Common Intention Constructive Trusts

A recent case in the High Court highlighted the importance of using the correct legal structure or vehicle to hold business assets.

In Oberman v Collins (21 December 2020) an unmarried couple had built up a portfolio of investment properties over 20 years. Some of the properties were owned by one person, some by both and some by a company, in which both were shareholders.

When the couple separated one of them applied for a court order to ensure they had a 50% interest in all of the properties. The application was based on that person making financial contributions, working unpaid and giving their partner day-to-day control of the portfolio, whilst providing bank guarantees and assuming financial liabilities.

The court rejected the claim that there was a business partnership, but did accept there was a common intention constructive trust, even though the case concerned investment properties and not the family home. It did not matter that the case concerned a fluid portfolio of properties provided the trust was established. If the judge was wrong about that point there could be a common intention constructive trust for each property that was purchased because he found that the couple intended to acquire each property in equal shares. This finding was based on the couple’s agreement about the portfolio and the actions taken as regards the rents and sale proceeds that were received.

The court agreed the applicant’s failure to protect their interest in the property was inconsistent with their argument that there was a common intention the couple would have equal shares in the properties. However, the court found that because the failure to protect those interests prejudiced the applicant, it supported their claim.

It is important to consider, from the start, how business assets will be owned in order to protect the interests of all of the investors in the business and to keep this issue under review as a business develops.

When building up a property portfolio, eg buy-to-let houses, it is important that the properties are held within an appropriate legal structure and that the interests of all of the investors in the property business are properly protected. Legal advice should be obtained at an early stage to decide whether to use a formal partnership agreement or a company. If a company is formed, is a shareholders’ agreement required? Alternatively, is a declaration of trust appropriate to record the investors’ interests in the properties and to protect both of their positions?

Obtaining good legal advice at any early stage can avoid costly disputes and litigation later on. For more information please contact us.