sister, on the other hand, contended that they’d agreed (via joint venture) that the property would be in her brother’s name but that they would both have a joint beneficial interest in the property (i.e. Mr Nguyen would hold Ms Nguyen’s share on trust).
In the alternative, she maintained that even if the court did not agree with this approach, that the court should declare she has a beneficial interest under a trust to the extent of her mortgage repayment. Her final alternative was that she would have a 40% beneficial interest in the property as the parties had mutually agreed in a 2003 agreement.
Ms Nguyen paid the deposit, stamp duty and associated fees, and was a co-borrower under the loan and made significant contributions towards its repayment. She furthermore paid the rates and undertook renovations.
Mr Nguyen’s argument that his sister was a mere tenant was firmly rejected by Slattery J. Tenants do not act the way Ms Nguyen did, and His Honour also noticed it was interesting that Mr Nguyen did not declare the payments his sister made as ‘rent’ for the purposes of his tax returns.
Mr Nguyen’s account was accordingly rejected.
Ms Nguyen claimed her trust interest was that of a constructive trust, or alternatively a resulting trust.
His Honour Slattery J held that Ms Nguyen did have a constructive trust claim, and whilst it was not then necessary to determine, His Honour held that Ms Nguyen would also have succeeded on her resulting trust claim.
His Honour further held that the parties did indeed vary the initial 50:50 agreement to 60:40 (Ms Nguyen’s share being the latter) in 2003. Accordingly, Ms Nguyen’s trust interest was declared as being 40% of the property.
If you or someone you know have a property law matter and require expert legal advice, contact Maclarens Lawyers on 98623777.