General Law Land and Priority Principles



9.1   Introduction

Today, proprietary estates and interests in land are divided according to whether they come under the Torrens system or not. All land estates and interests which are not covered by the Torrens system are referred to as ‘old title’ or ‘general law’ land interests. Old title land interests are governed by fundamental common law and equitable rules which have developed specifically to deal with priority disputes which may arise between these interests. These rules have been further embellished through the inception of a non-compulsory, statutory system of registration known as the Deeds Registration System. The creation and enforcement of Torrens title land interests are, unless otherwise stated, governed by express statutory provisions within the Torrens legislation (this is discussed in Chapter 11). Old title land interests are not as prevalent today due to the fact that, increasingly, titles to land are being brought under the Torrens system. Nevertheless, old system titles still exist, particularly in older, more historical areas of Australia, and for this reason it is important to understand the fundamental general law. Furthermore, even interests which come within the ambit of the Torrens system may draw upon general law principles, where such interests remain unregistered or are unregistrable.

Under common law, ownership of an estate is absolute. Only one fee simple estate may exist against any single piece of land, although, as discussed in Chapter 3, it is possible to create successive common law estates, such as a life estate and a future interest. Strictly speaking, a priority dispute over ownership of a particular estate or interest cannot arise at law because common law principles will vest title and possession absolutely: it is not possible for two common law estates, both vesting the same title and possession, to exist. Hence, if A confers a fee simple in land to B absolutely, according to the common law, B holds the only fee simple in the land. It may be possible for B to ‘co-own’ the fee simple with another person, but no other person can claim a separate right to the fee simple, because it is already vested in B.

Despite this rigid approach to ownership, alleged priority disputes do arise under the common law. Such disputes generally occur in circumstances where the holder of a legal estate has fraudulently attempted to transfer it to two or more persons. In such a situation, it is important to determine who has the better and prior right to the estate.

The equitable jurisdiction assumes a different perspective to land ownership. Equitable interests are either created or imposed on the basis of fairness. The evolution of equitable interests and the acceptance that, under the Chancery jurisdiction, there is no limit on the number of equitable interests which can arise or be created over a single piece of land, has meant that the incidence of priority disputes has increased.

A priority dispute is essentially an argument which arises where two or more persons hold property interests in a piece of land which are inconsistent, making it necessary to determine who has the superior right to the land. Priority disputes may arise in a number of different ways. First, a priority dispute may arise where a grantor purports to grant two interests, the second of which is either completely or partially inconsistent with the first. These interests may be legal and/or equitable in nature.

For example, A holds a fee simple interest in land. A purports to sell the fee simple to B, create a trust over the land for the benefit of C, and enters into a loan contract with D, using the land as security. Following these three transactions, B, C and D all hold interests in the land. B holds a fee simple following the conveyance of that estate. C holds a beneficial interest in the land following the valid creation of an inter vivos trust, and D holds a security interest in the land which may be enforced if the loan agreement is not complied with. If each of the parties is aware of the existence of the other and accepts his position, there may be no priority dispute. Where, however, one party claims absolute priority to the land to the exclusion of all others, a clear priority dispute will arise. If this is the case, then the common law priority principles would suggest that, provided B is bona fide and has acquired the fee simple for value, he will have first priority over the interests of C and D.

Secondly, a priority dispute may arise where, despite the grantor not expressly conferring the estate or interest to a third party, a third party nevertheless claims an interest because of an alleged defect associated with the title of the grantor.

For example, if X purports to issue a conveyance of a fee simple estate to Y and, unbeknown to X, her title (which she has received from Z) is defective, a priority dispute may arise. Y will claim a fee simple estate pursuant to the transfer from X, and Z may claim a prior fee simple estate, arguing that the transfer to X was void or ineffective because it was fraudulently acquired or forged. As such, what Z is really arguing is that X never received any valid title to the land because it always remained with Z and, therefore, Y cannot have acquired any estate. This may be a question of fact in the individual case, but if it is proven that the document has been forged or fraudulently conferred, then it may be that X has never acquired any title to pass on. Alternatively, Y may raise a defence which may assist his claim. For example, Y may claim that Z contributed to the fraud or was in some way negligent in dealing with the title throughout the transaction and, as such, Z is legally precluded from asserting his legal rights. Strictly speaking, this is probably better described as a ‘validity’ dispute rather than a ‘priority’ dispute, but it does still require a court to consider who has the better claim.

