old system priorities prof cameron stewart. priorities characterisation of interests – legal of...

Old System Priorities

Prof Cameron Stewart

Priorities

• Characterisation of interests – legal of equitable• Legal - formality in creation and transfer

– Land• Conveyancing Act 1919, s 23B, s 23C, s 23D, s 54A• Real Property Act 1900, s 41, s 42, s 43, s 43A

– Personal Property• Goods – Sale of Goods Act 1923; Trade Practices Act 1975• Choses in Action – Conveyancing Act 1919, s 12; Patents Act 1990 s

14; Life Insurance Act 1995, s 200; Copyright Act 1968, 196; Trade Marks Act 1995, s 109, Personal Property Securities Act 2009

• Equitable – doctrinal reason for recognising an interest? Part performance/ estoppel/ unconscionability etc

Four types of dispute

• Legal v legal – first in time• Eq v Eq – first in time unless there is postponing

conduct• Earlier legal v Later Eq – if the equities are equal

the law remains• Earlier Eq v Later Legal – bona fide purchaser for

values without notice defeats the equitable interest

Conflicting Legal Interests in Goods

• Legal v Legal

• When two or more legal interests in goods conflict the main principle is that a person cannot convey an interest which he or she does not have (“nemo dat quod non habet”)

Legal interest v legal interest

• When two or more legal interests in the land/personalty conflict the main principle is that a person cannot convey an interest which he or she does not have (“nemo dat quod non habet”)

• Partial eg where A leases to B – A then sells to C – C ‘s interest is taken subject to the lease

• Wholly inconsistent – A sells to B and then sells to C: C receives nothing

Innocence of Purchaser

• The innocence of the purchaser is irrelevant (to common law)!

• Policy of who is better able to avoid the loss?• Policy of first acquirer (first in, best dressed)?

Equitable interest v equitable interest

• Moffett v Dillon [1999] 2 VR 480, at 491, it was stated by Brooking JA (Buchanan JA concurring, at 506) that the resolution of priority disputes in the context of competing equitable interests in property could be resolved by applying either of two distinct rules. The first rule is that, generally, if the holder of the second equitable interest takes with notice of the first equitable interest, he or she takes that interest subject to the first equitable interest. The second rule is that, prima facie, the equitable interest first created prevails. However, this prima facie rule can be displaced if the holder of the second equitable interest has a ‘better equity’. The onus of proof in such cases is upon the holder of the second equitable interest to displace the prima facie priority of the first equitable interest holder: Platzer v Commonwealth Bank of Australia [1997] 1 Qd R 266, at 279

Equitable interest v equitable interest

• Who has the best equity? • Heid v Reliance Finance Corporation Ltd – the better

equity depends on the circumstances – • look to the conduct of the parties• the question of negligence on the part of the prior

claimant• the effect of any representations made by the prior

claimant which may give rise to an estoppel• did the conduct of the prior claimant enable such a

representation to be made?

Equitable interest v equitable interest

• Generally: the earlier equitable interest may be postponed to the later interest where:

• (a) the conduct of the earlier interest holder has led to the later interest holderacquiring an interest;

• (b) in the mistaken belief that the prior interest did not exist

• If the equities are equal then first in time

Equitable interest v equitable interest

EG Able agrees to sell his land to Barb. Able gives the title deeds to barb and signs a receipt for the purchase money even though he has yet to be paid. Barb proceeds to grant an equitable mortgage over the land to Clary. How has the better interest?

