Improvement of Another’s Property
by Dirk A Verse and Andreas Gaschler
1. Introduction
When someone invests his money, property or labour for the improvement of another’s property, the question arises whether he can claim compensation for his expenses. The improvement can take place in a number of different situations, and there are equally many bases upon which a claim for compensation can be established. If the improvement is part of a contractual obligation, eg in a contract for services, the compensation is governed by the relevant contractual provisions; these cases are not particularly problematic. If the improvement is carried out in the absence of a contract but nonetheless with the intent to benefit the property of another (in an emergency, for instance), most legal systems recognize a claim for reimbursement of the improver’s expenses based on management of another’s affairs without a mandate (negotiorum gestio). If, however, the improvement is undertaken neither on a contractual basis nor with the intent to benefit the property of another, eg in the mistaken belief that the property being improved is in fact not someone else’s, then the issue becomes one of restitution through the law of unjustified enrichment. Many legal systems have special rules dealing with this very situation which take precedence over the general rules on unjustified enrichment, especially in the case of improvements carried out by tenants or possessors without a right to possess. The common goal of these provisions is to strike a fair balance between the improver’s interest in being compensated for his expenses and the protection of the owner’s freedom to invest in the improvement of his property or not.
The particular problem of improvements is that restitution in kind is often impossible (especially when the improver’s investment is of time and labour) or leads to a result materially worthless for the improver (eg the demolition of a building erected on another’s land). In these situations the improver’s interest can only be compensated through the payment of money. This, however, may cause an undue hardship on the owner of the property, particularly in cases where he would not have undertaken the improvement himself (‘imposed enrichment’; aufgedrängte Bereicherung).
2. Historical development and comparative overview
a) Roman law
A number of the legal issues surrounding improvements were already dealt with in Roman law. Roman law recognized unjustified enrichment claims only in specific factual situations. There was no general unjustified enrichment claim nor any general claim for restitution of mistaken improvements. Instead, Roman law closed the gaps left by the law of unjustified enrichment by providing detailed rules for different types of cases, eg for improvements by apparent heirs or possessors without a right to possession. These rules provided that improvements could establish a right of retention against the true heir’s or the owner’s claim to obtain the object concerned (hereditatis petitio; rei vindicatio) depending on the quality of the improvement (necessary, useful or luxurious) and the improver’s good or bad faith. In the case of necessary improvements (impensae necessariae), even a mala fide possessor (but not a thief) could claim compensation and could do so even if there was no longer any added value from the improvement, the idea being that in these cases the owner of the property would very likely have undertaken the same course of action himself. Compensation for useful improvements (impensae utiles) could only be claimed by a bona fide possessor and only to the extent that the property still retained the value added to it. Moreover, in Roman law useful improvements required not only an increase in the value of the property, but also an increase in its utility. When the improvement was a luxury (impensae voluptuariae), ie neither necessary nor useful, even the bona fide possessor was left without compensation. In this case he had to be content with a right of removal (ius tollendi). According to the majority of sources, even mala fide possessors could avail themselves of this right.
b) Influence of Roman law in continental Europe
To varying degrees, many continental jurisdictions have adopted the Roman rules on improvements. The Roman example is quite closely emulated, albeit with minor differences in detail, in Germany and Switzerland (§§ 994 ff Bürgerliches Gesetzbuch (BGB); Arts 939 ff Swiss Civil Code (ZGB)). Other continental systems show more marked differences from the Roman rules. With the development of the law on unjustified enrichment and the emergence of a general unjustified enrichment claim, the focus has shifted in a number of jurisdictions from whether the improver deserves protection to whether the owner deserves to retain the enrichment. Thus French law has preserved the Roman distinction between the three types of impensae but, influenced by the arguments of Charles Dumoulin and Jacob Cujaz, has modified them with a view towards unjustified enrichment such that even the mala fide possessor is entitled to compensation not only for necessary, but also for useful improvements (théorie des impenses). Special rules exist, however, when buildings are built or seeds are sown on another’s land, allowing the owner to refuse to pay compensation if he permits the improver to remove the improvements (Art 555 Code civil). The situation in Italy is similar (Arts 936 and 1150 Codice civile). In Austria, the mala fide possessor also has a claim for compensation both for necessary and for useful improvements, insofar as they present a ‘clear and substantial advantage’ to the owner (§ 336 in conjunction with § 1037 ABGB). This resembles the position of Dutch law, which subjects claims by mala fide possessors to the general rules on unjustified enrichment (Art 3:121(2) Burgerlijk Wetboek (BW)). The bona fide possessor, on the other hand, can be compensated for any type of improvement under Dutch law, even those done as a luxury. However, the court retains the discretion to reduce the amount of compensation to prevent an unfair advantage for the possessor over the property’s owner (Art 3:120(2) BW).