Priority disputes are primarily concerned with resolving the dispute to the extent of the inconsistency. In some cases, the priority of one party will not necessarily result in the other party losing the full proprietary interest she claimed. For example, if the interest which has gained priority is of a lesser status than the subsequent interest, the subsequent interest will not be absolutely destroyed; it will only be limited or extinguished to the extent of the prior interest. Hence, if priority is given to a leasehold interest over that of a fee simple holder, the fee simple holder will only have his interest limited for the duration of the lease; it will not be completely extinguished.

This chapter examines the creation and enforceability principles relating to old title or general law land interests. This requires an analysis of the basic nature of old title claims and the fundamental common law and equitable priority principles which have developed to assist in the resolution of disputes over land. The Deeds Registration System, the first statutory system to regulate interests and disputes relating to old title land, will be examined in some detail in Chapter 10. This provides an excellent foundation for a subsequent examination of the changes and developments introduced under the Torrens system in Chapter 11.

9.2   Investigating and conveying legal title under general law

9.2.1   Good root of title

Legal title under general law land can only be properly and absolutely proven by tracing in an unbroken chain all of the transactions issued with respect to the land back to the original Crown grant. In Australia, as colonisation is still relatively recent, it is possible to make such a search, but often extremely difficult, time consuming and cumbersome to do. In England, such an investigation is virtually impossible. Consequently, in order to deal with this problem, a number of conveyancing rules have been adopted. The first is the practice of tracing old title interests back to what is known as a ‘good root of title’.

The good root of title is simply an instrument or document which, by its very terms, describes the nature of the property in issue, proves that the entire legal and equitable estate has been dealt with and includes nothing to raise any concerns about the nature of the title held by the party disposing of it. The good root of title amounts to evidence that a valid and enforceable title exists.1 It is not, and does not purport to be, absolute evidence of title: this could only be achieved through a complete tracing back to the original grant. However, it purports to provide a ‘good’ foundation for a subsequent disposition of the title. Examples of a good root of title would include: documents evidencing a conveyance of the whole legal and equitable estate in the land or a first mortgage over the land; such documents should expressly reveal the full character, ownership and status of the old title. If the root of title does not evidence title of the land involved, it will generally be regarded as too uncertain to constitute a good root of title (Re Bramwell’s Contract [1969] 1 WLR 1659). Disposers of old title land, particularly vendors, are only required to provide a chain of documents dating back to the ‘good root of title’; there is no further legal obligation.

Originally, the practice in England was that the good root of title had to be dated back at least 60 years from the date of the particular contract of sale. In Victoria, all vendors must provide purchasers with a good root of title which is no earlier than 30 years old.2 A lessee or an assignee receiving the land for a specified period of years will have no entitlement to such title documentation.3 The time frame is merely a starting point. A vendor must search back for a good root of title which is at least 30 years old, but it may be older than this, and it is unlikely that a good root of title will be discovered exactly 30 years from the date of the contract. Hence, a vendor must search back for a good root of title which is at least 30 years old.

The fact that a vendor has adduced documents showing a good root of title will not necessarily mean that the title is not defective. It may well be that an invalidity exists in the title which occurred before the document evidencing good root of title was executed, which is not at all apparent from this document. Absolute certainty can never be achieved under this conveyancing practice. The only way to be sure is to conduct a complete and thorough search of all transactions traced back to the Crown grant.

9.2.2   Abstract of title

In light of the uncertainty surrounding old title land, it has been held that a vendor selling old title land must provide the purchaser with what is described as an ‘abstract of title’.4 An abstract of title is a document prepared by the vendor which evidences all the dealings with the land back to the good root of title. Usually, a vendor will provide the abstract of title to the purchaser, at his own expense, once the purchaser has entered into the contract of sale.

