England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT
MISS RECORDER MICHAELS QC

		Royal Courts of Justice Strand, London, WC2A 2LL
		03/07/2012

Lady Justice Arden:

1. In 1997, Mr Sebastianelli and Mr Gallarotti did what many single people do: they decided to buy a flat with the help of a mortgage and with each of them making a cash contribution. Mr Sebastianelli paid the larger share. The transfer was into Mr Sebastianelli's sole name, and he took out the mortgage for the balance of the price and proceeded to pay the mortgage repayments. Recorder Michaels found that Mr Sebastianelli and Mr Gallarotti expressly agreed that they would each have a 50% interest in the flat, notwithstanding their unequal contributions. The Recorder also found that this agreement was qualified by a further agreement, or rider. The parties made this when they realised that their contributions would be unequal. They agreed that Mr Gallarotti would pay a larger proportion of the mortgage repayments. However, on the Recorder's findings, this did not happen though Mr Gallarotti did make some other, lesser, payments for the parties' joint benefit.
2. Was the Recorder right to conclude that the parties were beneficially entitled to the flat in equal shares? That is the only issue on this appeal. It is essentially a question as to the proper inferences to be drawn from the evidence. We are not asked to decide any new question of substantive law. Nonetheless, this appeal may be of wide interest as the factual paradigm is not uncommon.
3. The starting point is to consider the background to the parties' agreement. Mr Sebastianelli and Mr Gallarotti's friendship went back to about 1988 and their friendship was a strong, platonic one. There were cultural and other ties. They were both Italian in origin, though Mr Sebastianelli's family then lived in Spain. Mr Sebastianelli and Mr Gallarotti had both come to London to make their careers here. They started to rent flats together. On one occasion Mr Sebastianelli took out the lease in his name alone. They both contributed to the outgoings of the flats they rented. They joined together for companionship, not because they wished to establish themselves as a family unit.
4. The acquisition of the flat to which this appeal relates was a natural step in their becoming more settled in London. No doubt both felt that it would be a sensible step to take. They agreed to buy the first floor flat at 122, Holland Park Avenue, London W11 4UA ("the Flat"). The price was attractive. The relevant figures for their contributions at the time of purchase were as follows. The total cost of acquisition was £188,287.44. Mr Sebastianelli and Mr Gallarotti made cash payments of £86,500 and £26,896.20 respectively. Mr Gallarotti agreed to postpone any interest he might have in the Flat to that of the mortgagee.
5. The parties did not execute a written declaration of trust as to the proportions in which they owned the Flat. Accordingly the parties did not comply with the legal requirements for creating a trust. The Recorder relied for her conclusions on a common intention constructive trust, that is, a trust arising by operation of law where parties agree that beneficial ownership should be held in a particular way but do not follow the formalities required by law and where one of the parties has suffered detriment in reliance on the agreement. In the case of a constructive trust, the court looks at the conduct of the parties throughout their relationship. It is not restricted, as it would be in the case of a resulting trust, to examining the contributions made to the acquisition. The common intention constructive trust is thus more flexible. It is also more appropriate where the parties have incurred expenditure on the strength of their personal relationship and without expectation of having to account, or to call for an account, of every item as they would have to do in the case of a true legal partnership.
6. In giving her reasons for the conclusion that the parties had equal shares in the Flat, the Recorder held that the onus of proof was on Mr Gallarotti. The Recorder held that the principles to be applied to a constructive trust were the same whether the parties were in a relationship such as that of husband and wife or were business associates, though the court might draw different inferences as to their conduct in the latter case. The Recorder held that "in the light of the close relationship between the parties when the Flat was purchased" the analysis to be carried out "is to be seen more in the domestic than in the commercial context" (Judgment, paragraph 106). I agree with all those points.
