Constructive Trusts

A constructive trust is an arrangement in which a person holds property as its nominal owner for a beneficiary. In family law, a constructive trust is an equitable remedy that gives a person an interest in a spouse’s property when the person has contributed to the purchase, maintenance or improvement of the property, and it would be unconscionable for the spouse to retain the sole benefit of the joint endeavour.

A constructive trust is imposed by the court irrespective of the intentions of the parties. The court determines that the nominal owner of the property holds it as a constructive trustee for beneficiaries.

It can be hard to establish a constructive trust, so a court will look to other remedies before finding such a trust exists.

The Family Law Act 1975

Section 79 of the Family Law Act 1975 allows the court to alter interests of parties, by settlement or transfer of property to benefit either or both parties or their children.

The court will make an order only if it is satisfied that, in all the circumstances, that is it just and equitable to do so. In considering an order in property matters, the court must consider:

• the financial contribution made directly or indirectly by or on behalf of a party or their children to the purchase, conservation or improvement of the property;
• the non-financial contribution made directly or indirectly by or on behalf of a party or their children to the purchase, conservation or improvement of the property;
• the contribution made by a party to the welfare of the family constituted by the parties and any children, including any contribution made in the capacity of homemaker or parent;
• the effect of any order on the earning capacity of a party;

Section 75 of the Act adds further considerations, including each party’s:

• financial resources;
• age and health status;
• capacity for employment;
• responsibilities to children.

Constructive trusts apply to areas not covered by the Act, such as between a party to a marriage and a third party, such as a spouse’s creditor.

Case law

Constructive trusts have been imposed in a range of situations, and this is reflected in the following cases.

Baumgartner v Baumgartner (1987)

A de facto couple both contributed to mortgage payments for their home, which was bought in the husband’s name and using a loan in his name. The court ruled the husband’s claim that he was the sole owner of the property amounted to unconscionable conduct and so equity could intervene. A constructive trust was imposed that allocated 55% to the husband and 45% to the wife, with the court stating the court should: “strive to give effect to the notion of practical equality rather than pursue complicated factual enquiries which will result in relatively insignificant differences in contributions and consequential beneficial interest.”

Foley & Foley and Anor (2007)

A husband and wife sought a declaration that the wife’s interest in the family home was 75% and the husband’s 25%. A creditor of the husband opposed the declaration on the basis that the recovery of their debt owed by the husband would be adversely affected.

The wife had contributed 92% of the purchase price of the family home but the property was bought in joint names. The court found no evidence that the couple had regarded the home as anything other than the family home, in which they each held an equal interest. It dismissed the couple’s application, and held: “A constructive trust will be imposed by the court when, having regard to the circumstances of the case, it would be unconscionable for one party to rely, as against the other party, on legal title to property as representing the actual interests of the parties.”

Kleber v Kleber (2007)

A husband and wife sought final property orders and their son sought leave to intervene in the proceedings. The son sought a declaration that his parents held their farm on constructive trust for him. The declaration would have had the effect of removing the farm from the pool of assets to be divided.

The son submitted that he relied, to his detriment, on a promise from his parents that he was to inherit the farm. He said the expectation led him to continuing to work on the farm when he could have sought work elsewhere for proper remuneration.

The court held the son had failed to make any causal connection between the promise and his work on the farm, and so, there was no constructive trust and his application must fail.

Karbines & Karbines and Anor (2008)

A husband and wife were directors and equal shareholders in a company. The company’s funds were used to buy a property before the company was placed in liquidation. The liquidator provided evidence that the company’s funds had been used to pay the mortgage on the property. The couple argued the mortgage repayments were made by the company in lieu of rent. The liquidator sought a declaration that the property was held on constructive trust for the company to the extent of the mortgage repayments. The court imposed the constructive trust.

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