The abstract of title should provide full details of the nature of the title, every encumbrance to which the land is subject (and which has been revealed through searching back for the good root of title, or even if the encumbrance exists before this time, if the vendor is expressly aware of it) including restrictive covenants and implied easements which may exist. The vendor should carefully set out all of the material parts of each document so that the purchaser is properly informed as to the exact nature of the land he or she is acquiring. These days, vendors commonly offer the purchaser an abstract of title in an abbreviated form; the contract of sale will usually allow the vendor to include a chronological list of the transactions and documents which would have been set out in the abstract, and a photocopy of all relevant documents is included.

9.2.3   Conveying a legal estate in old title land   A legal conveyance can only be executed by deed

All conveyances of legal estates in land must be executed by way of a deed in order to be valid (Property Law Act 1958 (Vic), s 52(1)).5 Exceptions to this are set out in s 52(2) and include:

(a)   assents by a personal representative;

(b)   disclaimers made in accordance with bankruptcy laws;

(c)   surrenders by operation of law;

(d)   leases or tenancies not required by law to be made in writing;

(e)   receipts not required by law to be under seal;

(f)   vesting orders of the court; and

(g)   conveyances taking effect by operation of law.

Section 54(2) goes on to set out that parol leases taking effect in possession for a term not exceeding three years (irrespective of whether an option to renew is incorporated within the term) at a best rent which can reasonably be obtained without taking a fine do not need to be executed by way of a deed in order to be legally valid.

A deed is a formal legal document which solemnly binds the parties. As set out by Young J in Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361 (p 363):

…a deed is the most solemn act that a person can perform with respect to a particular property or contract involved, and the form of that deed is as laid down by the law from time to time.

The identifying feature of a deed is writing which is: (a) on paper, vellum or parchment; (b) sealed; and (c) delivered, whereby an interest, right or property passes, or an obligation binding on some person is created, or which is in affirmance of some act whereby an interest, right or property has passed.6

The important common law requirement for a deed is the sealing, because this provides evidence of the solemnity of the document and the seriousness of the intention of the parties. It is not necessary under common law for the deed to be signed or witnessed. The traditional method of sealing a document is through the stamping of a blob of hot red wax with an imprint at the foot of the document. Nowadays, it is sufficient if it can be proven that the document either contains a written indication that the document is sealed or is expressed to be sealed even though no actual seal has been included.

Statutory provisions have now embellished the common law approach to deeds. Section 73(1) and (2) of the Property Law Act 1958 (Vic) requires an individual who executes deeds after the commencement of the Act either to sign or to place his mark upon the deed: sealing alone is insufficient. This no longer has to be a wax seal. An ordinary adhesive seal may be used and corporations tend to emboss the corporate seal next to the signature of the appropriate corporate ‘signing’ officer. Section 73A of the Victorian legislation sets out that an instrument which is expressed to be sealed without actually being sealed can still take effect as if it were sealed. Section 74(1) sets out that a corporation will be deemed to have sealed a deed if its seal is affixed in the presence of, and attested by, its clerk, secretary or other officer.7

A deed will not take effect until it has been delivered ( Xenos v Wickham (1867) LR 2 HL 296).8 Delivery does not have to be actual, in the sense of a physical handing over of the deed; it may be constructive where it can be established that the party regards the deed as binding from the date of its execution and displays an intention, through conduct or words, to be bound by it (Xenos v Wickham (1867) LR 2 HL 296). Where a deed has been properly executed in the presence of a witness, there will be an automatic inference that it has been delivered, but this may be rebutted where it can be proven that the parties did not intend to be immediately bound. Where the deed is executed in escrow, immediate delivery will not be presumed. A deed in escrow is a conditional deed which will not come into effect until the condition is fulfilled (Beesly v Hallwood Estates Ltd [1961] 1 Ch 105). The condition may be express or implied, and the deed is usually held by a third party until the condition has been satisfied. The deed will not come into effect until the condition is performed and hence, if the condition is never satisfied, the deed will never be effective. Delivery is the final requirement needed for the execution of a deed. Once the deed is signed, sealed and delivered, it becomes immediately effective and cannot be withdrawn (Beesly v Hallwood Estates Ltd).