7. Nothing now turns on why the Flat was registered in Mr Sebastianelli's sole name. Neither party had a secure source of income. Mr Gallarotti had a series of jobs in the catering trade. He undertook a university course and developed an interest in acting. While Mr Sebastianelli was also not in regular paid employment there was a period when his mother, Mrs Rose Estrella, supplemented his income. This ceased on her death in 2008. Mr Sebastianelli had various financial ventures. At one point he and Mr Gallarotti were in business together producing songs written and performed by Mr Sebastianelli and others. Later they had a café business together. Their joint ventures came to an end when their friendship terminated in 2008.
8. There was a certain amount of informality in the way the parties met the outgoings of the Flat. They did not have a formal system for accounting between them to ensure that they each paid an equal share. It was on occasions a matter of convenience who paid what outgoing. During 2008, when Mr Sebastianelli's mother was terminally ill, and Mr Sebastianelli returned to Spain to be with her, Mr Gallarotti took steps to see that the outgoings were paid.
9. The autumn of 2008 also saw the end of the parties' great friendship. Following disagreements arising from their joint ventures, Mr Gallarotti was one evening excluded by Mr Sebastianelli from the Flat. Mr Sebastianelli wished to occupy it with his girlfriend. Mr Gallarotti has married and he now lives elsewhere. The value of the Flat now substantially exceeds the price paid at acquisition. Mr Gallarotti therefore brought proceedings to obtain a declaration as to his interest in the Flat.
10. The contributions which each party made directly towards the cost of the Flat can be established. If account is taken of their cash contributions to the purchase price and Mr Sebastianelli's mortgage repayments in the period April 2003 to September 2008, Mr Sebastianelli paid approximately 75% and Mr Gallarotti 25%. Mr Sebastianelli had in fact made mortgage repayments of £59,165.76 from April 2003 up to the time when the parties fell out in 2008. (This was the only period for which copies of his bank statements were available.) There is nothing to suggest that Mr Sebastianelli did not similarly pay the mortgage debt in the year prior to April 2003. If, as Mr Sebastianelli contends, the whole of the amount raised by way of mortgage is treated as contributed by Mr Sebastianelli, his share increases to approximately 86% and that of Mr Gallarotti is reduced to some 14%. There is still money owing on the mortgage. However, some of that balance has to be left out of account as Mr Sebastianelli used the Flat as collateral for further advances to himself from the mortgagee. Likewise payments made to the mortgagee after Mr Gallarotti left the Flat must also be left out of account.
11. The Recorder's finding of an agreement must be read as a whole. The agreement found was not just for equal shares in the Flat. A crucial part of the Recorder's conclusion was that the agreement contained a rider. The Recorder found that, when the parties realised that they were going to make unequal contributions, they agreed that Mr Gallarotti would make larger contributions to the mortgage repayments than Mr Sebastianelli.
12. Mr Gallarotti's case was that he had performed his side of the bargain. He contended at trial that he in fact had made very substantial contributions to the various outgoings, renovations and repairs to the Flat. He did not rely on any resulting trust, so he did not assert that these payments enhanced his share based on his initial cash contribution. But the problem for him was that there was little satisfactory evidence about any payments following the initial cash contribution. The Recorder did not wholly accept his case.
13. The evidence about the mortgage repayments was that, far from Mr Gallarotti making a larger contribution than Mr Sebastianelli, he made no real contribution at all. The available evidence showed that the mortgage was paid by direct debit from Mr Sebastianelli's account. Mr Sebastianelli's available bank statements show Mr Gallarotti made only five payments into Mr Sebastianelli's bank account. They totalled a mere £3,500.
14. Nor was there any hard evidence that Mr Gallarotti had paid an equivalent amount of other outgoings so that it might be said that he had indirectly contributed to the payment of the mortgage. Mr Gallarotti's case was that he had made substantial payments on account of repairs and outgoings but he could not produce bank statements to show these payments. He contended that he had left his bank statements in the Flat when he was evicted, and that Mr Sebastianelli had destroyed them. But the Recorder made no findings on that alleged incident.
15. All the Recorder was able to find was that he made some payments but that the payments were not as large as he contended. The Recorder made no findings as to how much he in fact paid. Mr Gallarotti does not cross-appeal against those findings. The Recorder, however, noted that Mr Sebastianelli also made substantial payments to Mr Gallarotti.
16. So the Recorder had, on her findings, to deal with a case for which neither side had contended. The Recorder came to the conclusion that the agreement governed the situation:

