The fifth and sixth dimensions of land
The fifth and sixth dimensions of land
<op>1.23 If land is capable of description in three physical dimensions, and of extension into a fourth dimension by the component of time, English law soon added two further dimensions of analysis. These extra dimensions turned on the 'legal' or 'equitable' quality accorded to the various abstract rights which had emerged from the medieval conceptualism of estates. It came to be recognised that each estate could itself be 'the subject of "ownership" both in law and in equity' (Mabo v Queensland (No 2) (1992) per Deane and Gaudron JJ). Although for historical reasons 'legal estates and equitable estates have differing incidents', it is truly the case that 'the person owning either type of estate has a right of property' (Tinsley v Milligan (1994) per Lord Browne-Wilkinson). Indeed, much of the rich complexity of today's law of property results from the potential duality of estate ownership, for amidst other consequences it makes possible that most distinctive of English contributions to jurisprudence, the institution of the trust (1.26; 6.34).
<ha>Legal and equitable rights
<op>1.24 Within the field of proprietary rights in land, English law still draws a fundamental distinction between legal and equitable rights. Historically this distinction was grounded on the fact that legal rights were enforceable only in the common law courts of the king, whereas equitable rights fell within the exclusive and conscience-based jurisdiction, initially of the king's Chancellor, and later of the Court of Chancery. Equity was conceived as a corrective system of justice, designed to supplement the common law by responding more flexibly and sensitively to the need for fair dealing and just outcomes. It addressed, on an instance-specific basis, the hard cases for which the generalised dogmas of the common law afforded no adequate remedy. Inevitably the jurisdictions of common law and equity came into conflict, in so far as they frequently recognised different forms of entitlement and provided different forms of remedy for the litigant. After several centuries of fierce competition between the rival jurisdictions, the administration of legal and equitable rules was finally fused within our court system towards the end of the 19th century. It can thus be said today that 'English law has one single law of property made up of legal and equitable interests' (Tinsley v Milligan (1994) per Lord Browne-Wilkinson). Rights and remedies, whether legal or equitable, are now recognised and enforced in all courts, albeit subject to the overriding principle that in cases of conflict the rules of equity shall prevail (Supreme Court of Judicature Act 1873, s 25(11), now Supreme Court Act 1981, s 49(1)).
<sp>- The difference between legal and equitable rights Many important differences nevertheless persist between legal and equitable pro-prietary rights. It is difficult to summarise these differences here, since they constitute much of the substance of this book. Moreover, the borderline between legal and equitable rights in land has now been artificially, and somewhat arbitrarily, redefined by the property legislation of 1925 (2.24-2.25). Under this statutory categorisation of rights some sorts of entitlement may now exist either at law or in equity; others may exist only in equity. But there remains considerable truth in the idea that legal rights are normally created by compliance with various statutory requirements of documentary formality, whereas equitable rights tend to be generated, in a more diffuse fashion, by informal transactions, by implications from circumstance, and by obligations of conscience.
<sp>- The distinction between form and substance In some important sense - particularly in the context of the trust - legal rights can often be said to represent form, whereas equitable rights represent substance. It is frequently the case that legal rights comprise merely a nominal or paper title, as evidenced in some superficial record, and therefore carry more of a connotation of responsibility than of entitlement. (The enhanced publicity implicit in the documentary derivation of most legal rights may, however, ensure a wider range of binding impact upon strangers (2.37).) On the other hand, equitable rights embody ...
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<sp>- The distinction between form and substance In some important sense - particularly in the context of the trust - legal rights can often be said to represent form, whereas equitable rights represent substance. It is frequently the case that legal rights comprise merely a nominal or paper title, as evidenced in some superficial record, and therefore carry more of a connotation of responsibility than of entitlement. (The enhanced publicity implicit in the documentary derivation of most legal rights may, however, ensure a wider range of binding impact upon strangers (2.37).) On the other hand, equitable rights embody more clearly the inner reality (as distinct from the outer form) of a transaction and often locate rather more accurately the substance of intended beneficial enjoyment. (Correspondingly, in view of their less formal origins, the enforcement of equitable rights against strangers may require assistance from various mechanisms of registration (2.30, 2.40; 9.41) or even from the application of further conscience-based doctrines of equity such as the doctrine of notice (1.26; 2.42; 9.45).)