A deed of conveyance should clearly describe the nature of the estate being transferred, the names of the transferor and transferee and the amount for which the property is being purchased. A legal estate in general law land will pass once the deed of conveyance is properly executed. If a conveyance of land does not constitute a deed or is not properly executed, and the conveyance does not fit within one of the recognised statutory exceptions, no legal estate may pass, although the equitable jurisdiction may enforce the transfer (see Chapter 5). Upon registration under the Torrens system, most instruments are deemed to have the same effect as a deed.9   Terms and conditions of the contract of sale

When selling land, the first stage will be to enter into an enforceable contract of sale. This is achieved when the purchaser signs the contract and (in an ordinary sale) pays a deposit of the purchase price, the balance to be paid over upon settlement date. Settlement date is the date set out, usually about three to six months later, when the actual conveyance of the legal title to the land occurs and the balance of the purchase price is handed over. Under old title land, settlement occurs once a deed of conveyance transferring the vendor’s estate to the purchaser is properly executed. All persons who hold an interest in the estate which is to be conveyed should be set out in the contract so that the purchaser is aware of any encumbrances or charges which may be attached to the property.

The contract will contain all of the conditions and terms of sale. In Victoria, the conditions of sale which are usually incorporated into a contract of sale for old title land are set out in Sched 3 to the Property Law Act 1958.10 These conditions may be varied, amended or modified to suit the particular circumstances. The conditions contained in this schedule include, inter alia:

(a)   requirements concerning the production of title documents and requisitions on title;

(b)   a condition setting out that time is deemed to be of the essence and the consequences of a default; and

(c)   a condition requiring all rates, taxes, assessments, fire insurance premiums and other outgoings to be paid by the vendor and borne by the purchaser from the date on which the purchaser becomes entitled to possession.

Other general conditions dealing with the right to possession, finance, dividing fences, etc, may all be expressly included within the contract. A sale of old title land at an auction will usually be made subject to the conditions of sale which have been adopted by Sched 3 or expressly included in the contract. Additional conditions in a contract of sale by auction include:

(a)   the purchaser will be the highest bidder;

(b)   if the sale is subject to a reserve price, the property cannot be sold until the reserve has been reached;

(c)   the auctioneer has the power to resolve any dispute between bidders which may arise; and

(d)   a bidder may not retract a bid.   Statutory ‘cooling off’ period

The Sale of Land Act 1962 (Vic) sets out that a purchaser who enters a contract for the sale of land at a price not exceeding $250,000 may, at any time before the expiration of three clear business days after he has signed the contract, give notice to the vendor that he wishes to terminate the contract and, where he has signed that notice and given it in accordance with the provisions of this section, the contract shall be terminated (s 31(2)). The three clear business days are to run from the date on which the purchaser signs the contract, irrespective of whether the contract becomes binding and enforceable on this date (Lebdeh v Smith [1985] VR 807).   Statutory requirements for the vendor’s statement

The Sale of Land Act 1962 (Vic) also requires the vendor to give to the purchaser, before the purchaser signs the contract, a statement which shall include all relevant details of any matters affecting the land (s 32(1)). This statement is generally included in the actual contract of sale. The requirements under s 32(2)(a)–(e) include:

If a vendor provides false information on the vendor’s statement, or fails to supply all the information required, the purchaser will be entitled to rescind the contract of sale at any time before title is transferred and the purchaser becomes entitled to possession (s 32(5)).   Statutory implied covenants as to title

In all conveyances of old title land, a number of implied covenants shall be deemed which, if breached, shall entitle the purchaser to damages against the vendor. Section 76(1) of the Property Law Act 1958 (Vic) sets out that all conveyances for valuable consideration, other than mortgages, where the person who conveys is expressed to convey as beneficial owner, shall contain four implied covenants as set out in Part I of Sched 4. The schedule contains one entire covenant with four separate parts. The schedule is prefaced by words indicating that the implied covenants do not represent an absolute warranty of good title but, rather, cover acts or omissions for which the vendor may be responsible. The four implied parts of the covenant are as follows:

(a) full power to convey

The vendor impliedly covenants that she has full power to convey the property. This covenant requires the vendor to disclose any defects in title which the purchaser should be aware of. If the vendor has done anything to make his or her title defective and does not disclose such a defect to the purchaser, the covenant will be breached. This covenant does not mean that the vendor guarantees the good title of the property but, rather, that he or she has not personally done anything, or is not aware of anything, which would make their title defective.

