Equity and the Doctrine of Notice PDF

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Topic 5 –Equity and the Doctrine of Notice

READING LIST Primary Reading

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De Londras, Principles of Irish Property Law, 2nd ed. (Dublin: Clarus Press, 2011) Howlin & McGrath, Lyall on Land Law, 4th ed. (Dublin: Round Hall, 2018) Wylie, Irish Land Law, 5th ed. (Dublin: Bloomsbury Professional, 2013) Wylie, The Land and Conveyancing Law Reform Acts: Annotations and Commentary, 2nd ed. (Dublin: Bloomsbury Professional, 2017)

Recommended Reading Texts

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Pearce & Mee, Land Law, 3rd ed. (Dublin: Round Hall 2011) Wylie, Casebook on Irish Land Law, 2nd ed. (Dublin: Butterworths, 2000) Maddox, Land and Conveyancing Law Reform Act 2009 – A Commentary, (Dublin: Round Hall, 2009) Coughlan, Property Law, 2nd ed. (Dublin: Gill & MacMillan, 1998)

Cases

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Hunt v Luck [1902] 1 Ch 428

LRC Documents ▪ Law Reform Commission, Consultation Paper on Reform and Modernisation of Land Law and Conveyancing Law (LRC CP 34-2004)

Topic Outline

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1. Introduction/ Historical Background 2. The Use / The Trust The Practice and Terminology of the Use Rationale for the Use Who was bound by the Use? The Statute of Uses (Ireland) 1634 The Double Use and Development of the Modern Trust Trusts 3. General Equitable Principles The Maxims of Equity The Bona Fide Purchaser Elements of Equitys’s Darling/ The Bona Fide Purchaser The Doctrine of Notice Precautions to Avoid Being Fixed With Notice Physical Investigations on the Property Investigations on Title The Merger of Law and Equity

3 Introduction – Historical Background Equity and its principles have exerted an enormous influence over the development of Irish land law. It is a more flexible scheme of the law that operates in parallel to the common law. In order to fully understand the operation of equity in property law, it is important to appreciate the way in which equity developed. Under the common law, one could only get relief for injury caused to you if your case would “fit” into a particular writ. A writ was a document that specified the nature of the claim and the facts and basis on which it was based. There was a different writ for each cause of action that existed at the time, and the invention of new writs was restricted. Therefore if your complaint did not fit into a particular writ there was no remedy available to you. The second problem with the common law was that the remedy that was usually given at the time was damages. This remedy is not always suitable. The practice developed whereby a disappointed litigant would petition the king for redress. Originally these petitions were heard by the king, but as the volume of them increased they were later referred to the Chancellor. By the 16th century, petitions were made directly to the Chancellor, who made the decrees in his own name and had his own court. As the petitions grew in number the Court of Chancery (i.e. the Lord Chancellor’s court) evolved as a court independent of the common law courts. By the end of the 17th century the jurisdiction of the Chancellor had been established as an independent system of justice, known as the law of equity. The Chancellors were not bound by the restraints and strict rules of the common law courts, but instead they based their decisions upon what they considered to be just and equitable and upon what they believed to be required in conscience. This was to ensure the necessary level of flexibility to allow the court to deal with the varying natures of the claims that came before them. However, while over time equity developed guiding principles (“maxims” of equity), it still remains more flexible than the rules of common law. Equity acknowledges rights that were not recognised at common law, and gave remedies that could not be obtained at common law. Equitable remedies were—and continue to be—discretionary and the conduct of the parties along with the justice of the case still determines what remedies will be granted.

1. The Use / The Trust

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The equitable development of the “use” (the modern equivalent of which is the “trust”) forms an integral part of the law relating to land and is one of the most important contributions of equity to property law. It was a device used in the transfers of land and was mainly designed to avoid certain incidents and to get around inheritance rules that were in existence at the time.

