Topic 3 - Equitable Property and Trusts PDF

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Topic 3 - Equitable Property and Trusts Equity ● “Equity” refers to that body of law that derives from the specific jurisdiction developed and exercised by the English Court of Chancery before 1873. ● When we speak of “equitable doctrines or principles” or ‘equitable interests in property” or “equitable remedies” we are talking about claims and rights and remedies that are ONLY recognised through their development in Chancery courts. ● The administrative restructure from the Judicature Acts gave all superior court judges the power to administer equitable remedies and common law remedies but did not “fuse” the principles of common law and equity. ● This topic explores in more detail the nature of equitable interests in property. All equitable interests in property are choses in action. ● What are proprietary rights? ○ In Heydon, Leeming and Turner's, Equity Doctrines and Remedies (5th ed, 2015,) the authors suggest that there are at least four characteristics that are relevant in identifying interests in any particular property as being “proprietary”: ■ the power to recover the specific property; ■ the power to transfer the property to another; ■ the persistence of remedies in respect of the interest against third parties who assume the burden of such remedies; ■ the extent to which the interest may be displaced in favour of competing dealings by the grantor or others with interests in the subject matter (i.e., priorities). ● Nature of Equitable Interests in Property ○ Historically, petitions to the Chancellor which concerned property resulted in orders against the person restricting their ability to use their legal rights. Over time, the principles that developed from these cases led to the recognition of equitable rights in legal property owned by another. The historical development and recognition of rights explains their features. ○ Equitable property rights can vary in terms of the characteristics of transmissibility, priority, permanence, the remedies available to enforce them, and other matters. ○ Equity at all times presupposes the existence and validity of the common law and legal rights to property but recognises additional rights to that property. ● Characteristics of Equitable Interests in Property ○ Creation of Equitable rights and interests in property ■ By agreement ie intentionally; ■ By express trust; ■ By court order/ operation of law: eg equitable lien imposed by a court over the defendant’s property, so that if the defendant does not comply with the court order the property can be sold to satisfy it. ○ Features of Equitable Interests in property

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Created less formally (note requirements for transfer of equitable interests is studied in Equity & Trusts 70517) ■ Bind the holder of the legal interest and volunteers but not a purchaser for good faith without notice. Equitable Interests – property for some purposes, not others ○ Equitable interests may be regarded as forms of ‘property’ for some purposes and not others, depending upon the context, particularly in insolvency and for taxation purposes where the construction of the legislation is determinative. ○ For example, in Baker v Archer-Shee [1927] AC 844, the House of Lords decided that a British resident who was a beneficiary under a trust and entitled to the income of a residuary estate during her lifetime was in receipt of income “arising from foreign stocks securities and shares.” The case decided that the right of a beneficiary under a fixed trust should be treated as an (equitable) interest in property, at least for some purposes. ○ Note: Discretionary Trusts are different: a beneficiary under a fixed trust has a definite entitlement as compared with a beneficiary under a discretionary trust, who may receive nothing: the trustee can decide whether to allocate a share or nothing at all. Their interests are regarded differently in equity. A beneficiary under a fixed trust has a proprietary interest whereas for most purposes, a beneficiary under a discretionary trust is not regarded as having a proprietary interest, merely a right to compel the trustee to properly administer the trust. ○ Example: Interest of a person under a will that has not been administered ○ In Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694 it was held that Mrs Coulson’s residuary interest in the unadministered estate was a chose in action but was not a property interest for the purposes of stamp duty law because until the estate was administered no one could say what property would be realised to give effect to it or what the residue might be, so it gave her only a personal right to compel proper administration of the estate by the executors, and therefore did not attract stamp duty in Queensland where the property existed. ○ However, the right has one of the indicia of property – it is transmissible by will. ○ In another context, in Official Receiver v Schultz (1990) 170 CLR 306 it was held that for the purposes of bankruptcy law, the same chose in action was a property interest, so that when it later bore fruit that vested in the Official Receiver in Bankruptcy. What is a trust? ○ A trust can be defined as a relationship between a person known as the trustee, who undertakes to hold property of which it is the owner exclusively for the benefit of others, known as the beneficiaries. ○ A trust is not a company; nor a separate legal entity – it is an undertaking recognised in equity to give a proprietary interest in the beneficiaries. ○ Requires three certainties: ■ Certainty of intention (to create a trust) ■ Certainty of subject matter (any presently existing legal or equitable property)