"The next question is as to the size of Mr Gallarotti's beneficial interest – should this reflect the whole course of conduct of the parties, especially the sums paid by each party towards the purchase price, the mortgage repayments, etc. or was Mr Gallarotti justified in claiming a half-share in the Flat? In my judgment, Mr Gallarotti has a good claim to a half-share in the Flat. I find on the balance of probabilities that the express agreement between the parties was that they would each have a 50% interest in the Flat, despite the unequal amounts contributed by each of them. I accept Mr Gallarotti's evidence that when the parties realised that they were contributing an unequal amount of capital, they agreed that he would make up for that by paying more of the mortgage repayments. It seems to me that such an agreement would have made a good deal of sense given the close and trusting relationship between the parties at the time, and their past practice of sharing the costs of rented accommodation equally. The fact that Mr Gallarotti may not have contributed exactly 50% of the cost of acquiring and renovating the Flat, or at least that Mr Gallarotti cannot now prove that he did so, does not in my judgment detract from the effect of the express oral agreement which they made, in the light of the detriment to Mr Gallarotti. In addition, in my view, had they agreed that they would have unequal shares in the Flat, it is extremely likely that one of them would have said as much to Mr Proctor when he asked them about the ownership of the Flat and the lack of a deed of trust. I conclude that although the Flat was purchased in the sole name of Mr Sebastianelli, he held it on trust for the parties in equal shares." (Judgment, paragraph 122).