c) Common law
The development of rules on improvements in English law has proceeded largely untouched by the Roman approach. The common law has traditionally been sceptical of any claim to compensation for improvements of another’s property unless the owner encouraged the improvements (proprietary estoppel) or stood by and sanctioned the improver’s expenditures (doctrine of acquiescence). Since 1973, cases of restitution for improvements have been built on the law of unjustified enrichment (Greenwood v Bennett [1973] QB 195 with respect to movables; Yeoman’s Row v Cobbe [2008] UKHL 55 with respect to land). Application of the law of unjustified enrichment does not, however, create a general liability for property owners to reimburse improvers for any increase in the value of their property. Rather, the common law, in England as well as in the United States, excludes any recovery whatsoever on the part of the mala fide improver. Further, property owners are also protected to a large extent from claims by bona fide improvers since the concept of ‘enrichment’ is a subjective one, allowing the property owner to object that the improvements made to his property are not personally useful to him (‘subjective devaluation’; see 3. below).
d) An international trend towards unjustified enrichment
Viewed as a whole, a certain tendency emerges across most of the jurisdictions surveyed, moving away from the specific Roman rules on improvements and seeking a place for these cases within the general law of unjustified enrichment. Even in a legal system like Germany’s, which has kept most of the Roman rules, the academic literature is increasingly concerned about conflicts between these rules and the general law of unjustified enrichment. A first step away from the Roman rules was made in 2002 as part of the general reform of the German law of obligations. Since then, improvements made to property which must be compensated as a result of the exercise of a right of termination are no longer governed by the Roman-inspired §§ 994 ff Bürgerliches Gesetzbuch (BGB); the code now refers to the law of unjustified enrichment (§ 347(2) BGB). This movement towards unjustified enrichment is also reflected in the Draft Common Frame of Reference (DCFR) of the Study Group on a European Civil Code. The DCFR essentially limits itself to generally placing improvements by a possessor without a right to possess under the larger heading of unjustified enrichment (VIII.-7:104 DCFR). However, there are deviations from this general position in the DCFR’s individual model rules. Improvements made to property which must be returned as a result of the exercise of a right of termination are governed by specific rules which at least partly differ from those on unjustified enrichment (III.-3:513(2)). Specific rules also apply to improvements made by tenants (IV.B.-5:106).
The tendency to view improvements more from the perspective of unjustified enrichment does not necessarily mean that this is more favourable to improvers than the old Roman-inspired rules. Instead, the improver’s position is dependent on the specific details of a legal system’s treatment of unjustified enrichment, as the example of English law neatly illustrates.
3. Selected issues
a) Compensation also for mala fide improvers?
At least with regard to necessary improvements, there is wide consensus among continental jurisdictions that such improvements should also be compensated if they were made by a mala fide possessor. As mentioned before, this is based on the idea that the owner very likely would have undertaken the necessary improvements himself. In addition, an economic reasoning comes into play, namely that also the mala fide possessor should be given an incentive to maintain the property in his possession. Unimpressed with these arguments, English law adopts the contrary position, denying the mala fide possessor any restitution for improvements. Although this position is exceptional in Europe, it finds support in the DCFR. Article VIII.-7:104(1) in conjunction with Art VII.-2:101(1)(b) DCFR excludes claims when the improver consented freely and without error to the disadvantage. Whether international consensus can be built around this solution remains to be seen.
b) Protection from imposed enrichment
The central problem, however, is less one of necessary improvements than one of other improvements which increase the value of the property. In these cases, the need to protect the owner from an imposed enrichment is a more pressing issue than in cases of necessary improvements. The issue arises not only in jurisdictions allowing claims by mala fide improvers but also in those restricting claims to bona fide improvers. It is particularly acute when buildings are built on another’s land, since in these cases the improver’s investment will often run into high figures. It is no coincidence that a number of jurisdictions directly address this situation with specific rules. Mention has already been made of Art 555 Code civil and Art 936 Codice civile which, however, offer protection from imposed enrichment only in relation to mala fide possessors. In Germany, special rules for this situation have been developed by the courts. The German Federal Supreme Court (BGH 26 February 1964, BGHZ 41, 157) has ruled that the provisions of §§ 994 ff BGB do not apply to improvements which alter the fundamental character of the property, the classic example of which is the construction of a building on land (enger Verwendungsbegriff). Instead, the Court only granted a claim on the basis of good faith (§ 242 BGB) in the amount of the economic value of the improver’s right to remove the building (ie break-up value minus break-up cost).
