Workshop 6 Notes - Common Law, Equity and the Priority Rules PDF

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Common Law, Equity and the Priority Rules...

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Real Property Law: Ro’s Workshop 6 Common Law, Equity and the Priority Rules

Common Law and Equity

Common Law vs Equity  Common law (also known as judge-made law/case law) is the body of law developed by judges and courts. The defining characteristic of “common law” is that it arises as precedent.  The Latin name for the doctrine of precedent is stare decisis ('stand by that decided'). It is a principle that requires judges to follow the rulings and determinations of judges in higher courts, where a case involves similar facts and issues.  Equity is a body of law that addresses concerns that fall outside the jurisdiction of the common law. It is a system based upon promoting ‘fairness’ and preventing ‘unconscionability’. Key Features of Equity  Promotion of fairness.  Prevention of unconscionable conduct.  Fill is gaps not addressed by the common law.  Concepts of equity include: Trusts, Fiduciary Duties, Injunctions, Specific Performance, Estoppel and Unjust Enrichment. Legal Interest v Equitable Interest  A legal interest is one registered on title. o For example: A registered mortgage.  An equitable interest is an interest not registered on title. o For example: Unregistered mortgage

Competing Priorities

Prior Legal Interest v Later Legal Interest  Two parties have a registered legal interest. The general rule is:  The earlier legal interest prevails to the extent that they are inconsistent, therefore, the first in time prevails.  Nemo dat non quod habet (nemo dat rule) = you cannot give better title than you yourself have. Therefore, priority is given to the legal interest that is created first in time.  If it is possible for interests to coexist, the second (later) interest is subject to the first.  If it is not possible, the second is nullified. Page 1 of 5

Real Property Law: Ro’s Workshop 6 Common Law, Equity and the Priority Rules Example  If a car is stolen the legal title remains with the original owner and cannot be given to someone who later purchases the stolen car.  In relation to land, if you have sold or given away the fee simple estate then you have nothing left to give to another party.  Again, priority is given to the legal interest that is created first in time. The first in time prevails. Prior Legal Interest v Later Equitable Interest  Two parties: First in time has a registered interest, the second an equitable:  Generally, where a prior legal and later equitable interest exist, the legal interest will prevail.  Unless the legal owner is fraudulent, or arms another with the authority to create an equitable interest, a prior legal interest will be preferred to that of a subsequent equitable interest: Northern Counties of England Fire Insurance Company v Whipp (1884) (UK). Northern Counties of England Fire Insurance Company v Whipp (1884) Facts  Cabtree employed by Northern Counties Fire Insurance Co (“Northern”).  Northern gives Cabtree a loan; the security being land owned by Cabtree.  Title deeds held in Northern’s safe. Cabtree, as manager, had a key and therefore access.  Cabtree removed deeds, obtained a further loan from Whipp, giving Whipp the deeds as security.  Liquidator of Northern foreclosed on mortgage, however, Whipp argued that their subsequent mortgage should be given priority over Northern’s mortgage. Therefore, Prior Legal v Later Equitable. Argument:  Northern’s gross negligence in not keeping the deeds safe was conduct sufficient to justify Whipp’s equitable mortgage being given priority. Held:  Court will not postpone a legal mortgage to a subsequent equitable mortgagee on the ground of mere carelessness on the part of the legal mortgagee.  Nothing but fraud or negligence that the court considers to be evidence of fraud will be sufficient to postpone a legal mortgagee to an equitable mortgagee.