(b) quiet enjoyment

The vendor impliedly covenants that the purchaser will be undisturbed in his or her possession of the land which has been conveyed. If the vendor, or any person claiming under her, lawfully disturbs the quiet enjoyment of the purchaser, then the vendor will be in breach. In order to breach this covenant, it must be established that the interference is substantial and can be related back to some action by the vendor (Browne v flower [1911] 1 Ch 219). Importantly, there will be no breach of this covenant unless it can be proven that the disturbance is lawful; unlawful interferences with possession will generally be covered by tort remedies.

(c) freedom from encumbrances

The vendor impliedly covenants that the purchaser will acquire the property free from encumbrances, apart from those which are expressly set out in the conveyance. This covenant does not in fact require the land to be free from encumbrances but, rather, that the purchaser will not have his or her enjoyment of the land interfered with by reason of the existence of covenants not expressly noted in the contract. Furthermore, the covenant will only be breached where the encumbrance has been created or imposed as a direct result of the actions of the vendor or some person lawfully claiming under him. The covenant will not be breached where an encumbrance is established which is proven to have existed without the knowledge of the vendor.

(d) further assurance

The vendor impliedly covenants that she will do everything necessary and reasonably appropriate to make good the conveyance. Hence, for example, a vendor must ensure (unless otherwise agreed to in the contract) that all previous mortgages are discharged prior to the execution of the conveyance.

If it is agreed that the purchaser will purchase the land subject to an express defect in the title, the vendor should expressly set this out in the contract and ensure that the terms of the contract modify the application of the implied covenants (s 76(7) of the Property Law Act 1958 (Vic)).

The remedies available to a purchaser for breach of the covenants as to title will include damages for all loss flowing from the breach. If the conveyance has already been executed, damages may still be sought by the purchaser, but a breach will not entitle a purchaser to a repayment of the purchase price (Hawkins v Gaden (1925) 37 CLR183).

The implied statutory covenants will only apply to a vendor who conveys as full ‘beneficial owner’ of the land. Furthermore, the acts and omissions covered by the implied covenants will only be those which have occurred after the last sale of the land. Hence, a previous vendor will not be liable to a subsequent purchaser. The implied covenants will, however, extend to all persons lawfully claiming from the vendor and all persons claiming in trust for the vendor (s 76(1)(a)–(f) of the Property Law Act 1958 (Vic)).

9.3   Priority disputes between legal estates: the nemo dat principle

A legal estate will confer upon the grantee all of the rights, title and interest associated with a full common law estate and only the grantee (whether that be one person or a number of persons in co-ownership) can hold that estate. It is not possible to confer two identical legal estates to separate persons; hence, as discussed in the introduction, technically, priority disputes between legal estate holders do not exist.

For example, say A holds a fee simple estate in old title land. A decides to transfer the fee simple to B and C as co-owners of the land and, to this effect, A executes a deed of conveyance. Subsequently, A executes another deed of conveyance purporting to convey the same fee simple to D. In this situation, provided the deed of conveyance is properly executed and complies with the requirements for a valid deed, upon the execution of the first deed of conveyance, the legal estate will pass from A to B and C. This means that A has nothing to pass over to D, and even if the deed of conveyance to D is valid, it is impossible to convey a legal estate in land when you no longer hold one.

Where a person attempts to convey a legal estate which he or she no longer has, the nemo dat quod non habet principle will apply. Literally translated, this means that no person can give what he or she does not possess or that a person cannot assign a greater interest than the interest which is possessed. The nemo dat principle prevents any priority dispute between two identical legal estates from arising, because a grantor who has already transferred his or her legal estate to a grantee cannot execute a subsequent grant of that estate; the grantee cannot give away what he or she does not possess. The inevitable consequence of this is that, once created, a legal interest will prevail against any purported creation of a subsequent legal interest, to the extent of any inconsistency. The nemo dat principle may arise in a number of ways.

For example:

It may be the case that where two legal estates are purportedly created, no issue of nemo dat arises, because they either are not, or are only partially, in conflict.