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■ Certainty of object (the identity of the beneficiaries) Examples of equitable proprietary interests ○ Interest of a partner in a partnership: Canny Gabriel Castle Jackson Advertising Pty ltd v Volume Sales Finance Pty Ltd (1974) 131 CLR 321, 327-328. ○ Equitable interests created by creation of security interests in property – eg an unregistered mortage will be treated as an equitable mortgage. J H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546. ○ An equitable charge arising from contractual agreement that property be held as security for a debt. ○ The interest of a beneficiary under a fixed trust (not a discretionary trust) ○ The trustee’s interest in trust assets in respect of properly incurred trust expenses ○ A restrictive covenant over land: see Tulk v Moxhay (1848) 2 Ph 774; 41 ER 1143 which established that there are occasions in which equitable covenants can bind future purchasers of property and ‘run with the land’. ○ Equitable interest of a purchaser under a contract for sale ○ Future property: Norman v Federal Commissioner of Taxation (1963) 109 CLR 9. ○ Equitable interests in assignment of property for value that do not comply with formalities ○ Equitable interests in voluntary assignment of property that do not comply with formalities in certain circumstances: Milroy v Lord (1862) 4 De GF&J 264; 45 ER 1185, where the donor has done everything necessary to be done by the donor personally which according to the nature of the property is necessary to vest legal title in the intended done (as interpreted by the High Court in Corin v Paton (1990) 169 CLR 540. ○ By implication of law – eg resulting trusts; equitable lien ○ By operation of law – eg where the court orders that property be held on constructive trust. Hierarchy of equitable interests ○ Equitable proprietary rights and interests ○ “Mere” Equity ■ A “mere equity” is not a fully fledged equitable property right – it is a right ancillary to the recognition of an equitable proprietary interest’: Latec Investments (1965) 113 CLR 265 at 277-8, per Kitto J. ■ These are equitable claims which if made out and accepted by the court, may lead to an equitable proprietary interest coming into existence upon the exercise of the original equitable right. ■ The key difference between an equitable interest and a mere equity is that with a mere equity, the court is required to “perfect” the interest: Mills v Ruthol (2002) 10 BPR 19,381; [2002] NSWSC 294 at [132] per Palmer J. ■ Examples of circumstances in which the court recognises a ‘mere’ equity’ arising include: ● the rights to set aside a transaction for fraud or unconscionable

conduct or undue influence, and the right to obtain rectification for mistake. the right to claim an interest in property pursuant to proprietary estoppel principles; ● the right to a constructive trust over property, pursuant to principles laid down by the HC in Muschinski v. Dodds (1985) 160 CLR 583; 62 ALR 429 and Baumgartner v. Baumgartner (1987) 164 CLR 137; 76 ALR 75. ○ Personal Equity ■ A personal equity is simply the basic right of access to a court of equity of a plaintiff seeking equitable remedies that are not a proprietary remedy. ■ Incapable of assignment ■ Does not attach to particular assets ■ National Provincial Bank v. Ainsworth [1965] Ac 1175 at 1238; 2 All ER 472 at 488 per Lord Upjohn: Role of Equitable Proprietary Interests in Commercial Law ○ Personal property is now the most significant form of wealth in modern economies. ○ Trade and investment in choses in action includes both legal choses in action and equitable choses in action. ○ Of particular importance in Australian commerce is the commercial use of the trust as an investment and profit making enterprise, where the investors are beneficiaries in the trust and where the trustee manages trust property with a view to making profit for investors. ○ Advantages to the use of such trading or commercial trusts include taxation: generally trust not taxed as an entity so may make distributions of profits in gross (and losses) to beneficiaries who may be taxed at a lower rate, and distributions of capital. There are further structural advantages – far less regulated than corporations. ○ For further information see: N D’ Angelo Transacting with Trusts and Trustees (LexisNexis Australia 2020) The Use of the Commercial Trust under Australian law ○ Examples (from N D’Angelo, Transacting with Trusts and Trustees, ch 1, pp 1-39) ■ Superannuation: all superannuation funds are highly regulated forms of trusts. Employees members have an interest in the trust property, rights which are defined by contract. Approximately 3 trillion dollars are held in superannuation funds in Australia. ■ Managed Investment Schemes: almost all being a public unit trust, such as real estate investment trusts which if they meet relevant criteria are regulated under Part 5C of the Corporations Act. ASIC reports that as at June 2019, there were 3,712 registered MIS and public offer retail unit trusts holding a total of A$378.5 billion in unconsolidated assets. ■ Trading trusts – generally taken to mean a trust (either a unit trust or discretionary trust) where the trustee is given power to carry on business ● ●

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activities with trust assets and functions as an alternative to a corporation. Usually the trustee is a corporate entity with nominal value. In the 2017 financial year 874,874 trusts lodged tax returns declaring total business income of $385.7 billion. CSD v Livingston ●

Latec Investments v Hotel Terrigal ●...