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Priorities Between Competing Legal Interests Notes

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LAWS2381 - Property Equity and Trusts Session 1 2010

Priorities between competing legal interests

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More than one person can claim proprietary interest to an object; often there is no issue but sometimes conflicts can arise where one does not agree to take title subject to existing interests

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Sometimes this occurs due to fraud or mistake - e.g. o

A conveys a fee simple to B but C is the true owner- in this case nemo dat quod non habet applies

o

Person creates several interests wholly or partially inconsistent with each other, concealing the existence of the earlier one - here the court must resolve the conflict by ranking the interests*

Sometimes both may continue to exist - e.g. A mortgages property to B and later C - C's interest may be worthless if the value of the land can't cover B's mortgage or it may have some worth if it does not

Since the Judicature Act's the only issue as to proprietary interests being equitable and legal is the issue of their enforceability o

Where enforceability is prescribed for statute, the question is generally irrelevant

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But under general law the principles of law and equity apply

Legal and equitable remedies

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Legal and equitable remedies differ substantially in character o

At CLAW remedies are generally awarded as of right (e.g. compensatory damages for restitution in integrum) - not always the case (e.g. return of goods from detinue not always; but damages always)

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At equity remedies are given on the discretion of the court; the award is often based on the maxims of equity which have crystallized into principles"equitable discretions are exercised by taking into account all relevant matters which tend towards the justice or injustice of granting the remedy which is sought" (Spry)Remedies include - specific performance, rectification/cancellation of documents, holding someone to account, appointment of a receiver to let one acquire possession of property, a declaration etc.

It is often said the 'court of equity acts in personam'; Spry says this reflects three fundamental equitable principles: o

It emphasises that the origin of an equitable right is based on the unconscionability of the exercise by a particular defendant of his rights at law

o

It refers to the fact that every equitable decree involves a direction to a particular defendant and a requirement that he exercise his legal rights as the court directsThis has exceptions - decrees of a declaratory nature made; but these can be explained because they just indicate that certain equitable rights in personam don't arise against particular persons 1|Page

LAWS2381 - Property Equity and Trusts Session 1 2010 o

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It directs attention to the manner of enforcement of equitable decrees, based on the application of constraints on the defendant until he should exercise his rights at law in the manner required

Spry's conception doesn't necessarily exhaust the meaning of the maxim o

Maitland argues that equitable interests are personal and not proprietary in character - the former being jura in personam (rights enforceable against a particular person) and the latter jura in rem (rights enforceable against the world)o

Equitable interests, since not enforceable against a BFPOVWN were classified as jura in personam

Jackson argues that this isn't the indication of a proprietary right saying that the test is whether the interest is enforceable against those other than the grantor of the interest contending that Maitland's approach is narrow and emphasises the ability of the owner to recover the object which she has an interest

Enforceability of legal interests in old system land Earlier legal interest against later legal interest

* Generally a prior legal interest prevails over those subsequently created, that is, to the extent of any in consistency the principle of nemo dat quod non habet o

Sometimes competing interests can stand together - e.g. A conveys a Blackacre to B for 10 years and to C in fee simple without telling him of B's interestCs fee simple is subject to B's legal leasehold and can't obtain possession for 10 years; but is entitled to rent payable under the lease

Earlier legal interest against a later equitable interest

* There are exceptions to the rule that legal interests are good against all the world: Northern Counties of England Fire Insurance Company v Whipp (1884) 26 Ch D 482 Facts: The legal mortgage holder (P) was challenged by a later equitable mortgage holder (D). The mortgagor (Crabtree - C) gave title documents to P when the mortgage was created but when he was the manager of the company he retained the key to the safe where it was kept. C later obtained a loan from the defendant and to secure it he removed the title documents and deposited them with D - hence this created a mortgage over the land in equity in favour of the defendant. The defendant was unaware of the earlier loan/mortgage to P. In an action for foreclosure by the liquidator of the P company against C's trustee in bankruptcy and D, D filed a defence claiming a declaration that the company's mortgage was fraudulent and void against her and for the mortgage to be postponed to the security. Fry LJ:

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The plaintiffs, as owners over the legal estate, are prima facie entitled to priority over the defendant.

