Severance and Ending Co-ownership

Cameron StewartThanks to Jim Helman and Shae

McCrystal – errors are mine

Severance of Joint Tenancy

• A joint tenant can change the nature of their co-ownership from joint tenancy to tenancy in common. This will not terminate the co-ownership, (unless the method used to change the nature of the ownership involves divesting of the interests) it will simply change the nature of the co-ownership from joint tenancy to tenancy in common.

Unilateral Severance of Joint Tenancy

• The unilateral severance of the joint tenancy deprives the other co-owners of the right of survivorship to the portion of the land that is severed, but equally the severing co-owner loses the right of survivorship with respect to a portion of the land now belonging to the other joint tenants.

• There is no duty not to sever- co-owners are not fiduciaries • In Public Trustee of the ACT v Hall [2003] ACTCA 27, a surviving co-tenant (Hall)

tried to argue that a unilateral severance undertaken by his former wife in respect of their co-owned property was ineffective because she had severed the joint tenancy in breach of her obligations to him as co-joint tenant. In effect, Hall argued that joint tenants were in a fiduciary relationship and if one co-tenant tried to sever the co tenancy without notice or consultation, they would be severing in breach of that relationship. The ACT Court of Appeal unanimously rejected that argument citing long established principles that joint tenants are not in a fiduciary relationship and are entitled to unilaterally pursue their own interests by severing the joint tenancy without giving notice to, or getting permission from, their co-owner.

Ways to sever

• One joint tenant alienates his or her share inter vivos, with or without the consent of the other joint tenants.

• They can do this by transferring their interest to a third person, to themselves, by declaring a trust over their interest or by transferring the interest to a trustee to hold on trust for someone else or themselves.

Ways to sever

• Old System Land - s 30 of the Conveyancing Act 1919 (NSW) states that where a person causes the unilateral severance of a joint tenancy in old system land, notice of the unilateral severance must be given to the other co-tenants as soon as practicable, although a failure to do so will not invalidate the severance.

• Torrens Land – s 97 of the Real Property Act 1900 (NSW) requires the Registrar General to notify the other joint tenants of the lodgement of a dealing that may sever the joint tenancy.

Ways to sever – alienation to self• A simple way of unilaterally severing a joint tenancy is to alienate the

land to yourself. The CA s 24 empowers a person to assume property to himself or herself.

• In order to make this effective to sever the joint tenancy, it must comply with the legal requirements and equity WILL NOT perfect an incomplete severance.

• Old System Land – To alienate the land to oneself under old system

land, the severing joint tenant had to use a valid deed.

• Torrens – To alienate land to oneself, the severing joint tenant must register a transfer of the interest to themselves.

Ways to sever – transfer and settlement of trust

• Corin v Patton (1990) 92 ALR 1: Mr and Mrs Patton were joint tenants of Torrens title land, and Mrs Patton became seriously ill. Anticipating her own death she decided she wanted to benefit her children. She attempted to transfer her interest as joint tenant to her brother, Mr Corin, to hold the interest as trustee for the benefit of Mrs Patton. If this was effective it would sever the joint tenancy enabling her to pass her beneficial share of the property through her will. Unfortunately there was no transfer registered before Mrs Patton died, and so the issue was whether the transfer to her brother as trustee for herself was effective in equity to sever the joint tenancy. The High Court found that the gift was ineffective because, while Mrs P had signed a transfer form, she had not taken any steps to obtain the certificate of title that was held by an unregistered mortgagee. Thus, on Mrs Patton’s death the survivor, Mr Patton, took the whole interest.

• Rule in Milroy v Lord

Severance – grant of mortgage over share

• A legal mortgage by the joint tenant under general law constitutes alienation because the mortgage transfers the legal title to the mortgagee. This has the effect of breaking the co-ownership because the mortgagee becomes the owner. On the other hand, a Torrens mortgage does not constitute alienation, because a mortgage of Torrens title land operates as a charge only and not as a transfer of the interest mortgaged.

• Interestingly, if the mortgaging joint tenant dies before the other, the charge ceases to be effective because the interest over which the mortgage was granted has ceased to exist (right of survivorship – surviving JT takes all);

• Alternatively - If the non mortgaging JT dies, the mortgage then applies to the whole of the interest owned by the surviving joint tenant. Ie – the whole estate will then be encumbered by the mortgage.

Severance – grant of mortgage over share

• In Lyons v Lyons [1967] VR 169 the Court considered a claim by the executors of the estate of William Lyons that they were entitled to an interest as tenant in common with Hazel Lyons as a result of a severance of the joint tenancy by the conduct of the applicant and her late husband or by agreement or by William granting a mortgage over his estate and interest in the land to Adelaide Gray.

