5. Legal and Equitable Interests (2019 ) PDF

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Summary

appreciate the development of the equitable jurisdiction of the judicial system, • identify and demonstrate an understanding of various other types of equitable interests, namely estate contracts, vendor’s liens, mortgages and restrictive covenants...

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Faculty of Law, The University of the West Indies, Mona Campus LAW 2210 – REAL PROPERTY I André Sheckleford ([email protected]) Worksheet 5 Legal and Equitable Interests Learning Outcomes: By the end of this topic, students should be able to:       I.

appreciate the development of the equitable jurisdiction of the judicial system; appreciate the development of the ‘use’; demonstrate an understanding of the operation of the modern trust; identify and demonstrate an understanding of various other types of equitable interests, namely estate contracts, vendor’s liens, mortgages and restrictive covenants; demonstrate an understanding of the differences between legal and equitable interests, with a focus on the concept of the bona fide purchaser for value without notice; demonstrate an understanding of the rules and principles relevant to a determination of which interest takes priority in cases of conflict. Introduction

Another peculiar feature of English law that proprietary interests may exist in two forms: legal and beneficial (or equitable). For example, title to property exist in a legal or equitable form, though more often than not we are not called upon to think of these as being separate; however there are certain circumstances where they are deemed separated, whether as a matter of express intention or by operation of law. The development of the principles related to beneficial interests arose out of “the use”, which later became known as a “trust”. The equity jurisdiction of property law is an essential element of the subject area of property law, with beneficial or equitable title creating a dimension of ownership based on moral right. Reading Harpum C et al, Megarry & Wade: The Law of Real Property, Seventh Edition (Sweet & Maxwell 2008), Chapter 4. Owusu S, Land Law, Routledge-Cavendish 2007, Chapter 6; Butt P, Land Law, 6th (Thomson Reuters 2010), Ch 19, pp. 709 – 719 [on OurVLE]

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II.

The rise of equity and the ‘trust’

As early as the middle ages, it was evident that the doctrines of tenures and estates alone were not sufficient bases for English land law in light of social evolutions. As such the notions of freehold estates at common law were a source of some resentment for freeholders. As a result a legal device, now known as the trust, was formulated. However what were some of the conditions which led to freeholders considering alternatives ways of dealing with their interests? Disadvantages of the common law A few common law doctrines which bred dissatisfaction with the common law’s rules were: Rules relating to conveyancing – the common law, to ensure there was no doubt as to who the owner of land was, required conveyances to be public and formal. Conveyances had to be “effected by an open and public delivery of seisin, either upon or within view of the land conveyed”1. This method of conveyancing, called feoffment by livery of seisin , was meant to ensure that those living in the area could provide evidence of the current freeholder. The consequence of this strict rule was freeholders who had valid reasons for engaging in transactions away from the public eye were unable to do so. Inability to dispose of an estate by will – at common law there could be no testamentary disposition of a freehold (this changed in 1540 with the Statute of Wills), and any attempt to do so was invalid. Feudal burdens – freeholders were subject to many onerous duties, one of the most burdensome being the requirement to pay feudal dues, known as “relief”, by the heir upon the death of the freeholder. This “relief” was paid to the feudal overlord. In order to prevent the loss of such feudal dues by conveyance to a body which never dies, statutes were enacted to provide that lands conveyed to such bodies passed to the feudal overlord. A brief overview of the Chancery Before addressing the measures used to combat common law rules which were sometimes viewed as disfavourable, it is useful to have an overview of the development of the “equitable jurisdiction” and the Chancery courts. Initially “the Chancery” was concerned with the administration of common law, being responsible for the issuance of the writs to commence an action. By the start of the 14 th century the writs which were issued by the Chancery were of a clearly defined set, and the situation developed whereby potential litigants were faced with the possibility of being unable to fit within the rubric of a particular writ given his particular circumstances. Such a person was unable to approach the courts of common law. Despite the creation of the common law courts in the 11 th and 12th centuries the King retained some residual judicial power, allowing an aggrieved person unable to obtain a writ to approach 1 Chesire Burn C and Cartwright J, Chesire & Burn’s Modern Law of Real Property, 17th Edition (OUP 2011), p. 40