• Look to the equities: – Able has an equitable lien over the property– Clary has an equitable mortgage

Equitable interest v equitable interest

• Both the equities are security interests – no real difference between them – However Able’s negligent conduct in giving the title deeds and signing the certificate means that it was his fault that Clary took his interest without notice- Hence Clary’s interest is superior

• See Rice v Rice (1853) 61 ER 646

Equitable v Equitable• In JNJ Investments Pty Ltd v Sunnyville Pty Ltd [2006] QSC 138, a

vendor of property contracted to sell property to a purchaser. On the day of settlement of this contract, the vendor completed a sale of the property to a second purchaser for a higher price. The first purchaser, upon becoming aware of what had happened, lodged a caveat to prevent registration of the second purchaser’s transfer. The second purchaser commenced proceedings to have the caveat removed. The issue before the court was whether the first purchaser had priority over the second purchaser. Mullins J, at [70], held that the first purchaser had priority because the second purchaser ‘had notice of the first [purchaser’s] equitable interest at the time of the acquisition of its interests’.

Equitable interest v equitable interest

• Exception: in the case of land held under a trust the beneficiaries will not lose their priority because of negligent or fraudulent conduct by the trustee

• Shropshire Union Railways and Canal Company v The Queen

Equitable interest v equitable interest

• Shropshire Union Railways and Canal Company v The Queen• In that case Holyoake, as trustee of shares for Shropshire, held

all title documents relating to the shares. In breach of trust Holyoake borrowed from Robson and gave Robson the share certificate as security for the loan. Robson held the shares but did not have them registered into his name on the company register. The issue before the court was whether Shropshire’s earlier equitable interest as beneficiary under the trust of the shares was defeated by Robson’s later equitable mortgage over the shares. The House of Lords ruled that Shropshire’s earlier equitable interest had priority.

Equitable interest v equitable interest

• Exception doesn’t apply unless the trust is properly formed or in cases where the trustee has failed to complete the trust be receiving the trust property

• Walker v Linom

Mere Equities• Exception: Mere equities – personal right to a

remedy – proprietary in nature but less than a full equitable interest

• Examples: the right to have a document rectified, right to have a conveyance set aside because of the grantee’s fraud

• Latec Investments Ltd v Hotel Terrigal Pty Limited: Terrigal had granted a mortgage to Latec. Latec exercised the power of sale of the mortgage and sold it to a wholly owned subsidiary, Southern – Southern granted a further equitable interest to MLC which had no notice of the Terrigal interest

Mere Equities

• Terrigal argued that the sale was fraudulent – not at arm’s length – both Southern and Latec had conspired to sell at a low price

• What was the priority between the interest held by Terrigal and the interest held by MLC? It was held that Terrigal had a bare right to sue and have the transaction set aside – a mere equity

• A prior mere equity will not prevail over a later full-blown equitable interest that was taken without notice

Exception: tacking• Exception: tacking – tabula in naufragio – if a later

equitable interest holder purchased for value and without notice and is later able to acquire the legal estate then the later interest holder can tack its equity onto the legal estate and jump priority

• EG Mortgages – If Able grants a mortgage to Bette then an equitable mortgage to Clary and then another equitable mortgage to Donna – then the order of priority will normally be B, C, D – but if Donna can later buy the land off Bette then Donna equitable interest will be tacked to the legal estate and Clary will come in last

Prior legal interest v equitable interest

• In cases where there has been no fraud on the part of the legal estate holder the prior legal estate prevails over the later equitable estate

• Where the equities are equal the law prevails

Exception – fraud Northern Counties v Whipp

• This is a case of an earlier legal interest competing with a later equitable interest in land

• Crabtree gave a legal mortgage of old system title land to Northern Counties.

• Crabtree was the manager of that company who was also entrusted with a key to a safe which housed the documents of title relating to the mortgage.

• Crabtree removed the title documents from the safe and executed a second mortgage to Whipp. Because of the earlier legal mortgage, the only property interest that Crabtree had in relation to the land at the time of the mortgage to Whipp was an equity of redemption

• Whipp had an equitable mortgage

Northern Counties

• Northern Counties want to foreclose, which would destroy both Crabtree’s and Whipp’s interests

• Whipp argues that Northern Counties is responsible for Crabtree’s fraud.

• Had Northern Counties been fraudulent by reason of their agent Crabtree?