• After considering the issues, the Court held that where land is held under the Victorian equivalent of the Real Property Act a joint tenancy is not severed by a mortgage given by one of the joint tenants and the mortgagee’s security in the land lapses if the mortgagor dies before the surviving joint tenant.

Severance – grant of mortgage over share

• Guthrie v ANZ Banking Group Ltd (1991) 23 NSWLR 672 – Mr and Mrs Guthrie were joint tenants in a fee simple of Torrens Land. Mr Guthrie gave a guarantee over the indebtedness of a company he was involved in, and to secure the guarantee, he gave the ANZ Bank a mortgage over his portion of the property. Subsequently, the Guthries marriage broke down, and in the divorce proceedings it was determined that Mr Guthrie would ‘release’ his share of the property to Mrs Guthrie so that she would become the sole owner. The question for the court was whether or not the charge over Mr Guthries share in the joint tenancy survived the release of his share to Mrs Guthrie:

• Where judgment is given against one of two joint tenants and afterwards that one releases to the other before execution such release shall not bar the creditor’s execution, whereas if the releasing joint tenant had died before the execution the survivor holds the land discharged of any execution. The reason for the distinction is that in the former case the releasee derives title from the release…. (per Meagher J at 680)

• So the answer is – yes it did – a mortgage will travel with an inter vivos release to the other joint tenant.

• In his judgment, Justice Priestley notes that this outcome was necessary to ensure that a joint tenant would not have a simple mechanism to frustrate creditors – giving someone a statutory charge and defeating it simply by surrendering their share of the property to their joint tenant.

Severance – lease

• Whereas English authority favours the view that a lease granted by one joint tenant constitutes alienation, Australian authority tends to favour the view that a lease suspends rather than severs the joint tenancy. Here, the joint tenancy revives upon the ending of the lease: Lyons v Lyons

• Obiter – Wright v Gibbons (1949) 78 CLR 313 per Dixon J at 330: “One joint tenant for an estate in fee simple may grant a lease of his equal share and during the lease the jointure is suspended and there is a temporary severance”.

Ways to sever – agreement• Where all of the parties to a joint tenancy agree between themselves to

sever the joint tenancy, equity will enforce the agreement although it is ineffective to sever the joint tenancy at law. In contract terms, each joint tenant agrees to give up their right of survivorship in consideration for agreement of the others to give up theirs – thus all parties have provided consideration for the agreement. Agreement to sever a joint tenancy can appear in a formal document, an informal document or an oral agreement. The elements of specific performance do not have to be present. As long as equity can distil an intention to sever from the parties agreement, it will enforce the severance.

• The necessary intention to sever from an agreement can be found in agreed terms that demonstrate that the parties were treating the property as if it had distinct and divided shares – which is inconsistent with a continued right of survivorship.

Ways to sever – agreement

• Gould v Kemp (1834) 39 ER 959 – A and B were joint tenants. B purported to dispose of B’s interest in the estate under B’s will (which would be ineffective to sever the joint tenancy). However before B died, A and B entered into and agreement that A would, after B died, honour the terms of B’s will. This would be an agreement between the parties that demonstrates that they agreed to treat the property as if it had distinct shares.

Ways to sever – sale to each joint tenant

• Wright v Gibbons (1949) 78 CLR 313 three sisters, Olinda Gibbons, Ethel Rose Gibbons and Bessie Melba Gibbons were registered as joint tenants in land at Hobart. By a Memorandum of Transfer Ethel Rose Gibbons transferred to Olinda Gibbons her one- third share and Olinda Gibbons transferred to Ethel Rose Gibbons her one-third share in the land.

• Upon registration the Certificate of Title was endorsed to show that the three owners were registered as tenants in common in equal shares. Bessie Melba Gibbons who survived both Olinda and Ethel Rose, approached the Court for a declaration that the Memorandum of Transfer did not sever the joint tenancy and that she became solely entitled to the land as proprietor.

• The matter came before the High Court on appeal and the Court held that the Transfer did effect a severance of the joint tenancy and that Olinda, Ethel Rose and Bessie Melba were tenants in common upon registration of the Transfer.

Severance by conduct

• Course of conduct – If you can’t show an actual agreement about severance, you may be able to show a course of conduct which demonstrates that all parties were acting on a commonly held belief or assumption that they had distinct shares in the property and therefore they were tenants in common. You have to show a course of conduct engaged in by all of the joint tenants that intimates that ‘the interests of all were mutually treated as constituting a tenancy in common’.