For example, if A holds a fee simple estate in land and purports to create a legal leasehold estate in favour of B for a period of five years, and subsequently purports to execute a deed of conveyance of the fee simple to C, the interests of B and C may co-exist. In this circumstance, C will hold a fee simple reversion whilst B will acquire a legal leasehold interest. The two interests are not directly inconsistent because the legal leasehold interest exists for a defined period of time rather than indefinitely and, once it expires, the fee simple held by A will vest in possession. Whilst the nemo dat principle would prevent C from receiving a fee simple with a current right to possession, the conveyance will be deemed to transfer the fee simple reversion, the title of which A is perfectly capable of passing to C.

The decision of Boyce v Beckman (1890) 11 LR (NSW) (L) 139 considered what will constitute inconsistent dealings. On the facts of that case, the Crown originally granted a parcel of land in fee simple to O’Donnell. In 1841, Sparke acquired the fee simple estate in the land from O’Donnell. In 1845, Sparke conveyed some parts of the fee simple to Boyce by way of a deed. The deed referred to ‘certain lots in accordance with a map or plan attached to the deed’. The deed of conveyance to Boyce was not registered under the DRS until a later date. On 1 January 1852, Sparke conveyed similar parcels of land to Turner. The deed of conveyance set out that the land to be conveyed was ‘all or any other lots forming a portion of the said grant, to William O’Donnell to which Sparke is entitled…’.

Turner registered the conveyance with the old Deeds Registration System (DRS) on 5 January 1852. Boyce registered his conveyance with the DRS after this date. Both of the conveyances to Boyce and Turner were for valuable consideration, and Turner had received no express or constructive notice of the earlier conveyance. Beckman, Turner’s successor in title, claimed priority over the later registered interest of Boyce on the basis that his registration was prior in time. Boyce argued that the DRS did not confer any greater title upon an instrument and, as the later conveyance was invalid under the nemo dat principle (because the legal estate in the land had already been conveyed to Boyce), the priority principles could not apply.

The court ultimately held that Turner’s interest had priority over that held by Boyce. It was held that the instruments held by Boyce and Turner were conflicting, and, as such, the nemo dat principle did not apply. The court found that the two conveyances were inconsistent, and consequently, as the latter was registered first, it was entitled to priority. The land which was passed in the first conveyance was intended to be different from that which was passed in the second. However, due to a direct written inconsistency in the deed of conveyance, this was not achieved.

Whilst it is not possible to confer two identical legal estates in the same land upon separate grantees, it is possible for successive legal and equitable interests to exist over a single piece of land. Equitable interests are created according to justice and fairness, and may be expressly created, implied by the circumstances, or imposed by a court; their existence does not conflict with legal ownership because they are recognised and enforceable in a separate jurisdiction (see Chapter 5). Hence, priority disputes between legal and equitable interests commonly arise, making it important to appreciate the relevant priority rules.

9.4   Priorities between legal and equitable interests

Priority disputes between legal and equitable interests will arise where legal and equitable interests relate to the same piece of land and the rights conferred under these interests are inconsistent. Whether the legal interest arises prior, or is subsequent to, an equitable interest, the basic priority rule is that a bona fide purchaser of the legal estate for value without notice will take priority over the interest of an equitable interest holder. Where the legal interest is created prior in time to the equitable interest, the primary concern for a court in assessing the dispute will be whether the grantee is bona fide and has given good value for the interest. Alternatively, where the legal interest is created subsequent to an equitable interest, the court must also consider whether or not the grantee took without notice of the existence of the equitable interest. Each situation is considered below.

9.4.1   Prior legal estate and subsequent equitable interest: the fraud principle

A grantee of a prior legal estate will have his interest postponed in circumstances where the conduct of the legal estate holder cannot be described as bona fides. Conduct fitting into this category would include circumstances where the legal estate holder is guilty of fraud, gross negligence and, in some cases, where the conduct of the legal estate holder effectively results in him being estopped from asserting his legal priority. These categories will generally arise where it can be proven that the prior legal estate holder has contributed to the creation of the subsequent equitable interest without the subsequent interest holder being aware of the prior legal estate.