A practice developed in the early stages of the common law whereby land would be conveyed to one person, A, to be held by him for the benefit of B. A was the legal owner of the land and, under the common law, he could dispose of his interest as he wanted; however, this was clearly in contravention of the grantor’s wishes. If a situation arose whereby A abused his rights over the land in direct contravention of what the grantor had wanted, then could B, the person in whose benefit the land was being held, enforce any rights against A, the person to whom the land was actually transferred? “Whiteacre to A to the use of B”

The common law only recognised the rights of the person to whom the land-ownership had been transferred as he was now the “owner” of the land. Unlike the common law, however, equity recognised that title to land could be divided into legal and equitable (beneficial) ownership. Equity, concerned as it is with fairness and conscionable behaviour, wanted to honour the intention of the grantor, the person transferring the land for the benefit of B. So, equity recognised the concept of the “owner” (A), but also allowed for the fact that B had enforceable rights over the land as against A. Equity has always been concerned to ensure that the intention of the person transferring the land is upheld and, in this example, that person, the transferor, wanted the land to be held for someone else’s benefit. As De Londras says in her book (1st ed.), what this actually means in practice is that the person to whom the land had been transferred was required to give all of the benefit of that land to the person who was intended to receive that benefit. She gave a scenario by way of example:

My house “Willow Cottage” to Patrick to the use of Sally.

While both the common law and equity recognised that Patrick was the owner of Willow Cottage, equity also recognised that Sally was entitled to the benefit of Willow Cottage and would compel Patrick to ensure that she received it.

Where the same person was recognised as owner both at law (meaning common law) and in equity, he was described as the legal and beneficial owner. The development of the use recognised that one

5 person could hold the legal title to the land and be recognised at law as the legal owner, but that an other could hold the equitable title. The person holding the equitable title was known as the beneficiary, the equitable owner or the cestui que use/trust.

The Practice and Terminology of the Use The use arose where the grantor conveyed his land by way of feoffment to a person called a feoffee to uses (the feoffee). The feoffee was the legal owner. The feoffee would hold the land under the terms of the feoffment, i.e. to the uses that the grantor declared, i.e. for the benefit of a particular person, who was known as the cestui que use. As the feoffee held the legal estate in the land, the common law did not recognise the cestui que use as having any claim at all to the land. However, equity felt that his claim to the benefit of the land should not be ignored. Equity recognised the legal title of the feoffee, but required him to exercise his legal title as intended by the grantor. The cestui que use was therefore regarded as the owner of the property in equity. In summary, equity was willing to deal with this unorthodox transfer as follows: • The feoffee was now the person with the legal title to the land; • equity required the feoffee to hold the land for the benefit of the cestui que use; • the cestui que use had rights over the land in equity.

Rationale for the Use There were a number of reasons why the use was such a popular land law tool – it allowed the owner of land to get around various rules: a) Inheritance Under the old common law rules, all real property of the deceased passed by the ancient rules of inheritance known as primogeniture (either to the oldest male or, if there were no sons, to the daughters collectively), and the deceased could not leave his property by will (there was, essentially, no such thing as a will). These rules could be circumvented by way of a use. There was nothing to stop him achieving the same result as if he had a will by conveying the land to 3 rd parties before his death to be held by them to the uses declared by him on his death.

b) Family Estates There was a rule at the time that prevented the creation of successive estates or family settlements - so the landowner couldn’t make a settlement of land on his own family. If a landowner wanted to create a disposition leaving the property to himself for life and then to his son for life and subsequently to his son’s heirs, this would be impossible; the use provided a solution. The problem was solved by conveying the land to 3rd parties to be held by them to the use of various members of

6 the family. It might have been necessary in circumstances where the landowner was going abroad for a substantial period of time, for example to fight in the crusades. He could do it essentially in such a way that it was a conveyance to the feoffee to the use of the grantor and his sons in a line of descendancy. c) Avoidance of incidents Under the system of tenure the person seised of the land (i.e. the person in possession of the land) owed incidents (payments) to the feudal lord. If the landowner were no longer seised of the land on his death, the incidents arising on death, such as relief and wardship, could not be claimed by the lord as there was no succession by inheritance. One of the primary purposes of the use, and one which has survived to the present day, is tax avoidance. The taxes of the Middle Ages were the feudal dues or the incidents. So for example dues payable on the death of a tenant seised of the land, such as relief, marriage and wardship, could be avoided by the tenant conveying the land before his death to adult friends to the use of his heirs.