<ha>Separation of legal and equitable ownership
<op>1.25 Where the 'whole right of property' is vested in one person, there is 'no need to suppose the separate and concurrent existence of two different kinds of estate or interest, ie the legal and the equitable' (Comr of Stamp Duties (Queensland) v Livingston (1965) per Viscount Radcliffe). The sole owner of Greenacre need not see himself as owning both the legal and the equitable estate in the land. Merger in one owner of the totality of entitlement renders such a distinction unnecessary and even impossible: the absolute owner has no separate equitable estate since this is absorbed within his legal estate. But the moment this totality of ownership is split between two or more persons, the device of the trust becomes unavoidable in English law, ownership of the formal or documentary estate being a phenomenon recognised at law and ownership of the beneficial estate being recognised only in equity. In this way equity 'calls into existence and protects equitable rights and interests in property only where their recognition has been found to be required in order to give effect to its doctrines' (Comr of Stamp Duties (Queensland) v Livingston (1965)).
<ha>The institution of the trust
<op>1.26 The trust provides one highly significant instance of the necessary substantiation of equitable ownership.
<sp>- The essential structure of the trust The essence of the trust is the idea that the formal or titular interest in property (eg the legal estate in fee simple) is vested, in a nominal capacity, in one or more persons as trustee. The strict duty of such persons is to deflect all beneficial enjoyment to the beneficiaries or cestuis que trust, who are together entitled to the equitable interests (eg the equitable estate in fee simple). It is, in short, the beneficiaries who benefit under a trust (see Fig. 1).
<op>
<sp>Fig. 1
<sp>- The enforcement of a moral obligation In the trust the existence of an equitable estate in land (and the entitlement of the equitable owner) result from the enforcement of the moral obligation which is fastened upon the conscience of the trustee. In an expressly created trust (6.37) it is the trustee, after all, who has consented to undertake the function of trusteeship and in conscience he cannot later be heard to disavow his trust. Under the trust, as Maitland pointed out long ago, 'the benefit of an obligation has been so treated that it has come to look rather like a true proprietary right' (Equity, p 115). Equitable rights in trust property thus derive from conscientious obligations to deal with an asset or resource in a certain way. Equity answers its primary call of conscience by engrafting a corrective image of entitlement - a species of equitable ownership - upon the legal estate of the trustee (see Gray, Equitable Property, (1994) 47(2) Current Legal Problems 157 at 163, 207). Nowhere is the duality of estate ownership more plainly demonstrated.
<sp>- The beneficiaries' interests under the trust The beneficiaries' interests under the trust are usually - although not always - quantifiable as fractional shares in the assets of the trust. Thus, in an example which recurs in many forms throughout land law, the legal estate in a domestic dwelling-house may be held by a trustee or by trustees, who hold on trust for two beneficiaries who take equitable shares of, say, 75% and 25% respectively, or 50% each, or indeed any other percentages which add up to a unity (see Fig. 2).
<sp>LAW TRUSTEE(S)
<op> (holding legal estate)
<sp>EQUITY BENEFICIARY X BENEFICIARY Y
<op> 75% 25%
<sp>Fig. 2
<sp>- The impact of the trust on third parties Although the trust relationship was initially based upon an essentially personal confidence reposed in the trustee on behalf of his beneficiary, the courts of equity, comprising a jurisdiction of conscience, inevitably extended the ramifications of the trust beyond the nexus of trustee and beneficiary. Trusts would have had only limited significance if the moral obligation underlying the trust had remained enforceable merely against the original trustee. The fiduciary responsibility implicit in the trust would have been displaced and negated by any subsequent change of legal title, whether occurring on the death or bankruptcy of the trustee or on his transfer of the legal estate in the trust property to some third party. Equity accordingly expanded the reach of the beneficiary's rights against third parties under a rule which eventually came to be known as the bona fide purchaser rule or the equitable doctrine of notice (and which ultimately governed even those equitable rights which arose outside the context of a trust (9.45)). This extension of trust liability to third parties reinforced, in its turn, the perception that equitable rights were akin to proprietary rights. In effect, the benefit of the fiduciary obligation of the trust enlarged into a form of proprietary title or interest.