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the King to seek justice. These petitions were initially heard by the King's council, but by the end of the 14th century those tasks were delegated for the Chancellor; the Chancery Council presided over by the Chancellor heard these petitions. By the end of the 15 th century the judicial power of the Chancery was clearly recognised, and the rules administered and developed were known as “rules of equity”. In the early days of the Chancery these rules varied dramatically from Chancellor the Chancellor, leading to the notion that justice before the Chancery was as long as the Chancellor’s foot. John Selden, a 17 th century jurist, had the following to say: Equity is a roguish thing. For Law we have a measure, know what to trust to; Equity is according to the conscience of him that is Chancellor, and as that is larger or narrower, so is Equity. 'Tis all one as if they should make the standard for the measure we call a "foot" a Chancellor's foot; what an uncertain measure would this be! One Chancellor has a long foot, another a short foot, a third an indifferent foot. 'Tis the same thing in the Chancellor's conscience.

However by the end of the 17 th century the Chancery followed the system of the common law courts in relying on binding precedent. As such, a set of rules truly started to emerge. The judicial system which had developed was one where two different sets of rules, the rules of common law and the rules of equity, existed side-by-side and were enforced in different courts. Doctrines however emerged which checked the jurisdiction of the Chancery. This jurisdiction was confined to situations where the common law could not act (for example no recognisable writ was available to the plaintiff for the damage he suffered). The thinking was that equity's role was not to destroy the rules of common law but rather affect their method of operation. Effect of the Judicature Acts – the Judicature Acts of 1873 and 1875 in England brought together the administration of common law and equity. No longer was a litigant required to seek contemporaneous or subsequent relief from the different courts – pleadings in both common law and equity are now administered through a fused court. Where the rules of common law and equity are in conflict, the rules of equity prevail. Today’s courts therefore apply rules of both common law and equity, however courts very often speak of having an “equitable jurisdiction”. As to whether the rules of common law and the rules of equity as administered by contemporary courts are two streams running side by side or a single stream with intermingled waters will be a question for your consideration in the course “Equitable Remedies” next semester! The development of the use The Chancellor’s enforcement of the “use” gave rise to the equitable interest in land. In order to escape some of the fetters of the common law freeholders started to employ this unique tool. The use operated in a manner whereby the freeholder would convey his property to a trusted person who holds it “to the use” of another. This trusted person, known in older days as the “feofee to use” and nowadays as the trustee, therefore took the legal estate subject to terms, or an

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understanding, that this was for the benefit of the cestui que use (known nowadays as the ‘beneficiary’ or the cestui que trust). A Old nomenclature: feoffer Modern language: settlor

Old nomenclature: feofment Modern language: conveyance

B Old nomenclature: feoffee to use Modern language: trustee

C Old nomenclature: cestui que use Modern language: cestui que trust/ beneficiary

This device was helpful in constructing a way for the freeholder (A) to effectively will his property, with him conveying the land to B in his lifetime for the use of A and the remainder to such uses as set out in his will. It was also useful in avoiding the burdensome feudal duties and avoiding public conveyances. Common law courts only recognised B as having an interest in the land. He was the only one that was seised, and if he refused to honour the agreement to give C the use of the land C had no remedy. This was an obvious disadvantage of the use, however by the 15 th century the Court of Chancery began to protect the cestui que use against the feoffee, insisting the latter exercises his legal rights in accordance with the use. The class of persons whose conscience the Chancery considered to be affected by the use expanded over time:    

After 1465, action could also be taken against a purchaser with notice (to whom the feoffee disposed the property); After 1483 action could be taken against an heir of feoffee who inherited the property from feoffee; After 1522 action could be taken by a volunteer (someone who took the property as a gift without furnishing any consideration); After 1905 action could be taken against a squatter.