Who was bound by the use? Initially, the use could only be enforced only against the original feoffee to uses (legal owner). When he died, the legal estate passed to his heirs free of the use. In the late 1400s, the Chancellor began to enforce the use against an heir of the feoffee to uses and in time he was enforcing the use against all purchasers who were bound by the use. There was one exception to this and that was where a purchaser could prove he was bona fide (“good faith”), had given value for the land, and had not been aware of the use – “bona fide purchaser of a legal estate for value without notice”. This was the beginning of the “doctrine of notice”. The Statute of Uses (Ireland) 1634 The effect of the statute was to “execute” the use such that the legal title was taken from the feoffee and was placed with the cestui que use. In practical terms that meant that the feoffee would have no ownership at all (he or she was completely cut from the transaction), and the cestui que use would have both legal and beneficial ownership. Example from De Londras’ book (1st ed.):

“My house Willow Cottage to Patrick to the use of Sally” Prior to Statute of Uses 1634 Feoffee – Patrick; legal rights c.q.u. – Sally; equitable rights After Statute of Uses 1634 Use executed by the Statute of Uses Feoffee – Patrick; no rights

7 c.q.u. – Sally; legal & equitable rights The Double Use and Development of the Modern Trust New ways of avoiding the operation of the Statute of uses were invented. One of these devices was the “use upon a use”, or double use, e.g. “to A to the use of B to the use of [or on trust for] C and his heirs” So, to A, to the use of B to the use of C = To A, to the use of B; to B to the use of C. The court of equity had to decide what impact the Statute of Uses would have on this double use. In other words, would it be allowed to operate? The courts were undecided as to what effect the double use had:

Initially, in Jane Tyrell’s Case (1557) 2 Dy 155, the court essentially upheld the application of the Statute to the double use. The Statute executed the use in favour of B, giving him a legal and equitable estate. A was left with nothing and C’s use was not enforced; it was voided. The courts then changed their approach in Sambach v Dalston (1635) 163 Toth 188 and reconsidered their position in relation to the double use. It was held that (a) a use upon a use was valid, and (b) the use was not executed by the Statute. The Statute executed the first use, but the second use was allowed to operate as uses would have operated before the Statute was passed. The effect of this decision on “to A to the use of B to the use of [or on trust for] C and his heirs” was that the first use was executed, giving B the legal estate as trustee holding the legal estate in the property on trust for C. A dropped out of the picture. C’s use was therefore not executed and C and his heirs held an equitable fee simple estate.

This is where the word “use” became the modern day “trust”. The conveyance was initially shortened to “to B to the use of B on trust for C”. This later became “Unto and to the use of B in trust for C”. This is now the formula used to create an express trust in this jurisdiction.

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Trusts “A trust is the relationship which arises wherever a person (called the trustee) is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons (of whom he may be one and who are termed beneficiaries) or for some object permitted by law, in such a way that the real benefit accrues, not to trustee, but to the beneficiaries or other objects of the trust.” (Keeton & Sheridan, The Law of Trusts, 12th ed., p.3)

Trusts of Land Under the Land and Conveyancing (Law Reform) Act 2009 (Extracts taken from Explanatory Memorandum) The Land and Conveyancing Law Reform Act 2009 makes substantial changes in relation to settlement of land and trusts of land. A settlement of land is where land is given by a deed or will to a number of persons in succession e.g. to X for life, remainder to Y in fee simple. An alternative to this is that land is given to trustees to hold for the benefit of successive beneficiaries. Sometime this type of trust is simply that the trustees must hold (look after) land. Other times it might require the trustees to sell the land, invest the money from the sale and look after the investments for the beneficiaries (trusts for sale). The law governing settlements and trusts had become complicated. Part 4 of the 2009 Act abolishes the rules dealing with settled land (Settled Land Acts, 1882-1890) and replaces them with a trust of land scheme. Under the new rules, the legal title of the land under the trust will be vested in the trustees to ensure that they have the power to deal with the land for the benefit of the beneficiaries.