This type of situation was considered by the English Court of Appeal in Northern Counties of England Fire Insurance Co v Whipp (1884) 26 Ch D 482. On the facts of that case, Crabtree was the manager of the plaintiff insurance company. The company agreed to lend Crabtree money pursuant to a general law mortgage. Under this transaction, the company retained legal title to land which had been owned by Crabtree until the mortgage was discharged. After the mortgage had been executed, the deed of mortgage and the title documents were handed over to the company and placed in the company safe. Crabtree, as manager of the company, had one of the keys to the safe, and after the documents had been placed in the safe, Crabtree opened the safe and took out all of the title documents except the deed of mortgage. Crabtree then used the title documents to make out to Mrs Whipp, a third party, that he retained legal title to the land, in order to acquire a further loan from Mrs Whipp.

Mrs Whipp, being unaware of the existence of the first mortgage, approved the loan and believed that she held legal title to the land. When Crabtree subsequently became bankrupt, and the full position was disclosed, it became clear that the legal interest had been granted to the company as first mortgagee and that the transaction with Mrs Whipp was enforceable in equity. Mrs Whipp then argued that her subsequent equitable interest should defeat the prior legal title of the company because the company had acted inequitably in allowing Crabtree access to the title documents and, as such, could not be properly described as a bona fide purchaser.

The Court of Appeal found that the conduct of the company was insufficient to result in its priority being postponed. The court then examined the type of conduct that would constitute a postponing fraud. It held that, where a prior legal estate holder stands by and lets another lend money on the estate without giving any notice of the prior interest, the conduct will amount to a fraud sufficient to postpone the initial interest. On the facts, whilst the court found that the company had been careless in the way it had dealt with the title and security documents, mere carelessness or want of prudence on the part of the prior legal interest holder was insufficient to postpone the prior legal estate. In his judgment, Fry LJ noted that, whilst the company had displayed great carelessness in the manner in which it had dealt with the title documents, gross carelessness could not amount to postponing conduct.

Today, it is unlikely that fraud would be read so narrowly. Whilst the court in the Whipp decision distinguished between ‘gross’ negligence and mere carelessness, it is likely that modern courts would take a more flexible approach; the distinction between mere and gross negligence can be difficult to establish, particularly when assessing commercial behaviour (Hudston v Viney [1921] 1 Ch 98). These days, courts are more likely to consider the inequity in allowing a legal estate holder to enforce her right to priority in light of all of the circumstances, including what has been described as the ‘want of prudence’ on the part of the legal estate holder.

In Walker v Linom [1907] 2 Ch 104, Parker J made the following comments:

In my opinion, any conduct on the part of the holder of the legal estate in relation to the deeds which would make it inequitable for him to rely on his legal estate against a prior equitable estate of which he had no notice ought also to be sufficient to postpone him to a subsequent equitable estate, the creation of which has only been rendered possible by the possession of deeds which but for such conduct would have passed into the possession of the owner of the legal estate.11

On the facts of that case, his Honour held that trustees who hold a prior legal estate in land are postponed against a subsequent equitable interest holder in circumstances where the original transferor to the trustees has, unbeknown to the trustees, retained the original deed of conveyance from the chain of title.12 His Honour held that inequitable conduct could be sufficiently established from what he termed the ‘want of prudence’ on the part of the trustees in failing to acquire the title deeds in the chain of title.

A prior legal estate holder may also be precluded from enforcing his priority where a valid estoppel can be raised against him. The priority of the prior legal estate holder in this situation is defeated, not because of a lack of bona fides, but because the availability of the estoppel defence prevents priority rights from being asserted. The operation of the estoppel defence is well illustrated in the High Court decision of Barry v Heider (1914) 19 CLR 197.13 On the facts of that case, the registered proprietor of land executed a transfer of that land to Schmidt. This transfer could not be properly effected because, at the time, the Land Titles Office was in the process of issuing a new certificate of title to incorporate all of the land included in the transfer. Barry gave Schmidt an authority which stated that when the new certificate of title was released, it should be passed on to Schmidt. Schmidt subsequently entered into a mortgage with Heider. Both the interest of Schmidt and that of Heider remained unregistered. Barry sought injunctive relief to prevent Schmidt from registering the transfer, claiming it had been executed fraudulently and that he had not received any payment for the land, and a declaration that he held the land free from the mortgage. The High Court agreed with Barry about the transfer to Schmidt and, on the basis of fraud, set it aside. The important issue in the case, however, was whether the legal title which Barry now held could be postponed to the subsequent equitable interest held by Heider pursuant to the mortgage. In particular, did the conduct of Barry mean that he was estopped from asserting his legal title?