Northern Counties

• No!• Fry LJ, at 494-495, speaking on behalf of the Court of

Appeal, ruled that there was no fraud on the part of Northern Counties because Northern Counties ‘never combined with Crabtree to induce [Whipp] to lend her money’. His Lordship had earlier said, at 494, that fraud would arise ‘where the owner of the legal estate has assisted in or connived at the fraud which has led to the creation of a subsequent equitable interest, without notice of the prior legal interest’.

Northern Counties

• What about the fact that Northern Counties had been negligent?

• The Court of Appeal also observed that even though there was great carelessness on the part of Northern Counties, it was not enough to establish fraud. Northern Counties never combined with Crabtree to induce Whipp to advance the money. Northern Counties didn’t even know that Whipp was making the loan. Fry LJ, at 495, even contemplated that Northern Counties may have been grossly careless, but even this would not have been enough to rule in favour of Whipp in this case.

Exception – gross negligence with the title documents

• Legal owners of property may also be postponed to equitable interests when the legal owner has been grossly negligent with the title documents

• Walker v Linom – trust for shares in marriage settlement – trustees never bother to inquire where the shares are, or bother to check whether legal ownership has passed – Mr Walker created an equitable charge over the shares

Exception - gross negligence with the title documents

• With this exception mere carelessness on the part of the holder of the legal interest is not enough to constitute postponing conduct: Evans v Bickell (1801) 31 ER 908 at 1005-1006.

• 'Gross negligence' in the sense of a special degree of lack of care of prudence is needed for this exception to arise.

Prior equitable interest v legal interest

• Pilcher v Rawlins (1872) LR 7 Ch 259, at 268. The legal interest will prevail if it was acquired:

1. by a purchaser: • Anyone who acquire an interest for value (lessee, fee simple

owner, mortgagee)2 for value• Consideration in money – needs to be more than nominal

amount but not market value3 in good faith• Bona fide – no hint of conspiracy or unclean hands:Midland

Bank Trust Co Ltd v Green [1981] AC 513, at 528

Prior equitable interest v legal interest

4. without notice of the prior equitable interest• Can be actual, constructive or imputed• Actual: knowledge of the actual facts – real knowledge• Constructive: knowledge that would have come into the

person’s attention had they made reasonable inquiries eg case of land sold with a tenant in possession – purchaser should have checked the rights of the lessee - constructive notice

• Must be able to find the interest – old system title allowed to go back 30 years

• CAct s 164 • Imputed: at law you are regarded as having been notified eg

where agent is notified by no principle

Prior equitable interest v legal interest

The rule in Wilkes v Spooner [1911] 2 KB 473: Subsequent purchasers are in the same shoes as the legal estate holder even when the subsequent legal interest has notice or receives via gift:

[I]n justice to the owner of the land who had no notice when he acquired the land, it would not be right to hamper his power of dealing with his own land, because certain persons, who possibly would be the only customers for the land likely to pay the best price, have such notice.

(c) Cameron Stewart 2005

Registration Systems in NSW

• Problems with fraudulent transactions in the early colony

• 1800 – order of Governor King that all agreements concerning land be in writing or entered into books kept at Sydney, Parramatta and Hawkesbury

• 1802 – Judge Advocate’s office• 1817- Gov Macquarie – Fraudulent against a

bona fide purchaser for value• 1825 – Registration Act – substantially amended

over time and then repealed in 1984 and sections transferred into the Conveyancing Act

(c) Cameron Stewart 2005

Conveyancing Act and the Register of Deeds

• Section 184C – general register of deeds• Open to public inspection – s 199• Deliver original and copy to the Registrar –

registered with a number – copy kept on file• Any instrument affecting land or not can be

registered – not necessarily a “deed” as such

(c) Cameron Stewart 2005

The effect of registration?• Validity of the document – some instruments must

be registered to have legal force eg short form of mortgage discharge, appointment of new trustee, powers of attorney

• Registration for priority – s 184G – instruments affecting land, executed bona fide and for valuable consideration take priority over earlier instruments