17. Mr Sebastianelli challenges whether this agreement was truly made. However, the Recorder's finding was based on evidence given by Mr Gallarotti in the witness box. Mr Sebastianelli did not concede that Mr Gallarotti had any interest in the Flat at all. Mr Christopher Aylwin, for Mr Sebastianelli, urges us to hold that the agreement was not an agreement at all but only an arrangement or understanding. I do not accept that invitation. The finding is based on the oral evidence given by Mr Gallarotti and the Recorder had the advantage, not available to this court, of hearing his evidence. It is, therefore, unnecessary to consider the evidence of other witnesses who, on Miss Parker's submission, agreed with Mr Gallarotti's case that there was agreement for ownership of the Flat in equal shares.
18. That takes me to a submission made about the evidence of Mr Proctor, referred to at the end of paragraph 122 of the Recorder's judgment. Mr Sebastianelli asserts that the Recorder was wrong to place reliance on this evidence. Mr Proctor was a solicitor instructed by the parties in about 1997 to deal with a dispute with their neighbours. He was expressly instructed by both parties that they were joint owners of the Flat. Mr Aylwin submits that the Recorder gave an over-legalistic interpretation to that evidence. Just because lawyers would say that joint ownership meant 50/50 did not mean that lay persons would have meant the same. In any event, Mr Proctor was giving evidence some twelve years later.
19. One difficulty with this submission is that again the Recorder had the advantage of hearing Mr Proctor give his evidence on this point. My primary reason for rejecting it is, however, that it is clear that the Recorder relied principally on the evidence of Mr Gallarotti and not on that of Mr Proctor.
20. Accordingly, the real question is what was the meaning and effect of the agreement found by the Recorder. The express agreement found by the Recorder contemplated that Mr Gallarotti would make larger payments than Mr Sebastianelli towards paying off the mortgage. The parties' contemplation was not, however, borne out by events.
21. Mr Aylwin submits that, as the Recorder found that this agreement was made in May or June 1997, some two months in advance of transfer of the Flat to Mr Sebastianelli, it was overtaken by events. When the transfer took place in August 1997, it was by then clear that the parties' contributions were not simply slightly different, as the Recorder suggested in paragraph 122 of her judgment, but totally asymmetric. In any event, the parties could not possibly have intended that the agreement should apply in those circumstances. Since Mr Gallarotti had not made the promised contributions to repaying the mortgage, the Recorder reached the wholly surprising conclusion the transaction involved a substantial gratuitous element in his favour. That was inappropriate in this sort of relationship.
22. Miss Wendy Parker, for Mr Gallarotti, submits that this court should not interfere in the Recorder's conclusion as to the application of the express agreement because the Recorder was well aware that the parties' contributions were unequal and nonetheless held that there was an express agreement as to ownership in equal shares. This disposed of the objection of any gratuitous element. In any event, submits Miss Parker, there was no subsequent agreement to change the size of their beneficial interest from that expressly agreed at the time of the acquisition.
23. In my judgment, 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. But the question still has to be asked: did this agreement apply in the events which occurred? I leave aside, because the point was not argued, any objection based on lack of certainty as to how much larger those payments had to be.
24. In my judgment, the agreement did not apply in the events which unfolded. It only covered the case where there was a slight imbalance in contributions. Neither party fussed over minor differences in payments made by them. Since they had no formal system of accounting, there was no system for equalising contributions. They did not place much store on that consideration. The Recorder put this down to the strength of their friendship. But the fact that they were strong friends simply meant that one party would not chase each other for money which the other did not have. It did not, in my judgment, mean that they gave up any chance of substantial equality at the end of the day. The express agreement put forward by Mr Gallarotti, and accepted by the Recorder, shows that the parties were concerned that their ultimate shares in the Flat should, broadly speaking, represent their contributions to it.
25. Accordingly, in my judgment, the inference to be made from the parties' course of conduct was that they intended that their financial contributions should be taken into account but not that there should be any precise accounting.
26. One of Mr Aylwin's submissions is that the Recorder elided the process of finding a beneficial interest with that of determining its size. That is not how I see it. I conclude that, having found that there was an agreement which applied in particular circumstances, the Recorder did not go on to consider whether those circumstances occurred. Thus, in my judgment, the Recorder failed to pursue the logic of her own findings. She had found that at the date of the acquisition the parties recognised that there was some slight disparity between their contributions. However, in the event, she found that the disparity was much greater than the parties had expected at the date of their agreement. She found that Mr Gallarotti agreed that if he paid less towards the purchase price he would make that up by paying more towards the mortgage. If that was the agreement then she should have looked at the amount of the mortgage payments Mr Gallarotti had paid. He palpably had not made a substantial contribution on her findings. The logical result of the agreement, therefore, was that the agreement for 50/50 sharing was at an end. Miss Parker's submissions do not meet that point. The Recorder should have held that this was the case when the parties agreed to go their separate ways and Mr Gallarotti left the Flat. By that point in time, the only inference that could be drawn was that the parties intended the beneficial ownership should, in substance, reflect their financial contributions. It was wholly implausible that Mr Sebastianelli should make a substantial gift to Mr Gallarotti. Here were two flat sharers who were not in a family unit. They were people who for convenience lived together until they established their own homes.
27. There are some further submissions with which I must finally deal.
28. Miss Parker submits that the Recorder's holdings of an express agreement must be maintained because Mr Aylwin had not put it to Mr Gallarotti when giving evidence that he would have had a reduced share if he failed to any contribution over and above the cash contribution which he made at the time of purchase. I reject that submission. The size of Mr Gallarotti's share is a question of law.
29. Mr Aylwin submits that this court is not limited to holding that the shares of the parties should reflect their cash contributions at the time of purchase. It is, he submits, open to the court to hold that the shares are to be adjusted to reflect the full amount of the mortgage undertaken by Mr Sebastianelli. I also reject this latter submission. I do not consider that this inference can properly be drawn as to the parties' shared intentions. The Recorder found that Mr Gallarotti had made payments for their joint benefit. It cannot reasonably have been intended by the parties that these payments should be left out of account while full credit is given to Mr Sebastianelli for the mortgage.
30. In those circumstances, my conclusion is that the judge's holding that there was a 50/50 share in the Flat must be set aside. I would substitute a finding that Mr Sebastianelli has a 75 % share and that Mr Gallarotti has a 25% share.
31. I would add this coda. The Recorder's judgment extends to 134 paragraphs and 42 pages. I appreciate that this case was complex factually, and that there were some incidental matters with which this appeal is not concerned. However in two respects the judgment is longer than it needed to have been. First, the judgment records a substantial amount of the oral evidence of the witnesses without indicating how such detail bore on the issues to be decided or making findings. The Recorder's role should have been, so far as possible, to select and distil the relevant evidence, as well as to make findings (where findings could properly be made). Secondly, some pages of the judgment set out in detail the recent authorities on common intention constructive trust. Those citations could have been reduced as there was much common ground between the parties. The judgment was clear and careful, but much longer than it needed to have been.

Lord Justice Tomlinson:

32. I agree.

Lord Justice Davis

33. I also agree.