The class of persons against whom the beneficiary of the trust could bring an action has therefore become quite broad. Rights in equity are considered to be rights in personam, i.e. they are enforceable against a particular person, whereas land rights at common law are rights in rem, i.e. they are binding against the whole world. While the equitable propriety right, recognised through the principle of trusteeship, started out as a right against the trustee in particular, it has expanded to be similar to a right in rem. There is however a notable exception: the equitable rights are not enforceable against a bona fide purchaser of legal estate for value without notice (the BFP). This Page 4 of 12

person was cheekily referred to as “the Chancellor’s darling” or “equity’s darling”. 2 More on the BFP further below. The modern trust Trusts were utilised by the landed classes for quite some time for the purposes of locking land within a certain family. The modern trust is used for a variety of reasons including keeping affairs private, reducing tax obligations, making provisions for physically or intellectually challenged family members and the promotion of charitable purposes. There are many categories and characterisation of trusts, however for our purposes the following categorisation will be sufficient: Express trusts

Constructive trusts

Implied trusts Resulting trusts The trust has been a most significant and unique contribution from English law. Some civil law jurisdictions have recognised its usefulness and implanted trust-type devices in their civil codes (for example Curacao, Saint Maarten and Liechtenstein). III.

Equitable interests other than through (express) trusts

The express creation of a trust is not the only action which may give rise to an equitable interest. Doctrines have developed such that equity deems an individual’s conscience fixed in such a way that he must recognise the proprietary interest of another. Note an equitable interest is different from a ‘mere equity’ which arises where certain facts give rise to the ability of a party to seek and obtain equitable remedies. Note from following passage from Lord Upjohn in National Provincial Bank v Ainsworth [1965] AC 1175 (HL) at 1238: An equity to which a subsequent purchaser is subject must create an interest in the land. As Professor Crane has pointed out in an interesting article in The Conveyancer and Property Lawyer, Vol. 19 (N.S.), p. 343 at p. 346: "Beneficial interests under trusts, equitable mortgages, vendors' liens, restrictive covenants and estate contracts are all equitable interests." No lesser interests have been held to be sufficient. A mere "equity" used in contradistinction to an "equitable interest" but as a phrase denoting a right which in some circumstances may bind successors is a word of limited application and, like the learned editors of Snell, 25th edition, at p. 18, I shall attempt no definition of that phrase. It was illustrated in the case before me of Westminster Bank Ltd. v. Lee,85 where I was constrained in the then state of the authorities to assume that a mere equity might bind successors, yet being at most a mere equity, even subsequent equitable encumbrancers, contrary to the usual rule, could plead purchaser for value without notice. But, my Lords, freed from the fetters which there bound me, I myself cannot see how it is possible for a

2 Property law scholar Professor Hackney has expressed dissatisfaction with the term, expressing that the situation is not one of equity having any affection for the BFP but rather refusing to intervene to preserve any rights the beneficial owner to the property may have: Hackney J. Understanding Equity and Trusts. Understanding Law, 2nd ed. (Sweet & Maxwell 1996).

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"mere equity" to bind a purchaser unless such an equity is ancillary to or dependent upon an equitable estate or interest in the land.

Taking the list from Professor Crane, the following are equitable interests, other than by way of express trust, recognised by equity: i. ii. iii. iv.

Estate contracts Vendors’ liens Mortgages Restrictive covenants

The latter two are covered in detail in Real Property II, however we will consider their ability to create equitable interest here. Estate contracts Estate contracts are enforceable contracts to convey a legal estate. At common law a breach of contract generally gives rise to damages, however as equity regards each parcel of land as unique the equitable remedy of specific performance is made available. The purchaser under an estate contract is treated as having an equitable interest as ‘equity regards as done what ought to be done’: Walsh v Lonsdale (1882) 21 Ch D 9 (Eng. CA) [an agreement for a lease] Gardener S, ‘Equity, Estate Contracts and the Judicature Acts: Walsh v Lonsdale Revisited’, Oxf J Leg Stud., Vol. 7, No. 1 (Spring, 1987), pp. 60-103 (on OurVLE). Applicability of Walsh v Lonsdale principle is dependent on specific performance being available: Foster v Reeves [1892] 2 QB 255 Howard v Miller [1915] AC 318 (PC, Canada) per Lord Parker at 326: It is sometimes said that under a contract for the sale of an interest in land the vendor becomes a trustee for the purchaser of the interest contracted to be sold subject to a lien for the purchase-money; but however useful such a statement may be as illustrating a general principle of equity, it is only true if and so far as a Court of Equity would under all the circumstances of the case grant specific performance of the contract.