• Effect – earlier legal interest will be defeated by later legal interest upon registration of later interest and so on

• However it only affects priority – will not perfect a fraudulent transaction, mistake or forgery

(c) Cameron Stewart 2005

Important factors to consider:

(a) Competing instruments – must have an instrument to register and then it only concerns instruments in writing – if no instrument then the normal priority rules apply eg a short term lease without writing, competing with a legal registered interest eg a sale to a third party – the registration won’t give the later legal interest priority

(c) Cameron Stewart 2005

Important factors to consider:

• (a) Competing instruments – Another eg - equitable mortgage by deposit of title deeds created without writing not defeated by a later registered instrument

• Section 184 confers priority only in cases of “competition” – that is if the interests are compatible no priority is afforded

Scholes v Blunt

• In Scholes v Blunt (1917) 17 SR (NSW) 36, A conferred an easement on B by means of an unregistered instrument. A then sold the land to C ‘subject to all easements, if any, affecting the same’. C registered his instrument first. Because the instruments could stand together, s. 184G did not apply and C took the land subject to B’s easement.

Boyce

• Boyce v Beckman, in 1834 the Crown granted a parcel of land to O’Donnell. In 1841 Sparke acquired the fee simple in the land. In 1845 Sparke conveyed the land to Boyce by deed. The land was described by reference to a number of lots relating to a plan. On 1 January 1852 Sparke executed a second deed of conveyance to Turner in which the land was described as including ‘all and any other lots forming a portion of the said grant to … O’Donnell to which Sparke is entitled’. The conveyance to Turner was registered first. The issue in the case was whether this registration gave the second conveyance priority over the first.

• The Court ruled that it did. The result depended upon finding that the two conveyances were competing. It could have been argued that there was no inconsistency in that the latter general description of the land meant that Sparke was only conveying that land to which he was entitled at the time of the second conveyance, ie. the land he acquired in 1841 less the land he conveyed to Boyce in 1845. On this basis the two conveyances executed by Sparke would not be competing instruments. However, the Court ruled otherwise

• Innes J, at 146, said:• • Such words, then as ‘lands to which I am entitled’, when used by a vendor,

must be held to mean ‘such lands as I possess and am entitled to, whether included in any previous conveyance by me or not, if that conveyance remains unregistered’, and cannot be held to except lands previously conveyed by him, so long as that conveyance remains unregistered. To hold otherwise would, in our opinion, be to defeat the very object of the Act.

• • The significance of this case is that although registration does not confer title

upon the purchaser on an interest in old system title land, in some cases the failure to register results in the loss of title to land. Boyce should have registered his conveyance to preserve and protect his title. The lesson of this case is to register instruments by which interests in old system land are acquired.

(c) Cameron Stewart 2005

Important factors to consider:

• Registration can make effective instruments which may not have had any legal effect under priority rules – eg A sells land to B but then sells land to C

• Under the nemo dat principle C would take no interest – however if C registers before B, C will be given “priority” – eg defeats B’s interest

(c) Cameron Stewart 2005

Important factors to consider:

Bona fides – on the part of the person taking the interest – notice is enough for there to be an absence of bona fides – actual, constructive or implied

• Eg if a purchaser takes interest with notice that someone other than the vendor is in possession of the property and fails to make proper enquiries is said to be notified and will not gain priority in registration

(c) Cameron Stewart 2005

Important factors to consider:

• The onus of proving good faith is upon the person asserting priority based upon registration of his or her instrument: Jones v Collins (1891) 12 LR (NSW) (L) 247 at 250.

• The most significant example of a lack of good faith for the purposes of the legislation is a where a person takes an interest with notice of a prior interest in the land. Notice includes actual, constructive or imputed notice: s.164, Conveyancing Act 1919.

