Key point
- Constructive trust does not bind subsequent purchasers
Facts
- Cs entered into contracts with a developer to lease flats once they were built and paid a 20% deposit
- The developer ran into financial difficulty and the development was sold to Ds by the mortgagee bank
- Ds had notice of the contracts for leases (relating to how they were used as collateral for loans) but no express clause that they were to take subject to the contract
- Cs sought to recover their deposits from D on basis of constructive trust, Lyus v Prowsa was cited to argue that the constructive trusts are not overreached
Held (Court of Appeal)
- D was not subject to constructive trust
Moritt LJ
Current case
- Although Ds had prior knowledge of pre-existing contracts and obligations, that was insufficient to impose on them a constructive trust
- Whilst a constructive trust of the contractual right of Cs had arisen as against the initial developers, that was not binding on the Ds
Lyus v Prowsa distinguished
- There was a finding by Dillon J that if a constructive trust was imposed on the first defendant it would also be imposed on second defendant, but the constructive trust was imposed due to the terms of their contracts
- In this case, there is only mere notice of prior contracts, which is not sufficient to make it fraud for them to rely on the overreaching provisions in LRA 1925 to overreach the constructive trust of the prior contracts
Commentary
- The fact that a constructive trust does not bind subsequent purchasers suggests that it is not proprietary in nature