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PROPERTY LECTURE 6

Dr Glen Anderson

Old System Title and Priorities Topics 1. 2. 3. 4. 5. 6. 7. 8. 9.

Old System Title in Overview Why is it Important to Learn Old System Title? Legal and Equitable Interests in Old System Land Priority Disputes Competing Legal Interests Earlier Legal Interest and Later Equitable Interest Earlier Equitable Interest and Later Legal Interest: The Bona Fide Purchaser for Value Rule Competing Equitable Interests Old System Title, Registration of Deeds and Priorities

1. OLD SYSTEM TITLE IN OVERVIEW Introduction Old system title (or general law title) was the title system in use before the advent of Torrens title on 1 January 1863. Hence, all land held in New South Wales granted prior to this time was old system title. We should note, however, that the vast majority of this land has now been converted to Torrens title. Indeed, only a very small amount of old system title still exists in New South Wales. Ownership to land under old system title is established by a chain of documents going back many years. Some of these title deeds are, to use the words of Lord Westbury, “difficult to read, disgusting to touch and impossible to understand”: Wroth v Tyler [1974] Ch 30 at 56 per Megarry J (without precise attribution). Prior to 1874 a good root of title was established by investigation of the title deeds no less than 60 years previously. In 1874 the 60 year period was reduced to 40 years. This reduced period was incorporated into the Conveyancing Act 1919 (NSW) in its original 1919 form. The Conveyancing (Amendment) Act 1930 reduced the period to 30 years, which remains the current period: s 53(1) of the Conveyancing Act. The 30 year period is calculated from the date of the present contract for sale: Gateway Developments Pty Ltd v Grech (1970) 71 SR (NSW) 161 at 168 per Helsham J. Contrast with Torrens Title Old system title is based upon deeds. Section 23B(3) of the Conveyancing Act states that the requirement of a deed does not apply to “land under the provisions of the Real Property Act 1900”. Torrens title is instead based upon registration of the certificate of title. Only upon registration of the memorandum of

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transfer (a standard form) will the legal interest in the land pass to the purchaser: s 41 of the Real Property Act 1900 (NSW). 2. WHY IS IT IMPORTANT TO LEARN OLD SYSTEM TITLE? Understanding the Historical Predicates of Torrens Title The Torrens title system might be thought of as a “language.” Old system title is the language that preceded the Torrens system and therefore to properly understand Torrens title we must also have a basic understanding of old system title. In short, an overview of old system title provides an excellent conceptual and historical basis to the Torrens system. When examining the priorities of registered and unregistered interests under the Torrens system, we find a general assimilation of the doctrines relating to priorities of legal and equitable interests developed in the old system context. An example might be the seminal authority of Rice v Rice (1853) Drew 73; 161 ER 646 at 648 where Kindersley V-C distilled the rule for the resolution of competing equitable interests in land as follows: “[a]s between persons having only equitable interests, if their equities are, in all other respects equal, priority of time gives the better equity; or qui prior est tempore potior est jure.” This basic principle has been extrapolated into the Torrens context with regards to competing unregistered interests on numerous occasions. The concepts of “registered” and “unregistered” interests in Torrens land do not make sense unless it can be understood how they relate to “legal” and “equitable” interests under old system title. Furthermore, it is necessary to study old system title to understand that Torrens title incorporates conceptually anomalous unregistered “legal” interests and registrable “equitable” interests. Direct Application of Old System Concepts and Doctrines into the Torrens System Moreover, certain doctrines fashioned in the old system context still have direct application in relation to Torrens land. The classic example of this is the common law doctrine of the bona fide purchaser of the legal estate (discussed later in the lecture), which, by virtue of s 43A(1) of the Real Property Act 1900 (NSW), is directly incorporated into the Torrens system. Conclusion: Old System Title Provides the Conceptual Skeleton for Torrens Title The conceptual skeleton of the Torrens title system is old system title. Hence, to claim that old system title is an irrelevance to the modern Australian property lawyer is erroneous. The dominant land title system in Australia – the Torrens system with its distinction between registered and unregistered interests – is predicated upon the distinction between legal and equitable property interests which evolved steadily throughout English history prior to the administrative fusion of legal and equitable courts. 3. LEGAL AND EQUITABLE INTERESTS IN OLD SYSTEM LAND Legal Interests in Old System Land Legal interests in old system land are typically created by deed: s 23B(1) of the Conveyancing Act. Deeds can therefore create legal mortgages, easements, profits à prendre and leases. Legal leases created by parol constitute exceptions to this principle: ss 23B(2)(d) and 23D(2) of the Conveyancing Act. The interest of a trustee of old system land will be legal. If a life estate is established pursuant to a trust instrument, then the trustee will have a legal interest. In the case of a conveyance of old system land, a legal interest will accrue to the purchaser on the execution of a deed of conveyance and payment of the outstanding purchase price to the vendor at settlement. Equitable Interests in Old System Land Equitable interests in old system land are usually created by acts less than deed. In circumstances where