But the defendant seeks postponement- what conduct in relation to the title deeds of a mortgagee with a legal estate is sufficient to postpone it in favour of the equitable mortgagee without notice?:

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LAWS2381 - Property Equity and Trusts Session 1 2010

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(1) A court twill postpone the prior legal estate to a subsequent equitable estate: a) Where the owner of the legal estate has assisted in or connived at the fraud which has led to the creation of a subsequent legal estate without notice of the prior legal estate; a. Of which assistance or connivance, the omission to use ordinary care in inquiry after o keeping title deeds may be, and in some cases has been, held to be sufficient evidence, where such conduct cannot otherwise be complained b. Where the owner of the legal estates has constituted the mortgager his agent with authority to raise money, and the estate thus created has by the fraud or misconduct of the agent been represented as being the first estate (2) But the court doesn't postpone the prior legal estate to the subsequent equitable estate on the ground of mere carelessness or want of prudence on the part of the legal owner

? Here there was insufficient evidence of fraud - the plaintiffs didn't combine with Crabtree to induce the defendant to lend money and they never knew she was doing so. This could have been gross carelessness but it was carelessness likely to injure and not benefit them; hence the court won't convict them of fraud
? Was Crabtree an agent constituted to raise money? There is some evidence o

He had possession of the key.

o

But they didn't prove the circumstances attending this or the duties for performance of this agency that the key was essential to performing to conclude that the possession implied without to deal with the security

In relation to limb (1)(a)(b) of Fry's test:

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Perry-Herrick v Attwood - two prior joint mortgagees gave mortgagor posession of title deeds to give propriety to a particular charge - the mortgagor gave a different charge. They were postponed

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Brocklesby v Temperance Permanent BS - holder of legal estate gave deeds to his son to raise a sum of money, son exceeded authority and raised more. Father was postponed.

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Walker v Linom o

By marriage settlement, W conveyed real property to trustees. Under the terms of settlement W had an equitable life interest which would determine if he alienated the property. The same solicitors acted for both parties, holding a bundle of title deeds to the property. Both the solicitors and trustees were unaware that after the settlement W retained the deed by which the real estate was conveyed to him - later he mortgaged the property handing over the conveyance to the mortgagee who sold the real estate to L. Neither the mortgagee nor L had notice - the court held that all the parties acted honestly

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Held: Conduct of a holder of a legal estate wrt deeds, which makes it inequitable for him to rely on his legal estate against a prior equitable estate of which he had no notice, is sufficient to postpone him to a subsequent equitable estate, the creation of which was only possible by

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LAWS2381 - Property Equity and Trusts Session 1 2010 possession of feeds, which,, but for such conduct would have passed into the possession of the legal estateThe 'conduct' referred to in this case is the gross negligence on the part of the legal estate holders in failing to obtain possession of the title deedsHence here a later equitable interest was given precedence

Enforceability of equitable interests Prior equitable interest against a later legal interest Pilcher v Rawlins Facts: P held money in trust for beneficiaries. In 1851 P advanced to R (solicitor) who executed a mortgage of Blackacre to P as security - this conveyed a legal fee simple to P and the equitable fee simple to the beneficiaries. R was entitled to receive reconveyance on payment of the advance. R and P decided to make money fraudulently; borrowing $10k from S*L who were trustees for other beneficiaries. R agreed to give S&L a mortgage to Blackacre as security; but since P had the legal estate this couldn't be done. R prepared a chain of title that excluded the mortgage to P, to satisfy S&L that R had the legal estate. P discharged the mortgage from R by executing a reconveyance to R, the reconveyance was expressed in consideration of the payment of the advance. Later R executed a legal mortgage to S&L who had no knowledge of the earlier mortgage of reconveyance. As a result S&L acquired the fee simple estate, not under the title they received but by the mortgage of 1851 and reconveyance. S&L knew nothing of the mortgage until after this suit was filed - a question o which was whether the equitable interest of the beneficiaries for whom P was trustee could prevail against those of S&L.

Mellish LJ:

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The general rule - this court will not take an estate from a purchaser who has bought for valuable consideration without notice (except to the extent of constructive notice)

But here the two parties are trustees for different cestuis que trust - which of them bears the loss? The one whose trustee fraudulently conveyed the estate or the trustees who have honestly taken conveyance of that estate, advanced the money of their cestuis que trust on the faith of that estate which they have got.
? Mellish LJ was under the opinion - "If you trust your property to a man who turns out to be a rogue, it stands to reason that you may lose it"
? But the position of the other trustees were different - their trustees invested property, was not guilty of negligence and took the advice of a perfectly competent conveyancer; it would be incomprehensible to hold them liable for this

Hence - where a trustee conveys a legal estate which he possesses and it comes to the possession of a PFVWN, the purchaser can hold the property against cestuis que trust who were defrauded by the conveyance of their trustee

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LAWS2381 - Property Equity and Trusts Session 1 2010 What if S&L conveyed the land to X who had notice of the prior equitable interest?