Circumstances Falling Within the Definition of a Trust for Land Section 18 lays down the types of settlements and trusts that are considered trusts of land and that will be dealt with under this section. (Note, however that section 18(3) provides that these trusts will be governed by the general law of trusts) “Where land is— (a) for the time being limited by an instrument, whenever executed, to persons by way of succession without the interposition of a trust (in this Part referred to as a “strict settlement”), or (b) held, either with or without other property, on a trust whenever it arises and of whatever kind, or

9 (c) vested, whether before or after the commencement of this Part, in a minor, there is a trust of land for the purposes of this Part. The only exception to this rule is in section 18(9), where land is held directly for a charitable purpose.

Trustees of a Trust for Land The persons to be considered trustees are laid down in section 19 of the Act. Where a strict settlement is in place the trustees will be the tenant for life along with the trustees of settlement. Where a settlement is created after the commencement of Part 4, it will involve a trust and the instrument creating it should specify the trustees. In relation to an express trust of land or land vested in a minor, a trustee is someone who is expressly listed in the trust instrument; or (if not specified) someone who is given a power of sale (or power to consent to sale) under the trust instrument; or (if not specified) the settler or (if in a will) the testator’s personal representatives. Trusts which do not fall into the above categories are: (1.) constructive or resulting trusts (declared by a court), and (2.) bare trusts (where land is vested by the owner in a nominee). In all such cases the person holding the legal title is the trustee. Section 19(2) provides that an application to the court can be made as a last resort. Trustees’ Powers In section 20(1) all the powers of an owner to convey or otherwise deal with the land are conferred on the trustees; however, these powers are subject to the normal duties and restrictions generally imposed on trustees under trust law or under any statute. Specific powers are laid down in section 20(2). A trustee can permit a beneficiary to occupy or otherwise use the land on such terms as the trustee thinks fit. The trustee can also sell the land and re-invest the proceeds, in whole or in part, in the purchase of land, whether or not situated in the State, for such occupation or use.

Purchaser of Trust Lands This is dealt with in section 21. It provides, in subsection (1), that a conveyance to a purchaser of a legal estate or legal interest in land by the qualified persons overreaches any equitable interest in the land so that it ceases to affect that estate or interest, whether or not the purchaser has notice of the equitable interest. This power of overreaching will only occur where the conveyance is made by a qualified person or persons as laid down in section 21(2).

10 In the case of express trusts, including where land is held for a minor, the conveyance must be by at least two trustees or a trust corporation, i.e. a corporation authorised to act as a trustee (as provided for by section 30(4) of the Succession Act 1965). Under subsection (3)(a), no overreaching in favour of a purchaser will operate where the conveyance is made for a fraudulent purpose of which the purchaser had actual knowledge at the date of the conveyance or to which the purchaser was a party. Paragraph (b) of subsection (3) lists other cases where no overreaching will occur: where the conveyance of the land itself rules it out by expressly making it subject to the equitable interest in question; where the title documents have been deposited to protect the equitable interest so as to create a once-common equitable mortgage of the land; where there is no express trust or land held for a minor and so a conveyance may be made by a single legal owner, such as a constructive or resulting trustee. (In such a case the beneficiary or person entitled to claim an equitable interest may protect it by registration in the Registry of Deeds (in the case of unregistered land) or Land Registry (in the case of registered land), as provided for by subsection (4).) where the land is a family home within the Family Home Protection Act 1976. Under that Act a conveyance by the ‘‘owning’’ spouse (who has the legal title) must have the consent of the ‘‘non-owning’’ spouse (whether or not he or she has an equitable interest). Subsection (6) preserves that position.

General Equitable Principles The Maxims of Equity The initial focus of equity was to ensure a certain element of flexibility. Over time, however, general principles or maxims developed as guidelines for the...