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an executory contract to grant a property interest is created, an equitable property right will emerge provided the party seeking to enforce the agreement is entitled to specific performance: Walsh v Lonsdale (1882) 21 Ch D 9. Although Walsh v Lonsdale (1882) 21 Ch D 9 relates to leases, the same principle applies to other types of executory property interests such as mortgages, easements and profits à prendre: Kitching v Phillips [2011] WASCA 19 at paragraph 44 per Murphy JA. The interest of a beneficiary under a trust of old system land will be equitable. If a life estate is established pursuant to a trust instrument, then the recipient of the life estate will hold an equitable interest. In the case of a conveyance of old system land, an equitable interest will accrue to the purchaser at the moment a deposit (typically ten percent of the purchase price) passes to the vendor with a signed executory contract for the sale of land. This emerges by virtue of the purchaser’s right to the equitable remedy of specific performance of the subsisting contract at law. Equitable property rights can also be created pursuant to the doctrines of part performance and equitable estoppel. “Execution” of a “failed deed” will also cause an equitable interest in property to pass by virtue of s 23C(1)(a) of the Conveyancing Act. 4. PRIORITY DISPUTES Why Do We Have Priority Disputes? Priority disputes are created where there has been more than one dealing with a particular property interest. Priority disputes of old system title are governed by the rules of common law and equity and the statutory scheme of registration. Priority Dispute Types There are generally four priority dispute types that might emerge, namely: • • • •

Competing legal interests; Earlier legal interest and later equitable interest; Earlier equitable interest and later legal interest; and Competing equitable interests.

Summary of Priority Disputes Where the dispute is between competing legal interests, the Latin maxim nemo dat quod non habet applies, meaning that “a person cannot convey an interest that he or she does not have.” Where the dispute is between an earlier legal interest and a later equitable interest, the legal interest will typically prevail. Where the dispute is between an earlier equitable interest and a later legal interest the equitable interest cannot prevail over a bona fide purchaser of the legal interest without notice of the equity. Where the dispute is between competing equitable interests, the first in time will typically prevail, except in the case where the first equitable interest is a mere equity; such an interest will never prevail over a regular equitable interest. 5. COMPETING LEGAL INTERESTS Basic Principle A priority dispute between two legal interests is resolved by when the interests were created. The basis of the rule lies in the Latin maxim nemo dat quod non habet, meaning “a person cannot convey an interest that he or she does not have.” Thus, if Conan transfers a legal fee simple to Thulsa and later purports to convey the same interest to Rexor, Thulsa will obtain priority, as he was the first in time. Most legal interests in old system land are created by deed: s 23B of the Conveyancing Act. 6. EARLIER LEGAL INTEREST AND LATER EQUITABLE INTEREST