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Wilkes v Spooner -

S 1 (father) leased two premises from different landlords carrying on the

business of a butcher in both. He assigned the business and one of his leases to the plaintiff, covenanting with the plaintiff (for his successors) that he wouldn't conduct the business of a butcher in the other lease (effectively giving the plaintiff an equitable interest in the other leasehold.

S1

surrendered the lease to the landlord who had no notice of the covenant and then leased it to

S2

(son) who knew of the covenant but still conducted the business o

Held: A purchaser for valuable consideration without notice can give good title to a purchaser from him with noticeException: A trustee who sells property in breach of trust, or a person who has acquired property by fraud - neither can protect themselves by purchasing it from a BFPVWNException - Re Nisbet and Pott's Contract - A, the holder of a fee simple in Blackacre enters into a restrictive covenant with B (giving him an equitable interest). C adversely possesses A and then contracts to convey the unencumbered fee simple to D - can he?

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Held: No because even though he didn't have notice of the covenant, he was not a purchaser for value.

The statutory definition of notice - Conveyancing Act 1919 (NSW) s164 (1) A purchaser isn't prejudicially affected by notice unless a) It is within his knowledge or would have come to his knowledge if such inquiries/inspects had been made as ought reasonably to have been made by him b) In the same transaction, it came to the knowledge of counsel, solicitor or other agent of the purchaser, or would have come to such knowledge of these persons had inquiries and inspects as ought reasonably to have been made by them (3) Purchaser not by reason of this section affected by notice in any case where he would not have been affected if the act weren't passed (4) Section has retrospective effect

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LAWS2381 - Property Equity and Trusts Session 1 2010 Smith v Jones (1954) 1 WLR 1089 Facts: In '46, J buys an auction at a firm knowing it was occupied by the S (tenant). Before sale, J inspected S' tenancy agreement, forming the opinion that J was liable for structural repairs. After sale, S and J had a dispute over liability for structural repairs. S sought rectification of the agreement to impose repairs but J disputed the claim and also pleaded that even if a claim for rectification was made out against the original landlord, since he was a BFPFVWN he was not bound by the equity to rectify Upjohn J: Plaintiff counsel says - Since the plaintiff was in occupation, the defendant had notice of all his rights and equities, including the equity to rectify. The relevant principle is stated in Barnhart v Greenshields

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If there be a tenant in possession of land, a purchaser is bound by all the equities which the tenant could enforce against the vendor, and that equity of the tenant extends not only to interests connected with his tenancy, but also to interests under collateral agreement o

The principle is the same in both classes of case - the possession of the tenant is notice of some interest in the land, the purchaser having notice of this fact is bound to either inquire as to what the interest is, or to give effect to it, whatever it may be

But plaintiff counsel hasn't suggested any case to suggest that an equity for rectification is an equity enforceable against the purchaser - this would extend the doctrine of notice too far if it allowed this. The doctrine would extend for e.g. to an option to purchase. (Also: Purchaser is entitled to assume that the tenancy agreement correctly states all the tenant's rights between himself and the landlord)

Barnhart v Greenshields - The true question lies in the statute (even though the statute isn't intended to affect the CLAW - there it was the Law of Property Act, in NSW it is s164 Conveyancing Act)

What inquiries must be made by the purchaser to the tenant before sale in this case?

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The purchaser would only reasonably have to inspect the tenancy agreement to see if it matched with the copy already seen - no further inquiry is required

Here the defendant was entitled to rely on the document and the document speaks for itself. But his honour said even if he came to a contrary conclusion on rectification, the action would be defeated by the plea of a BFPFVWN

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Hunt v Luck (attempted to extend Barnhart v Greenshields) - H, holder of fee simple subject to tenancies, is fraudulently induced by Gilbert to sign a conveyance of the estate to him - giving him the legal fee simple and Hunt an equitable right to have it set aside for fraud. G then mortgaged the land to L, receiving the loan moneys. H's representatives (H dead) sought to have the conveyance set aside, claiming that the equitable interest took priority over the legal interest of the mortgagees)

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Argument: Mortgagees had notice of H's interest since when negotiating with G, the tenants paid rent to Woodrow (an estate agent) who paid the money to Hunt. Hence if they inquired 6|Page

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