Crossco No 4 Unlimited v Jolan Ltd [2012] 2 All ER 754

Companies carrying on an amusement-arcade business reorganised their interests through a demerger. Jolan became landlord of the building and Crossco occupied the ground floor under a lease containing a break clause. Negotiations had considered different ownership arrangements, but the trial judge found no agreement preventing use of that clause. Jolan later served a break notice. Crossco argued that Jolan's knowledge of its misunderstanding and the parties' negotiations meant the freehold was held on a constructive trust protecting its continued occupation. It relied on the line of commercial acquisition cases associated with Pallant v Morgan and Banner Homes.

Could unsuccessful commercial negotiations and a tenant's mistaken understanding prevent a landlord using a break clause through a Pallant v Morgan constructive trust?

The Court of Appeal dismissed Crossco's appeal. The factual findings did not establish the common arrangement necessary to support the claimed equity. A party's misunderstanding of the completed documentation did not itself impose a constructive trust on the other party. The judgments also debated the conceptual basis of Pallant v Morgan and Banner Homes. Arden LJ regarded Banner Homes as binding and based on common intention, notwithstanding arguments for restricting that model to domestic cases. Other reasoning explored a fiduciary explanation. Those differences did not alter the result. The court declined to turn unsuccessful negotiations into equitable rights which would undermine the certainty of commercial bargaining and the parties' completed arrangements.

Commercial negotiations do not themselves create a constructive trust. A claimant relying on Pallant v Morgan must establish the relevant acquisition arrangement and equitable basis; disappointment or unilateral misunderstanding is insufficient. Crossco discusses, without conclusively resolving, competing explanations of that equity.

Crossco combines a failed proprietary claim with a debate about the explanation of commercial acquisition trusts. It does not abolish commercial constructive trusts, and the judges' differing explanations must not be merged into one unanimous ratio. Compare Generator Developments v Lidl, where the subject-to-contract setting was central. The case also cautions against transferring domestic ownership reasoning mechanically to commercial bargaining: the parties' completed documents, negotiated allocation of risks and actual commitments all require close attention.