Severance by conduct

• Butt gives the following examples:• Continuously dividing the income from jointly owned

property;• Division of the proceeds of the sale of the property between

the co-owners (before settlement has terminated the jt)• The creation of ‘mutual wills’ which devise the interests in the

jointly held property in an agreed manner – ie all co-owners make wills at the same time, leaving the property to the same people. While you have nothing to pass in your will if you are not the final survivor, equity will enforce the agreement evidenced by the mutual wills if the final survivor changes his will after benefiting from the survivorship

Severance by conduct

• Williams v Hensman (1861) 70 ER 862, Sarah Creak died leaving £4,000.00 to her trustee to fund a legacy of £200.00 per year for a Mrs Hensman and providing for the principal sum to be divided between Mrs Hensman and eight children on her death.

• The question for determination by the Court was whether the joint tenancy created by the gift in the Will had been severed by the various events that occurred following the death. Vice-Chancellor Sir W. Page Wood found that parties had entered into deeds and arranges their affairs in ways which were not reconcilable with a joint tenancy:

Severance by conduct

• Vice-Chancellor Sir W. Page Wood:....there may be a severance by any course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common. When the severance depends on an inference of this kind without any express act of severance, it will not suffice to rely on an intention, with respect to the particular share, declared only behind the backs of the other persons interested. You must find in this class of cases a course of dealing by which the shares of all the parties to the contest have been effected, as happened in the cases of Wilson v Bell and Jackson v Jackson.

Severance by conduct

• Burgess v Rawnsley [1975] 1 Ch 429 a property was purchased by a Mr Honick and a Mrs Rawnsley. While the property was purchased by Mr Honick in his name, the purchase price was paid by Mr Honick and Mrs Rawnsley equally. The house consisted of 2 flats, an upstairs flat and a downstairs flat, with Mr Honick occupying the downstairs flat. It was Mrs Rawnsley’s intention that she would occupy the upper flat. Shortly after the Contract was signed Mr Honick instructed his solicitor to have the property conveyed into the joint names of himself and Mrs Rawnsley and this occurred.

Severance by conduct

• At this point the legal estate and the beneficial interests were both held as joint tenants. The following summary of the facts is set out in the judgment of Lord Denning, M R:

... In July 1968, being disappointed in his hopes of marriage, Mr Honick wanted Mrs Rawnsley to sell him her share in the house. He came to an agreement with her, as he thought, to buy it for £750. He went to his solicitor and said to him “Mrs Rawnsley is not going to marry me, but she has agreed to take £750 for her interest.” He handed the conveyance to the solicitor for him to draw up the necessary document.

Severance by conductThe solicitor thereupon wrote to Mrs Rawnsley on July 1, 1968, this letter:

Dear Mrs. Rawnsley. re 36 Queens Road, Waltham Cross. Mr. Honick called to see us today stating that you are agreeable to convey to him your interest in this property for the sum of £750. Will you please confirm that this is so and we will then finalise the matter and ask you to call upon us to collect those moneys and to sign the final deed.

Next day, however, Mrs Rawnsley went to the solicitors and said she was not willing to sell. She was not satisfied with £750 but wanted £1,000. Mr Honick told his daughter that Mrs Rawnsley was going “to ask a thousand which he was not going to pay.

A few days later Mr Honick went to the solicitor and told him to leave things as they were. He asked for the conveyance back and got it. From that time onwards things went on as before, with Mr Honick in his house alone, and she in hers; but both visited one another, being quite friendly. He paid all the rates and outgoings of his house. This went on for three more years until he died on October 26, 1971.

Severance by conduct

• Considering the law and earlier cases at some length, Lord Denning came to the following conclusion:

• ... I think there was evidence that Mr Honick and Mrs Rawnsley did come to an agreement that he would buy her share for £750. That agreement was not in writing and it was not specifically enforceable. Yet it was sufficient to effect a severance. Even if there was not any firm agreement but only a course of dealing, it clearly evinced an intention by both parties that the property should henceforth be held in common and not jointly.

Severance by court order

• A court has no inherent jurisdiction to adjust property rights, but it may effect a severance as a result of a court order that affects the property: clearest example is

• eg Family Law Act 1975 (Cth); Property Relationships Act 1984 (NSW). These orders are generally made in the context of a breakdown in family relationships and the courts exercise statutory power to adjust property rights.

• If one party dies before a court order can be given legal effect through a transfer, equity will compel the finalisation of the court orders as equity will not permit a court order to be frustrated.

Severance by operation of law

• Under the Bankruptcy Act 1966 (Cth), the property of a bankrupt person vests in the trustee-in-bankruptcy, and if the bankrupt person holds property as a joint tenant, the transfer of the bankrupt’s notional share to the trustee-in-bankruptcy, automatically severs the joint tenancy and converts the co-ownership to tenancy in common.

Severance by merger

• Severance also occurs where one of the joint tenants acquires a further estate in the land different from the existing estate. This breaks the unity of interest. ie A and B are joint tenants of a life estate. If A subsequently acquires the fee simple remainder of the estate, then A’s life estate merges with the fee simple remainder and there is no unity of interest between A and B.