<sp>The gradual diffusion of trust liability occurred with the transmission of the trustee's legal estate in the trust property to various kinds of third party. Trusts came to be enforced against:
<list>• persons who succeeded to the legal estate of the trustee on his death, ie his personal representatives, who could not claim to stand in any better position than the trustee himself
<list>• creditors of the trustee, who could not, of course, be allowed to claim the trust property in satisfaction of personal debts owed by the trustee
<list>• donees from the trustee, who, having received a gratuitous transfer of a legal estate to which they had no prior title, could not be heard to disavow the trust attached to that estate ('equity will not assist a volunteer')
<list>• purchasers from the trustee with actual notice of the trust, since it would be contrary to conscience - a kind of fraud - for a purchaser who bought a legal estate with actual knowledge of the existence of a trust subsequently to disclaim that trust
<list>• purchasers from the trustee with constructive notice of the trust, who were treated as if they had actual knowledge of the trust in those circumstances where, had they acted with due diligence in inspecting land and title, notice of the trust would inevitably have come to their attention.
<sp>Before 1926 all equitable rights, by analogy with this extended operation of trust liability, came to be regarded as enforceable against all persons other than:
<quote>... a bona fide purchaser of a legal title for valuable consideration without notice of the trust (whether actual or constructive).
<sp>This formula, comprising what is known as the equitable doctrine of notice, provided immunity from prior equitable rights only in the case of the purchaser whose conscience was wholly unaffected. In his case, however, the plea of purchase for valuable consideration without notice was 'an absolute, unqualified, unanswerable defence' in the eyes of equity (see Pilcher v Rawlins (1872) per James LJ). Such a purchaser was sometimes known simply as 'Equity's Darling' - one to whom the favour of equity had been extended. Even nowadays it is still said that '[t]he doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice)' (Barclays Bank plc v O'Brien (1994) per Lord Browne-Wilkinson).
<sp>During the course of the last century, however, this doctrine of notice, albeit the continuing inspirational force behind much of our land law, has now been severely cut back in scope. As we shall see, the bona fide purchaser rule has no application to land titles registered under the Land Registration Act 1925 (2.23; 9.31-9.32) and has only a residual relevance in the law of unregistered land (2.42; 9.45). In effect, the significant role played by the historic doctrine of notice has been displaced, largely by mechanisms of registration under which the publicity secured by the registration of rights now operates as a form of mandatory notice to the world at large (see eg LRA 1925, ss 20(1), 22(1); 9.29-9.30; LPA 1925, s 198(1); 9.41).
<sp>- The express trust as a management device The expressly created trust is, in effect, a sophisticated form of management device. It depends fundamentally on a functional separation of administration and enjoyment. The trustee is invested with a purely nominal (or 'legal') title - indeed so nominal that any unauthorised personal benefit derived by him from the trust signifies in itself a grave breach of trust except in so far as the trustee may also happen to be one of the designated beneficiaries. The substance of the practical benefit derived from the land held on trust - whether by way of occupation, rental exploitation or sale - is reserved at all times for the 'equitable' owner, the beneficiary or beneficiaries. Express trusts of land are necessarily marked by a certain degree of documentary formality in their creation. It is one of the venerable rules of trust law that a declaration of trust respecting land must be 'manifested and proved by some writing' signed by the author of the trust (LPA 1925, s 53(1)(b); 6.38).
<sp>- Implied trusts Many trusts arise by express creation, the author of the trust quite explicitly nominating both the trustees and the desired range of beneficiaries and stipulating the precise terms of the trust. Probably even more trusts are created by implication (6.36) - particularly in the family context - since it falls within the general remit of any court, in the exercise of its equitable jurisdiction, to recognise or construct equitable entitlement on behalf of any claimant who can demonstrate that another has incurred a conscientious obligation to hold a legal title on trust for him or her as beneficiary. In relation to implied trusts, the requirement of formal creation is necessarily abrogated (LPA 1925, s 53(2); 6.39), although the standard of evidence required in order to make good a claim of implied trust may still be disconcertingly demanding (7.5, 7.15-7.16). Implied trusts fall into two broad categories - the resulting trust (7.3) and the constructive trust (7.6) - and it is not impossible that circumstances which fail to disclose the existence of an enforceable express trust of land may nevertheless give rise to a valid resulting or constructive trust (6.39).
