Priorities

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This article is a topic within the subject Property, Equity and Trusts 1.

Contents

Required Reading

Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008, pp. 413-417 [4.145-4.155]; 429-449 [4.178-4.195].

Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012, pp. 35-40 [4.1-4.9]; 64-66 [6.25-6.32].

Introduction

[1] Whilst most transactions take place without any problem, it sometimes happens that there are multiple people with competing or inconsistent interests in one object. These arise when:

  1. The vendor's title is flawed - in other words, the vendor attempts to sell a property which isn't actually his (evoking the nemo dat principle[2]).
  2. The vendor's attempts to create several interest which are inconsistent with each other - for example, trying to mortgage a house to another mortgagee without telling him its already mortgaged (the two mortgagee will have titles inconsistent with one another.

When the latter situation arises with several inconsistent title, the courts need to determine the priorities of the interests. Relevant to this process is whether an interest is legal or equitable. This process was once extremely complicated because of the separation between common law and equity, but the Judicature Act rendered it much easier.

  • Note: when the sphere of enforceability of an interest is prescribed by statute, as is the case for registered interests in Torrens title land, the question of whether a competing proprietary interest is legal or equitable is generally irrelevant.

The Nature of Equitable Interests

[3] It is difficult to define the nature of an equitable interest. The courts have shied away from creating strict definitions because they aim to maintain the inherent flexibility of equity. Definitions of equitable interests are thus usually couched in terms of the remedies they provide (ie, an equitable fee simple is the right to obtain specific performance).

  • Note: equitable rights are always are rights in rem - this means that the holder of an equitable interest can only enforce that right against the trustee, and not anyone in the world.[4]

Working Out Priorities

Earlier Legal Interest and a Later Legal Interest

[5] Where two parties have received legal interests, the general rule is:

The earlier legal interest prevails to the extent that they are inconsistent.

This is because once the legal interest was passed on to the earlier holder, the vendor no longer possessed that title anymore, and could not have passed that title to the later holder (nemo dat).

Earlier Legal Interest and a Later Equitable Interest

[6] This is when the vendor passed on legal interest to one person (the legal title holder), and then passed on an inconsistent equitable interest in that same property to another person (eg, through part performance). The general rule in such cases, as before, is:

The earlier legal interest prevails to the extent that they are inconsistent.

However, an exception is made when the earlier holder (the one with the legal interest) has been guilty of some conduct which in equity would be considered as justifying the postponement of his title. Examples include:

  • The legal titleholder created the later interest through some declaration of trust, agreement or other assurance.
  • The legal titleholder acted fraudulently.
  • The legal titleholder failed to get in the deeds from the vendor, thereby enabling the vendor to hold itself out as the legal owner or the authorised agent for the legal owner.
  • The legal titleholder has given another person authority to deal with the property and that authority has been exceeded.

Earlier Equitable Interests and a Later Legal Interest

[7] This is when the vendor passed an equitable interest to one person, and then passed an inconsistent legal interest to another. It is governed by the doctrine of bona fide purcasher for value and without notice, which states:

If a purchaser acquired a legal interest
  1. In return for valuable consideration (ie, not a gift etc); and
  2. Had no notice of prior equitable interests
the later legal interest defeats any prior equitable interests to the extent which they are inconsistent.

On the other hand, if the purchaser of a legal title does have notice of the prior equitable rights of a person, his later legal title will be defeated by the known earlier equitable title. There are three types of notices:

  1. Actual notice: actual knowledge on the part of the person in question.
    • Suggestions in overhead conversation are not actual notice.[8]
    • Reasonably precise information, even from a stranger, cannot be safely disregarded.[9]
    • Trustees administering several trusts have statutory protection against being affected in one trust by facts received in another.[10]
  2. Imputed notice: actual or constructive knowledge received by an agent of the purchaser.
    • A principal is presumed to know what his agent knows, except any fraud on behalf of the agent.[11]
  3. Constructive notice - information which would have been discovered in either of the following situations:
    1. By making the usual searches and enquiries in this type of transaction; or
    2. By making the inquiries demanded because of some relevant fact of which that person had actual notice and would have put a reasonable person on inquiry.
    • In other words, a person that fails to make proper inquiries will be held to have 'constructive notice' of the equitable interests that would have been discovered by those enquiries.
    • Constructive knowledge has been reenacted in s 164 of the Conveyancing Act 1919 (NSW).

Earlier Equitable Interest and Later Equitable Interest

[12] This is when the vendor passed an equitable interest to one person, and then passed equitable interest again to another person. The general rule is:

The earlier title only succeeds if the two equitable interests are equal in all respects. If one has better equity to another, the time factor is immaterial.

This was discussed in Rice v Rice:[13]

  • The 'time' of the equitable interest should only be used as a last resort to determine priorities between equitable interests. Instead, the court examines the 'merits' of the interests.
  • The merit is examined by looking at:
    • Nature and condition of the equitable interest.
    • Special circumstances of the interest in this case.
    • The whole conduct of the party in this case (eg, failing to make proper inquiries will diminish one's merit).

There is a competing line of authority, beginning with Lapin v Abigail and confirmed in J&H Just v Bank of NSW, that reverses the Rice v Rice order: it says that the first-created equity has priority, unless on the merits there are reasons why it should be postponed. At any rate, there is little practical difference between the two.

An exception to the general rule is the concept is made in the instance of a notice

  • If the later equitable titleholder had notice of the prior equitable interest, the prior equitable interest would win.[14]

Another example determining priority between equitable interests is Shropshire Union Railways & Canal Co v R:[15]

  • If the trustee sells trust property to a purchaser without notifying him of the equitable interest of the beneficiary, the beneficiary's equitable interest will prevail, and the trustee will be in breach of trust.
    • However, if the trustee failed to obtain the transfer deeds, the beneficiary will lose priority.
    • The beneficiary can lose priority under the general principle of Rice v Rice as well.

Earlier 'Equity' and Later Equitable Interest

[16]

Earlier ' equity ' and later equitable interest - later wins unless there is notice.

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End

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References

Property Textbook refers to Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008.

Equity Textbook refers to Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012.

  1. Property Textbook, pp. 413-5 [4.145--4.148].
  2. One cannot give away that which one does not have.
  3. Equity Textbook, pp. 35-40 [4.1-4.9].
  4. Mills v Ruthol [2002] NSWSC 294.
  5. Property Textbook, p. 417 [4.155].
  6. Equity Textbook, p. 64 [6.25].
  7. Equity Textbook, pp. 65-6 [46.27-6.32].
  8. Williamson v Bors (1900) 21 LR (NSW) Eq 302, 307.
  9. Lloyd v Banks (1868) LR 3 Ch App 488.
  10. Trustee Act 1925 (NSW), s 62.
  11. Schultz v Corwill Properties (1969) 90 WN (Pt 1) (NSW) 529.
  12. Property Textbook, p. 429-34 [4.178-4.182].
  13. (1854) 61 ER 646
  14. Moffett v Dillon (1999) 2 VR 480; C/B p. 433.
  15. (1875) LR 7 HL 496.
  16. Property Textbook, pp. 434-5 [4.183].
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