Severance by unlawful killing

• If a joint tenant unlawfully kills another, the perpetrator cannot benefit as a survivor. This is an aspect of a broader principle that a person may not benefit from their crime. Thus if A and B hold property as joint tenants, and A kills B, then A holds legal title as survivor, subject to a constructive trust in favour of him/herself and B’s estate as tenants in common

Severance by unlawful killing

• Permanent Trustee Co Ltd v Freedom From Hunger Campaign (1991) 25 NSWLR 140 that “the public policy rule was said not to disqualify the killer from benefiting from the victim’s property unless the killing was done with the intent to bring about a benefit”.

Severance by unlawful killing• Troja v Troja (1994) 33 NSWLR 269, held that irrespective of the

mitigating factors, a person who kills another should not benefit from that crime. In this case a wife who killed her husband while in a state of depression brought on by the husband's conduct could not benefit from the joint tenancy she held with her husband.

• In response to this strict line taken by the courts the NSW Forfeiture Act 1995 was enacted. The legislation gives the Supreme Court power to modify the effect of the forfeiture rule following unlawful killing if “justice” so requires, but murder (as opposed to manslaughter) is excluded from the operation of the Act.

• Estate of Fitter and the Forfeiture Act 1995 [2005] NSWSC 1188 – forfeiture can be imposed without conviction

Effect of severance on co-ownership

• Where there is more one joint tenant, severance by one joint tenant will not affect the joint tenancy of the remaining joint tenants. Instead the severing joint tenant will hold with the remaining joint tenants as a tenant in common.

• Let's look at some examples:

X and Y are joint tenants of land, and X transfers her interest to Z The effect is that Z and Y become tenants in common of half shares

A, B and C hold as joint tenants and A transfers her share to D The effect is that D holds a one-third share as tenant in common with B and C, and B and C hold the two-thirds share as between themselves as joint tenants. Thus the survivor of B and C would take the whole of the two-thirds share, but B and C would be unaffected by D's death, and D would be unaffected by the death of B or C.

Effect of severance on co-ownership

• A, B and C hold as joint tenants. A transfers her interest to B and B transfers her interest to A. C does not participate.

• The effect of the first conveyance (from A to B) is that B held a one-third share as tenant in common, and B and C held the remaining two-thirds share as joint tenants. The effect of the second conveyance - B conveying to A the interest that B held as a joint tenant with C - was to sever the joint tenancy between B and C. Thus A, B and C held equal shares as tenants in common. These were the facts of Wright v Gibbons (1949) 78 CLR 313.

Bringing Co-Ownership to an EndCo-ownership may be terminated in any one of the following ways:• All but one of the joint tenants has died (or has been murdered by

another co-owner), possibly leaving the surviving co-owner with the entire estate;

• One of the co-owners may buy or otherwise acquire the interests of all of the other co-owners;

• All of the co-owners may transfer the property to a single third-party;• All of the co-owners agree to divide the property into their respective

shares; or• If the co-owners cannot agree to divide the property into their

respective shares, there is a statutory procedure for court ordered sale or physical partition of the land involving the creation of separate titles to the land. (Conveyancing Act 1919 NSW s 66G).

Partition

• Section 66G(1) which provides:Where any property (other than chattels) is held in co-ownership the court may, on the application of any one or more of the co-owners, appoint trustees of the property and vest the same in such trustees, subject to incumbrances affecting the entirety, but free from incumbrances affecting any undivided shares, to be held by them on the statutory trust for sale or on the statutory trust for partition.

Partition• The scheme provides that the court may appoint trustees over the

property, and the property in the estate will vest in the trustees for the purposes of partition or sale of the property. In the vast majority of cases the court will make an order for partition or sale on application by a co-owner unless there is some reason in law or equity that suggests that the sale is inappropriate (interest of a third party would be prejudiced; applicants conduct raises an estoppel etc). However the court will not refuse to order partition or sale just because one co-owner does not want it to happen or argues that it will cause them hardship or be unfair.

• The presumption under the legislation is in favour of the sale of the property (and a co-owner may be given a chance to buy it) over partition because partition involves physically dividing the land and creating new titles – a process that may be inconvenient or decrease the value of the land overall.

Partition

• It is important to note subsection (1A). This provides for proceedings to stay on foot even if the co-owner who has commenced the proceedings dies during the course of the proceedings. The section is expressed to apply “despite, in the case of a joint tenancy, the rule of survivorship.”

• Trustees for sale appointed by the Court have certain obligations: • To sell at the best price possible, usually after obtaining a valuation. • To sell the property expeditiously, given the obligation to obtain the best price