The High Court concluded that Barry was estopped from asserting the priority of his prior legal estate; his conduct in arming Schmidt with the transfer and an authority to receive the new certificate of title, and thereby giving him the power to represent that he had a good legal title to the property, operated as a representation to the rest of the world that Barry believed that Schmidt held good legal title. Barry was estopped from denying this by enforcing his priority rights under the legal estate. Griffith CJ concluded that the transfer ‘operated as a representation, addressed to any person into whose hands it might lawfully come without notice of Barry’s right to have it set aside, that Schmidt had such an assignable interest’.14

The overlap between conduct amounting to estoppel and that constituting a fraud was expressly noted. Isaacs J discussed the concepts of fraud and estoppel and noted:

Distinctions have been drawn as to whether such a case is to be solved by the doctrine of estoppel, or by the doctrine that, where one of two innocent persons has to suffer by the fraud of a third, he who…has enabled the third person to commit the fraud, shall bear the loss. I see no real distinction in principle. I call them both estoppel, because the second principle simply compels the person who enabled the fraud to be committed to stand by the consequences of his own conduct and precludes him from asserting his really superior title.15

The focus of the court in Barry v Heider is upon an expansive assessment of fraudulent, postponing conduct, and the estoppel action seems actually to form a subset of this broader category. It may be argued that this tendency to merge the two categories weakens the validity of the estoppel defence in this context. The court assumed that Barry’s conduct in giving Schmidt the authority constituted a representation to the world that the title was unencumbered and, furthermore, that Barry knew that Schmidt would then go out and obtain a mortgage on the strength of this. This is quite a presumption to reach, particularly if it is borne in mind that Barry had given the authority to Schmidt in accordance with the terms of the original transfer agreement, which had only been obtained due to the gross fraud perpetrated by Schmidt. Whilst Barry’s conduct may be regarded as unfair from the perspective of innocent mortgagees and postponement of the legal title may be justified on this ground alone, it seems more appropriate to expand the fraud category rather than impose unsuitable restrictions upon the concept of estoppel.

A good example of a contrary approach can be found in the old decision of Ettershank v Zeal (1882) 8 VLR 333, where the court refused to apply estoppel principles as a ground for postponing the priority of a legal estate. On the facts of that case, William Johnston Sr allowed his son, William Johnston Jr, to possess himself of title deeds to land which belonged to his father. The son subsequently represented himself to be the owner of the property, and obtained a mortgage on the strength of the title from Zeal and Cornish. The mortgage was subsequently confirmed by William Johnston Sr so that Zeal and Cornish held the legal title. William Johnston Jr then proceeded to enter into a second mortgage with the plaintiffs, still representing himself as the owner of the redemption interest which he retained after the first mortgage. William Johnston Sr refused to confirm the second mortgage and argued, as co-defendant with Zeal, priority to the estate because of the fact that they held the legal estate. The plaintiff argued that the defendants were estopped from asserting their priority because of their conduct in allowing the son to assert himself as owner of the land to the rest of the world.

The court held that estoppel could not be made out. Whilst the court noted the ‘culpable negligence’ of William Johnston Sr, it felt that an action in estoppel could not be made out because the father had no actual knowledge that the plaintiff was being deceived. As noted by Holroyd J:16 ‘A man is not bound to disclose his rights to all the world, lest somebody should be injured by ignorance of them, nor liable if anybody is injured by such ignorance without his knowledge.’

9.4.2   Prior equitable interest and subsequent legal estate: bona fide purchaser for value

The general principle where a priority dispute arises with a legal estate is that the holder of the legal estate may assert priority where he can prove himself to be a bona fide purchaser for value without notice. Where the estate is prior in time to an equitable estate, the primary question, as discussed above, will be whether or not the legal estate holder is bona fide and should, in all fairness, be entitled to enforce his or her priority rights. The question of notice will not be directly relevant. Where, however, the legal estate is created subsequent to a pre-existing equitable interest, a vitally important priority issue that must be examined is whether or not the subsequent legal estate holder took with notice of the prior equitable interest. Where notice can be established, the priority of the legal estate holder will be postponed (Pilcher v Rawlins (1872) LR 7 Ch 259). The bona fide