Marsden

• In Marsden v Campbell (1897) 18 LR (NSW) Eq 33, Campbell leased land to Marsden in 1888 for a fifteen year term. The lease was not registered. In 1893 Campbell conveyed the land to Byrnes, with the deed of conveyance being registered. At the time Byrnes took the conveyance he knew that Marsden had been in possession of the land for 5 years and that he was running sheep on the land. Byrnes contended that his registration gave him priority over Marsden’s lease. The Court ruled against Byrnes, stating that he could not rely on s. 184G because of a lack of good faith on his part.

Marsden

• Simpson J, at 38, said:• • I must hold that the defendant Byrnes knew that

Marsden had some interest in the land, and that he was content to run the risk of what this interest might be. … [I]n this case Byrnes knew that an interest in the land comprised in his transfer was outstanding [to Marsden], and he made no enquiry. I must, therefore, hold that the lease to [Marsden] takes priority over the transfer to Byrnes.

(c) Cameron Stewart 2005

Important factors to consider:

When does notice have to have occurred? Before execution of the instrument and not the registration

S 164 CA – actual constructive and imputed

Constructive notice if an interest is registered

(c) Cameron Stewart 2005

Important factors to consider:

The crucial issue concerning notice relates to the question of timing. Notice received before the execution of the instrument upon which priority by registration is based precludes priority based upon registration of that instrument: Scholes v Blunt (1917) 17 SR (NSW) 36.

Notice received after execution of the instrument but before its registration does not preclude priority based upon registration of that instrument: Burrows v Crimp (1887) LR (NSW) (L) 198 at 210.

(c) Cameron Stewart 2005

Important factors to consider:

(d) Valuable consideration – must not be nominal but may be inadequate (eg much lower than market value) – S 184G(1) includes marriage

Thus, in Bullen v a'Beckett (1863) 15 ER 684, a conveyance for 10 shillings was held to be for nominal consideration and thus not entitled to the benefits of the legislation.

(c) Cameron Stewart 2005

Important factors to consider:

An interest acquired for no or nominal consideration should nevertheless be registered because such registration will preserve the interest holder's priority against interests in the land created after registration. For example, if A acquires an interest in land for nominal consideration and registers it, he or she will not be able to claim priority by registration. However, if after A's registration B, for valuable consideration, acquires an interest in the same land, B will not be able to assert priority over A by registering his or her interest. This is because B's interest will have been acquired with notice of A's interest and thus B will have failed to satisfy the legislative requirement of good faith. Any priority dispute between A and B will therefore be determined by the general law rules relating to priority disputes.

Fraud• Unlike with the Torrens system, registration does not make the forgery

operative: Re Cooper; Cooper v Vesey (1882) 20 Ch D 611.

• In Re Cooper, Thomas Cooper in his will appointed his son of the same name one of his executors and trustees. The father died. The son had possession of the title deeds to land. The son concealed the fact of his father’s death and without the consent of the other executors and trustees, mortgaged the land, representing the mortgage to be one from his (deceased) father. The mortgagee registered the mortgage. The other executors and trustees, upon discovering the facts, sought recovery of the title deeds and a declaration that the mortgage was of no effect. The Court held in favour of the executors. The mortgage was a forgery and the mortgagee could not rely on forged documents. Registration under s. 184G did not in any way alter this fact

Efficacy

• In Fuller v Goodwin (1865) 4 SCR (NSW) 66, Stephen CJ said:

• Registration is, at any rate not necessary to give efficacy to the deed. It appears clearly to us, that, in favour of an innocent taker for value who registers his deed, the statute confers on the conveying party, notwithstanding his previous inconsistent conveyance, a title as against the transferee named therein; and thus enables the person secondly taking, immediately upon registration, to acquire that title.

(c) Cameron Stewart 2005

Problems with the deed registration system

• Improved level of knowledge• Offered greater degree of protectionBut• Did not grant a total security of interest• Purchasers took subject to unregistered interests which

have not been documented• Purchasers take subject to unregistered instruments

which they ought to have discovered• Purchasers title is still dependant on the chain of title

and the risk that a prior interest may be invalidated breaking the chain of title and destroying the purchaser’s interest