Walker v Linom [1907] Page 2 of 5

Real Property Law: Ro’s Workshop 6 Common Law, Equity and the Priority Rules Facts  Walker owner of land, but transferred the land to trustees to be held on trust.  As land was held under the general law, there was a chain of documentary titles.  Walker hand most title deeds to the trustee, but held onto the title deeds that confirmed the original transfer of the land to him.  Walker used these deeds to obtain a loan and executed a mortgage in favour of Linom.  Dispute arose between the trustees and Linom. Therefore, Prior Legal v Later Equitable. Held:  Trustees interest (prior legal) should be postponed to Linom (later equitable) on the basis that the trustees had acted inappropriately.  The trustees were grossly negligent in not ensuring that they obtained ‘all’ the title deeds in the chain of title. Prior Legal Interest v Later Equitable Interest  This priority dispute is now dealt with primarily by the operation of the Torrens system.  Registered legal title is, in general, indefeasible by either prior or subsequent informal interests: s 42(1) TLA.  The registered proprietor has title ‘free of all encumbrances’.  However, if the registered proprietor so conducts himself as to create an equitable interest in another party’s favour, their obligations may be enforceable in personam.  This is an exception to indefeasibility sufficient to recognise a prior (or subsequent) unregistered equitable interest: s 42(2).  Under the concept/principle of indefeasibility, the interest of the later registered interest will not lose priority to the earlier equitable interest, unless the legal title holder has notice (actual, imputed or constructive) of the prior interest or was a volunteer (i.e. provided no consideration).  However, under the relevant statutes, more than mere notice of the unregistered equitable interest is required for the legal interest to lose priority.  In short, the doctrine of the bona fide purchaser for value without notice applies and governs priority disputes of this nature.

Jared v Clements [1902] Facts Page 3 of 5

Real Property Law: Ro’s Workshop 6 Common Law, Equity and the Priority Rules  Taylor purchased two leasehold properties, obtaining necessary money from Jared.  Transaction was facilitated by Taylor’s solicitor Parr.  Taylor signed memorandum of deposit in favour of Jared for the money advanced and charged the houses in the title by means of an equitable mortgage. Title deeds remained with Parr.  Later, Taylor contracted to sell two houses to Clements, the abstract of the title delivered to Clements did not disclose the equitable mortgage, a search however of the bankruptcy file discovered its existence since Taylor had been discovered bankrupt.  Written request was made requiring it to be discharged.  Parr handed over a signed receipt that Jared had been paid all the money owed.  Purchase was completed, but subsequently found that Parr had forged Jared’s name, with money actually not being paid.  Jared took legal action to establish the priority of his charge. Issue:  Whether Clements who had deeds and legal estate (later legal interest) was entitled to hold the property free from the mortgage, or whether Jared, as equitable mortgagee, could uphold his security (prior equitable interest)? Held:  Jared prevailed as there was a subsisting charge in his favour of which Clements had notice prior to the payment of the purchase money. It was for Clements, or his solicitors, to be satisfied that the encumbrance was discharged before parting with the money.  Therefore, dispute between a prior equitable and a later legal interest involves the question as to whether the legal interest should be held subject to the prior equitable interest – refer to Jared v Clements [1902]. Prior Equitable Interest v Later Equitable Interest  In a dispute between two equitable interests, the principle in Rice v Rice (1853) needs to be applied.  In Rice, it was held that as between persons having only equitable interests, if the interests are in all other respects equal, priority of time gives the better equity.  To determine which of the two equities is superior, the court examined: 1.

The nature and condition of the respective equitable interests;

2.

The circumstances an manner of their acquisition; and

3.

The whole conduct of each party with respect thereto.

Rice v Rice (1853) Facts Page 4 of 5

Real Property Law: Ro’s Workshop 6 Common Law, Equity and the Priority Rules  George Rice conveyed land to his cousin Michael Rice, but did not receive the purchase price, meaning there had been no consideration.  George therefore had an equitable charge over the property (vendor’s lien).  George then signed documents stating that purchase price had been paid, and Michael subsequently mortgaged it to a third party – Ede. Issue:  Whether the equitable interest of George (vendor) was preferred to the equitable interest of Ede (equitable mortgage)? Held:  Persons only having equitable interests, if the interests are in all other respects equal, priority of time gives the better equity. To determine which of the two equitable interests is superior, courts will examine: 1. The nature and condition of the respective equitable interests; 2. The circumstances a manner of their acquisition; and 3. The whole conduct of each party with respect thereto. Other Cases of Note  Latec Investments v Hotel Terrigal (1965)  Barry v Heider (1914)  Heid v Reliance Finance Corporation P/L (1983) * As per the above cases, in applying the priority rule the conduct of the parties will also be considered. Prior Equitable Interest v Later Equitable Interest  Principle in Rice has been applied in a number of Australian cases – i.e. Latec Investments v Hotel Terrigal (1965).  This type of conflict is still relevant to Torrens system land because unregistered equitable interests are possible – refer to Barry v Heider (1914).  It most frequently arises when multiple successive equitable interests are created.

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