Vendor’s Liens An unpaid vendor’s lien arises by operation of law upon the making of a binding contract for the sale of land – unless and to the extent that the terms of the contract itself are inconsistent with the existence of the lien. As stated by Lord Clarke in Bank of Cyprus UK Ltd v Menelaou [2016] 2 All ER 913 at [49]: [T]he Bank is entitled to a lien on the property, which is in principle an equitable interest which it can enforce by sale.

Barclays Bank Plc. v Estates & Commercial Ltd [1997] 1 WLR 415 (Eng. CA) Page 6 of 12

Ken Sales & Marketing Limited v Cash Plus Development Limited [2015] JMCA Civ 14, esp [15] – [24] Mortgages A mortgage exists where property is used as security for a loan. The modern form of a mortgage involves the mortgagee (the lender) having a bundle of rights to enforce his security, and the mortgagor (the borrower) having an equity of redemption, that is an ability to redeem the mortgage after repaying the principal and interest. Restrictive covenants A restrictive covenant requires the covenantor not to do some specified thing, whether building on the land or using the land for particular purposes. Unlike ‘positive’ covenants, the burden of a restrictive covenant is capable of 'running with the land', so that successive owners or occupiers are bound by the restriction. Restrictive covenants are enforced in equity. IV.

Distinguishing legal and equitable interests

There are two primary respects in which equitable proprietary interests are distinguishable from their legal counterparts: the application of the doctrine of notice and the availability of equitable remedies. The doctrine of notice, and related concepts, are explored below: The bona fide purchaser of legal estate for valuable consideration without notice The authors of Meggary & Wade describe the following as a “cardinal maxim”: Legal rights are good against the whole world; equitable rights are good against all persons except a bona fide purchaser for value without notice, and those claiming under such a purchaser. Rights at common law are therefore rights in rem. Rights at equity, though initially said to be rights in personam, are almost as far reaching as legal rights except that they are not enforceable against a BFP (in relation to whom the doctrine of ‘notice’ is central). However in relation to registered land the doctrine of notice plays no significant role and as such it may be said that there is not much material difference, especially in relation to registered land, in the scope of legal and equitable rights. Now to unpack the concepts in the BFP, the most important of which is notice: Bona fide – the person relying on the defence must show that they exercised good faith. “Good faith” has been interpreted to in large part mean an absence of notice, but potentially something more: Midland Bank Trust Co. Ltd & Ano. v Green [1981] AC 513 (HL), 528 (per Lord Wiberforce): [T]he character in the law known as the bona fide (good faith) purchaser for value without notice was the creation of equity. In order to affect a purchaser for value of a legal estate with some equity or equitable interest, equity fastened upon his conscience and the composite expression

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was used to epitomise the circumstances in which equity would or rather would not do so. I think that it would generally be true to say that the words "in good faith" related to the existence of notice. Equity, in other words, required not only absence of notice, but genuine and honest absence of notice. As the law developed, this requirement became crystallised in the doctrine of constructive notice which assumed a statutory form in the Conveyancing Act 1882, section 3 [the equivalent being in section 5 of Jamaica’s Act]. But, and so far I would be willing to accompany the respondents, it would be a mistake to suppose that the requirement of good faith extended only to the matter of notice, or that when notice came to be regulated by statute, the requirement of good faith became obsolete. Equity still retained its interest in and power over the purchaser's conscience. The classic judgment of James L.J. in Pilcher v. Rawlins (1872) L.R. 7 Ch.App. 259, 269 is clear authority that it did: good faith there is stated as a separate test which may have to be passed even though absence of notice is proved. And there are references in cases subsequent to 1882 which confirm the proposition that honesty or bona fides remained something which might be inquired into…

The extent of the consideration may also be relevant: Pilcher v. Rawlins (1872) L.R. 7 Ch.App. 259 (Eng. CA), 269 (per James LJ): Such a purchaser, when he has once put in that plea [of being a BFP...