Guest v Guest: The Dangers of Proprietary Estoppel for Family Businesses
Many family businesses operate on an informal basis, without strictly defined roles and agreements about current and future financial rights. This is especially true for farming businesses, where younger family members will often work on the farm for a low income on the basis that they will one day inherit the business.
Where things go to plan, this is not necessarily an issue. But if a family falls out or parents change their minds about what should happen to the business, this can leave younger family members severely disappointed. In such cases, it is possible they may wish to make a claim for ‘proprietary estoppel’ to be compensated for the detriment they feel they have suffered.
What is proprietary estoppel?
Proprietary estoppel is a legal principle where someone has a potential claim over an estate because they were promised something which they relied on to their detriment.
Guest v Guest – a case study
The recent case of Guest v Guest is a clear example of how proprietary estoppel cases can arise and how tricky they can be to resolve.
Background to the case
The claimant, Andrew Guest, was the eldest child of the defendants, David and Josephine Guest. Andrew lived and worked on his parents’ farm for 32 years, during which time he was paid a relatively low rate. Andrew did so on the basis that he had been promised by his parents that he would inherit a substantial share of the farm on his father’s death. The exact percentage was not specified, but it was intended to be sufficient for Andrew to continue a viable farming business.
Unfortunately, the relationship between Andrew and his parents began deteriorating from around 2008 and, in May 2014, David and Josephine wrote new Wills excluding Andrew. Then, in April 2015, they dissolved their farming partnership with Andrew and gave him notice to leave the farm, where both he and his family lived.
Andrew made a claim on the basis of proprietary estoppel for a share of the farm or monetary equivalent, arguing he had accepted a low level of pay during his many years working on the farm, only because he had been assured he would inherit a substantial share of the farm.
Fundamentally, the claim argued that Andrew had accepted a loss of income compared to what he would have earned elsewhere, because he would be compensated in the future with his inheritance.
Andrew and his parents were unable to agree a settlement of the claim and it went to trial.
The original trial judge found in Andrew’s favour, ordering that he was owed an immediate payment of £1.3 million (subject to some adjustments) to cover what he would have expected to inherit. This was calculated on the basis that the judge considered Andrew was owed 50% of the value of the business plus 40% of the value of the freehold land and buildings.
David and Josephine appealed this judgment, arguing that the award should be based not on their son’s expectations but rather on his contribution and also that the requirement to make an immediate payment did not account for the fact that Andrew would not have inherited anything until after their death. The Court of Appeal upheld the original judgment and the parents took their appeal to the Supreme Court.
The Supreme Court partially upheld the appeal. It decided that the parents should be allowed to choose between placing their farm into trust for their children, or paying Andrew immediate compensation. The compensation would be at a reduced rate to reflect that he would be receiving the benefit earlier than he would have through an inheritance, so would have the benefit for longer.
Why proprietary estoppel is such a grey area and the dangers this poses
The Supreme Court judgment in the Guest v Guest case gave some important insights into how difficult proprietary estoppel cases are to decide and the issues that need to be looked at.
The case was heard by Supreme Court Justices Lord Briggs, Lady Arden, Lord Leggatt, Lord Stephens and Lady Rose.
Key points Lord Briggs identified in the judgment include:
- That the usual approach of the courts was to enforce the promise, as the simplest way to remedy the unfairness of the situation.
- But that the court could instead order a payment based upon the value that the claimant expected to receive.
- That the aim of a remedy for proprietary estoppel ever has been (or should be) based on compensating for the detriment suffered by the claimant.
- The court may have to consider alternatives if the property has been sold or if its transfer would cause injustice to others.
- Also, the court may limit the remedy awarded to the claimant, if the enforcement of the promise would be out of all proportion to the detriment to the claimant.
- Critically for the Guest v Guest case, Lord Briggs determined that, “If the remedy involves acceleration of a future promised benefit, it will generally require a discount for accelerated receipt”.
In such cases, determining whether a promise was made and whether someone really relied on it to their detriment can be very hard to prove. Even where detriment can be shown, the exact value of that detriment can also be hard to calculate. This can introduce a great deal of uncertainty as to what represents a fair outcome for proprietary estoppel cases.
How to avoid the risk of proprietary estoppel claims
There are various ways families can minimise the risk of proprietary estoppel claims in relation to their businesses.
One of the most effective is to ensure that any agreement between family members is in writing in professionally drafted legal documents. Clear wills and partnership agreements can make sure everyone knows exactly where they stand, what has been promised and to what each party is entitled. The value of any work offered and any benefits received should also ideally be recorded to minimise the room for dispute.
Should a dispute arise, it is really important to seek an early resolution. Where a case goes to court, the legal fees involved are likely to be substantial. This can significantly diminish the value of any award received. Court proceedings can also make the situation more acrimonious, making a future reconciliation less likely.
The good news is that most disputes of this kind can be resolved out of court through methods such as private negotiation and mediation. This can result in a faster resolution, keeping conflict and fees to a minimum. It also allows the parties to retain control of the outcome, so it may be possible to agree something a court would not consider e.g. the claimant taking a certain asset they are particularly keen to own in exchange for dropping their claim to other assets.
Given how uncertain the outcome of proprietary estoppel claims can be, reaching a sensible agreement out of court is often going to be the safest solution for all involved.
Speak to our dispute resolution experts
We know how sensitive these matters can be, with both the financial aspects and the potential impact on family relationships to consider. It is also really important to be realistic about the risk of financial costs escalating.
Our team has strong expertise in alternative dispute resolution, including mediation. As such, we can give you the best chance of securing a fair resolution without court proceedings, while also having the robust litigation skills needed to argue your case in court, should the need arise.
To discuss how we can help family business disputes, including those involving proprietary estoppel, please get in touch and we will be happy to advise.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.