Court finds that deposit paid for purchase of Ritz Hotel is held on trust

25/09/2007

In a claim involving fraudulent misrepresentation and conspiracy to defraud a potential purchaser of the Ritz Hotel, the High Court concluded that an agreement to transfer £1 million as a deposit was voidable on the basis that the funds were held on a consequential constructive trust. The claimant only sought relief for breach of contract in the event that relief under a constructive trust claim was unavailable.

The claimant was unable to trace the funds at common law because the funds had been mixed with property belonging to others. The claimant had no right to trace the funds in equity since there was no fiduciary relationship, merely a commercial relationship.

The facts were complicated but essentially as follows: The claimant was a property developer and the two key defendants in the scam were a former property trader (L) and a former contracts manager for a construction company (D). The former property developer had been declared bankrupt 10 days prior to the £1 million transfer being made to him. His trustee in bankruptcy did not claim any part of that payment as after-acquired property.

An indirect approach was made by L to the owners of the Ritz Hotel and their agent indicated that a deposit of at least £30 million would be required. L informed the claimant that a non-refundable deposit of £1 million was required for exclusivity for the contract. The claimant agreed to pay the £1 million on the basis that L would release the purchase documentation and if such documentation was not forthcoming 2 weeks later, the £1 million would be repaid.

The £1 million deposit was paid and the claimant's bankers issued a bank guarantee for £125 million for the purchase deposit. The purchase documentation never materialised, indeed no documentation ever existed, but upon payment of the £1 million, L immediately set about spending it, including a transfer of almost half the sum to D and the purchase of a Land Rover. D bought a Mercedes and the Court found that D held the amount which was transferred to him by L (and the Mercedes) on constructive trust. The Court also found that the claimant was subrogated to the charge over D's and Mrs D's house, since the tainted funds were used in part to pay D's and Mrs D's mortgage.

[i]London Allied Holdings Ltd v. Lee & Ors [2007] EWHC (Ch) (5 September 2007)

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