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Basic Principle In the case of an earlier legal interest and later equitable interest, where there is no supervening issue of fraud or gross negligence on the part of the legal interest holder, the legal interest will prevail over the later equitable interest. Exception in the Case of Fraud Where the earlier legal interest holder has fraudulently assisted the creation of the later equitable interest, it is possible that the later equitable interest may take priority over the earlier legal interest. This proposition was discussed by the English Court of Appeal in the nineteenth century case of Northern Counties Fire Insurance Co v Whipp (1884) 26 Ch D 482..... In that case Northern Counties Fire Insurance (NCFI) had provided a loan to its manager, Crabtree, who provided his employer with the deeds to his properties as security. The deeds were placed in the office safe. Crabtree began to experience financial difficulty and accessed the office safe, removing the deeds for two of his properties and creating an equitable mortgage over these properties in favour of Mrs Whipp. The question for the court was to determine whether the legal mortgage should be postponed to the later equitable mortgage. Fry LJ at 494-495, speaking for the Court of Appeal decided that the NCFI’s conduct, although negligent, did not warrant the postponement of its earlier legal interest. His Lordship held that a later equitable interest would only prevail over an earlier legal interest where the earlier legal interest holder has somehow assisted the fraud in question, by way of a deliberate act or “gross negligence.” Because NCFI was not a party to the fraud perpetrated by Crabtree, and had not committed “gross negligence”, Mrs Whipp’s later equitable interest could not take priority. Exception in the Case of “Gross Negligence” A later equitable interest may prevail over an earlier legal interest when the legal interest holder has committed gross negligence by allowing the later equitable interest to be created: Northern Counties Fire Insurance Co v Whipp (1884) 26 Ch D 482 at 494-496 per Fry LJ. Hudston v Viney [1921] 1 Ch 98 at 104 Eve J defined “gross negligence” as: ‘[S]omething more… than mere carelessness, it must at least be carelessness of so aggravated a nature as to amount to the neglect of precaution which the ordinary reasonable man would have observed and to indicate an attitude or mental indifference to obvious risks.’ Walker v Linom [1907] 2 Ch 104 is generally regarded as an example where “gross negligence” was satisfied by the earlier legal interest holder. In that case Walker conveyed his interest to trustees. Importantly Walker kept the deed that had provided him with legal title which he then used to create a mortgage in favour of Search. Search sold the security to Barnes, who then exercised the power of sale and sold the property to Linom. When trying to determine which interest took priority – that of the trustees or Linom’s later equitable interest – Parker J at 105 (relying on Lloyd’s Banking Co v Jones (1885) 29 Ch D 221 at 227-229) held that the trustees were guilty of “great negligence” by not obtaining the title deeds, and were therefore to be postponed to Linom’s later equitable interest. 7. EARLIER EQUITABLE INTEREST AND LATER LEGAL INTEREST: THE BONA FIDE PURCHASER FOR VALUE RULE Basic Principle The basic principle is that an earlier equitable interest will be defeated by a later legal interest where the holder of the subsequent legal interest is a bona fide purchaser for value who takes that interest without notice of the prior equitable interest: Pilcher v Rawlins (1872) LR 7 Ch App 259 at 268-269 per James LJ,

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273 per Mellish LJ; Macmillan Inc v Bishopgate Investment Trust plc (No 3) [1995] 1 WLR 978 at 1000 per Millett J. The Bona Fide Purchaser for Value Rule Butt has summarized the basic principle in relation to an earlier equitable interest and a later legal interest trichotomously: In a competition between an earlier equitable interest and a later legal interest, the legal interest prevails if it has been acquired by a “purchaser”: (i) for value; and (ii) in good faith (bona fide); and (iii) without notice of the earlier equitable interest. Quoted in Butt, Land Law, sixth edition, p. 717. Bona Fide Purchaser for Value The requirement of being a bona fide purchaser is normally fulfilled by proving a lack of notice, although there is some authority to suggest that it is a separate requirement that may need to be satisfied even if an absence of notice is established: Pilcher v Rawlins (1872) LR 7 Ch App 259 at 269 per James LJ; Midland Bank Trust Co Ltd v Green [1981] AC 513 at 528 per Lord Wilberforce (with whom Lord Edmund-Davies, Lord Fraser of Tullybelton, Lord Russell of Killowen and Lord Bridge of Harwich agreed); Corbett v Halifax Building Society plc [2003] 1 WLR 964 at 979 per Pumfrey J (with whom Schiemann, and Scott Baker LJJ agreed). A person who takes a subsequent legal interest may only take priority over an earlier equitable interest if they do so for value. Thus, a person who has taken a legal interest for no value will take the land with all its burdens and may be postponed to an earlier equitable interest. The word “value” in this context has a technical meaning, namely, consideration in the form of money or money’s worth. It does not necessarily connote market value though: Bassett v Nosworthy (1673) Rep Finch 102; 23 ER 55. Significantly, value can be satisfied by the consideration of a future promise of marriage: Floyer v Bankes (1863) De G, J & S 306; 46 ER 654 at J & S 312; ER 656 per Lord Westbury LC; Midland Bank Trust Co Ltd v Green [1981] AC 513 at 531 per Lord Wilberforce (with whom Lord Edmund-Davies, Lord Fraser of Tullybelton, Lord Russell of Killowen and Lord Bridge of Harwich agreed); Official Trustee in Bankruptcy v Mitchell (1992) 110 ALR 484 at 489 per Burchett, French and Einfeld JJ. The requirement of value will also include the satisfaction of an existing debt: Thorndike v Hunt (1859) 3 De G & J 563 at 570 per Knight Bruce LJ; Taylor v Blakelock (1886) LR 32 Ch D 560 at 568-569 per Cotton LJ, 570 per Bowen LJ. We should note that a volunteer (a purchaser who does not render consideration) will not satisfy the requirement of value. Taking a Legal Interest Without Notice When a purchaser renders consideration and simultaneously obtains a legal interest without notice of the earlier equitable interest, that purchaser will not be postponed to the prior equitable interest: Pilcher v Rawlins (1872) LR 7 Ch 259 at per James LJ, 273 per Mellish LJ. Pilcher v Rawlins Pilcher v Rawlins (1872) LR 7 Ch App 259 is perhaps the most commonly cited authority for the bona fide purchaser for value without notice test.

