Property Law and Equity
The Chancery Courts and the rules of equity are intimately linked with property law. See generally our sections on legal history, equity remedies, and trusts. As will be seen in several contexts, the courts recognise both legal and beneficial (or equitable) ownership or interests in property. Since 1877 all courts administer both law and equity so both types of ownership are recognised.
Legal and beneficial ownership coincide in the vast majority of cases. Where both types of interest subsist, the beneficial interest represents the substantial real interest in the asset. Equitable or beneficial owners are usually taxed and treated for all purposes, as the true “owner”.
Legal ownership arises when the title is created and transferred in the way prescribed by law. In the case of registered title, the legal owner is the person registered on the Register as such. Equally, in the case of unregistered title, the legal owner is the person in whom the title is vested under the most recent Conveyance of the legal estate. That person will usually be the beneficial owner as well.
Beneficial / Equitable Interest
In some cases, the legal owner may be a mere nominee, who holds the beneficial interest in whole or in part, as to a proportion of for a period of time, on trust for one or more beneficial owners. In other cases, the legal owner may hold a substantial beneficial interest in his own right. Equitable interests may arise because the formalities for the creation of a legal interest have not been completed.
For the most part, beneficial or equitable ownership may be enjoyed in much the same way as legal ownership. It is possible for there to be beneficial tenants in common and beneficial joint tenants. It is common for land to be held by the legal owners (trustees) as joint tenants on the trust for the beneficiaries as tenants in common. This would mean that on the death of the joint tenant trustee, the surviving joint tenant would continue to hold the legal title on trust for the beneficiaries tenant in common. Correspondingly, on the death of a beneficiary who is a tenant in common, the trustee (legal owner) holds the same for his successors.
Equitable ownership may subsist for ever, for a period of time or for life in the same way as legal ownership. The effect of the 2009 Land Law reform acts is to limit severely, the types of legal ownership that may be created. However, it allows and provides wide flexibility as to the varieties of beneficial ownership that may subsist. See the section on Trusts of Land.
Equity acts on the basis of conscience and justice, to a much greater extent than common law. Prior to 1877, there were distinct Courts of Law and Courts of Equity, operating separate systems of rules and principles. Upon the merger of the courts of equity and courts of law, it was declared that in the event of a difference between equity and the law on a point, the rules of equity were generally to prevail. This reaffirmed the preeminence of the beneficial interest as recognised by the Courts of Equity
The rights of the beneficiary are wholly defined by the terms of the trust. This may range from rights which are equivalent to full ownership where the legal owner is a bare nominee. At the other end of the spectrum, under a discretionary trust, the beneficiary may only have the possibility or prospect of a right, depending on the exercise of the trustees’ discretion. Beneficial ownership can, accordingly range from something as comprehensive full as legal ownership to something significantly less.
Certain types of beneficial ownership can arise automatically, by way of a resulting or constructive trust. If for example, A purchases property and B provides the funds, the presumption is that A is a bare nominee or trustee, for B. B’s beneficial or equitable interest in the property arises from the fact that A must hold it as trustee for B because B has furnished the purchase monies.
In the above case, B can call upon the legal owner to transfer the bare legal title at any time. He is entitled to the benefit of the property. He is entitled to the rent and proceeds of sales. Tax law treats the beneficial owners as the real owners and taxes him as such.
Nature of Rights
Legal rights are enjoyed as of right. Once the rights exist, the court must grant a remedy. Even if a person has suffered no loss, he would be entitled to nominal damages, at least for infringement of the right. In contrast, equitable remedies are not granted as of right. They are at the court’s discretion. or example, a person who comes to equity must “come with clean hands”. This encapsulates the principle that a person who seeks an equitable remedy may be denied it, if his is blameworthy in some way in relation to the matter.
Legal rights apply against the world. They bind third parties, irrespective of whether they are aware of them are not. If the right exists, then it binds owners and successors irrespective of their discoverability. To a significant extent, equitable rights are personal in the sense that they are enforced, primarily against the trustee. However, equitable interests hold good and are enforceable against nearly all third parties.
Equitable interests are at a disadvantage relative to legal ownership, in that they can be lost or defeated in certain circumstances. Where the legal owner (trustee) sells the trust asset to a buyer in good faith, the buyer will not be bound by an equitable right if he did not and could not have discovered it, in making the standard conveyancing investigations. In this case, the rights of the beneficial interest holder do not hold good against the buyer and the beneficiary is left with his personal right against the seller/trustee for breach of trust.
This principle has informed the recent land law reforms. The types of legal interests have been restricted, so that all other types of interest, must subsist as equitable interests under a trust. This ensures the saleability of land. Therefore, when the legal owner in possession sells, the beneficial/equitable interests in the land which are not discoverable, will not bind him and he will take title/ownership, free from them.
The key principle is that only a bona fide buyer for the value of the legal estate takes free of equitable interests and so-called equities. In order to be bona fide, the buyer must act in good faith. He must pay full or substantial value. This would not include a gift nor the payment of a relatively small amount. The payment of full value is not necessarily required.
A buyer may be on notice of equitable interest if he has actual or imputed knowledge of it. He cannot escape being “on notice” by failing to make the usual investigations and inquiries. If a right should have been discovered by making the inquiries, which are usual or appropriate to the circumstances, the buyer will nonetheless be bound by such rights and interests. Investigations on the part of the person’s legal advisor or solicitor, are deemed to be made by the buyer.
The recent land law reforms go further than the above principles by adopting the principle of overreaching, in the 1925 England and Wales legislation. The legislation provides further support for the sale by (generally at least two) legal owners (deemed trustees) under a trust of land. The legal owner need not be a mere trustee. He can be the holder of substantial rights in the land, for example, a life tenant. The equitable interests other than those actually known, or those of persons in actual occupation and certain other limited categories, are overridden notwithstanding that they would have been discoverable on an investigation.
The investigations that are to be made are determined by Conveyancing practice. For example, in a land purchase, it is usually necessary to make inquiries as to whether an occupier has contributed towards the purchase price of a property, thereby acquiring a beneficial interest. In a purchase of goods, it is not necessary to make investigations to any significant extent. The courts do not fix a buyer with constructive/imputed notice of equitable rights, in this context, recognising the impracticality of such an approach.
Mere Equities and Tracing
Certain classes of rights are regarded as less than equitable interests. They are regarded as mere equities. Included in this category are rights to have documents set aside for tracing, mistake, fraud or undue influence. Mere equities do not rank equally with equitable interest. The general principle with legal or equitable interests is that the first in time prevails. However, an equitable interest may take priority over a mere equity.
Where a trustee dissipates trust money to a third party who is so aware, he may hold it as a constructive trustee. The beneficiary may pursue the recovery of the trust monies against the recipient. Equity allows for the tracing of the property which has been transferred or dissipated in breach of trust.
Where, for example, monies are paid in breach of trust other than to a bona fide purchaser, the monies or assets so dissipated may be recovered. In the famous case monies paid in breach of trust were recovered from a charity which has received them.
It is a fundamental principle that where all the beneficiaries under the trust are full age and sound mind (thereby having legal capacity) they may terminate the trust. They may call upon the legal owner to transfer legal entrust to them. The principle will not apply, even if one potential beneficiary is unascertained, because he is s yet unborn or underage.
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