But the problem of imposed enrichment requires a solution generally, not only for the construction of buildings on another’s land. A suitable solution could lie in a subjective rendering of the concept of enrichment, allowing the property owner to object that the improvements, whilst increasing the value of his property objectively, are not useful to him personally. This concept of ‘subjective devaluation’ has resonated particularly in English law, which only acknowledges enrichment in cases of the owner’s ‘free acceptance’ of the improvements or of their ‘incontrovertible benefit’, eg when the owner has realized the increase in value through resale. According to some authors, the concept of incontrovertible benefit also extends to cases where the owner has not yet realized the increased value but could reasonably be expected to do so. Incontrovertible benefit is further recognized in cases where the enriched party could reasonably surrender the enrichment in its natural state yet refuses to do so (McDonald v Coys of Kensington [2004] 1 WLR 2775).
Comparable developments are recognizable on the Continent. Roman law had already accepted the possibility of taking the individual position of the property owner into account in order to protect him from imposed enrichment (Celsus D. 6,1,38). Similar considerations on subjective devaluation can also be found in the modern continental law, particularly in France and Germany, both in academic literature and court decisions.
The DCFR moves in the same direction, distinguishing in the law of unjustified enrichment between transferable and non-transferable enrichment. Improvements to another’s property generally fall in the latter category. If the enriched party did not consent to the enrichment or was in good faith, he is liable under the DCFR only for the expenses which he has been spared from incurring and not for the objective increase in value of the property (VII.-5:102(2) DCFR). Claims are thus restricted to improvements which the owner would have undertaken himself. This framework creates a far-reaching protection of the owner against imposed enrichment. If, in contrast, he has realized the increase in value through resale, he has converted the benefit into a transferable enrichment and is therefore liable to the improver in this amount (VII.5:101(1) DCFR). The DCFR is not entirely clear on whether the same applies to cases where the owner is unwilling to realize the value of the improvement although he is reasonably in a position to do so. At least in the special case of improvements to property which has to be returned following the exercise of a right of termination, the DCFR answers this question in the affirmative (subject to certain exceptions, III.-3:513(2) DCFR).
c) Limiting claims to the expenses
Common to many European jurisdictions is the proposition that the cost of the improvement also represents the maximum amount of the improver’s claim, even if the increase in value eventually realized by the owner is higher. Roman law had already recognized this limit, as do modern legal systems which have chosen to adopt the Roman rules only partially or not at all. In the context of useful improvements, French law speaks of a règle du double plafond limiting the claim to the amount of the owner’s enrichment on the one hand and the improver’s expenses on the other. This rule has come under the criticism that from the perspective of unjustified enrichment law it is not the loss to the improver, but rather the enrichment of the owner that should determine the amount of restitution. Some jurisdictions therefore prefer to look only at the increase in value and not the expenses (eg Art 1150(3) Codice civile in the case of bona fide possessors). However, here the converse criticism is that the owner could have undertaken the value-enhancing improvement himself. Therefore, he is enriched only by saving the expenses that he would have had to incur if he had undertaken the improvement himself (for support of this argument, see the recent decision by the House of Lords in Yeoman’s Row v Cobbe [2008] UKHL 55).
d) Right of removal
If a claim for restitution in money is denied, the question remains whether the improver should at least be granted a right, at his own expense, to remove the improvements, insofar as this is possible without detriment to the underlying property. Such a right conforms to the tradition of the Roman ius tollendi, and for many continental legal systems it is considered obvious. The common law is traditionally more reluctant. However, if the improvement is readily returnable and the owner nevertheless refuses to allow the removal, the owner would under English law have to be regarded as incontrovertibly benefited and would thus be barred from resorting to subjective devaluation (see McDonald v Coys of Kensington [2004] 1 WLR 2775). The DCFR does not contain provisions on the right of removal.
4. EU law; harmonization
The acquis communautaire has not yet taken up the subject of restitution for improvements. Apart from the DCFR, no other unification or harmonization projects are known to be engaged with the subject at present.
Literature
Richard J Sutton, ‘What should be done for mistaken improvers?’ in PD Finn (ed), Essays on Restitution (1990) 241; Dirk A Verse, ‘Improvements and Enrichment’ (1998) 6 Restitution Law Review 85; Dirk A Verse, Verwendungen im Eigentümer-Besitzer-Verhältnis (1999); David Greiner, Die Haftung auf Verwendungsersatz (2000); Peter Schlechtriem, Restitution und Bereicherungsausgleich in Europa, vol 2 (2001) ch 5; Andrew Kull, ‘Mistaken Improvements and the Restitution Calculus’ in David Johnston and Reinhard Zimmermann (eds), Unjustified Enrichment: Key Issues in Comparative Perspective (2002) 369; Peter Birks, Unjust Enrichment (2nd edn, 2005); James Wolffe, ‘Enrichment by Improvements in Scots Law’ in David Johnston and Reinhard Zimmermann (eds), Unjustified Enrichment: Key Issues in Comparative Perspective (2002) 384; Christiane Wendehorst, ‘The Draft Principles of European Unjustified Enrichment Law Prepared by the Study Group on a European Civil Code’ (2006) 7 ERA-Forum 244; Daniel Visser, Unjustified Enrichment (2008) ch 10.