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It is therefore unfortunate that the facts are less than straightforward. In that case the trustees of a settlement, J. G. Pilcher, G. Pilcher, and W. H. Pilcher, advanced the trust money to Rawlins on the security of real property which was conveyed to them, the mortgage deed alluding to the trust in favour of the Pilcher beneficiaries. Under the arrangement, the Pilcher beneficiaries would obtain a beneficial title to the property and Rawlins had an equity of redemption over the legal title once the advance had been repaid. J. G. Pilcher and G. Pilcher died in 1853, leaving W. H. Pilcher – a solicitor – as the sole trustee. W. H. Pilcher afterwards reconveyed part of the property to Rawlins on payment of part of the mortgage money, which he then appropriated for himself rather than to the Pilcher trust. In 1856 Rawlins, who had been a solicitor, made out, with the collusion of W. H. Pilcher, an abstract of title ending with a document earlier than the above-mentioned mortgage, thus showing a title in fee simple to himself, and induced two trustees, Stockwell and Lamb, to advance him £10,000 with the trust property as security. Rawlins eventually discharged the first mortgage and at this point Pilcher reconveyed the whole property to him. Rawlins then executed a “correct” legal mortgage over the property to Stockwell and Lamb. Stockwell and Lamb did not realise that they had not obtained the legal interest to the property until after Rawlins had discharged his mortgage. The Pilcher beneficiaries, meanwhile, had not received any of the money taken by W. H. Pilcher. When the fraud was discovered, the Pilcher trust beneficiaries filed a bill against Rawlins and W. H. Pilcher and the new mortgagees, Stockwell and Lamb, claiming priority to the property. The Court held that it was unable to take away the legal estate from the new mortgagees on the grounds that they satisfied the bona fide purchaser for value without notice test. James LJ at 268-269 alluded to the applicable test thus: I propose simply to apply myself to the case of a purchaser for valuable consideration, without notice, obtaining, upon the occasion of his purchase, and by means of his purchase deed, some legal estate, some legal right, some legal advantage; and, according to my view of the established law of this Court, such a purchaser's plea of a purchase for valuable consideration without notice is an absolute, unqualified, unanswerable defence, and an unanswerable plea to the jurisdiction of this Court. Such a purchaser, when he has once put in that plea, may be interrogated and tested to any extent as to the valuable consideration which he has given in order to shew the bona fides or mala fides of his purchase, and also the presence or the absence of notice; but when once he has gone through that ordeal, and has satisfied the terms of the plea of purchase for valuable consideration without notice, then, according to my judgment, this Court has no jurisdiction whatever to do anything more than to let him depart in possession of that legal estate, that legal right, that legal advantage which he has obtained, whatever it may be. In such a case a purchaser is entitled to hold that which, without breach of duty, he has had conveyed to him. Similar remarks were made by Mellish LJ at 273: The general rule seems to be laid down in the clearest terms by all the great authorities in equity, and has been acted on for a great number of years, namely, that this Court will not take an estate from a purchaser who has bought for valuable consideration without notice; and I find that the Appellants in both the cases before us are very clearly purchasers for valuable consideration without notice. In the final result the legal interest of the new mortgagees, Stockwell and Lamb, took priority over the earlier equitable interest of the Pilcher beneficiaries. As is apparent, the concept of a “purchaser” includes within its ambit mortgagees and also other int...