(p. 176) 6. Equitable interests
1. It is generally said that there are two sorts of property right in land: legal property rights and equitable property rights. We examined the content of legal property rights in Chapter 5; we will examine the content of equitable property rights in this chapter.
2. We saw in Chapter 5 that legal property rights in land can be split into two groups: legal estates and legal interests. In contrast, under the scheme of the Law of Property Act 1925, there is no such thing as an equitable estate in land. All equitable property rights in land are equitable interests. Equitable interests in land can usefully be split into two groups: equitable interests arising under a trust; and other equitable interests.
3. As we also saw in Chapter 5, there is a limited number of legal estates and legal interests in land. The list of possible equitable interests in land is also limited, but is longer than the list of legal interests. In particular, a right under a trust counts as an equitable interest—and rights under a trust can have very varied content. This means that whilst the content of B’s right may prevent it from being a legal interest in land, it may still count as an equitable interest in land.
4. Equitable interests in land share a key feature of legal estates and legal interests: they are capable of being asserted against third parties. For example, consider a case where A has a legal estate in land and B, through his dealings with A, acquires an equitable interest in A’s land. B’s right will then be prima facie binding on C, a party who later acquires a right from A. In this way, equitable interests in land have a power lacked by personal rights.
5. It is clear that the content and acquisition questions are answered differently depending on whether B claims a legal or equitable property right. In section 7 of this chapter, we will consider whether these differences can be justified. One important point is that if B has an equitable property right rather than a legal property right, it will generally be easier for a third party to show that he has a defence to B’s right. We will focus on the defences question in Chapter 12. It may also be the case that equitable interests are conceptually, as well as historically, distinct from legal property rights.
(p. 177) 1 Equity and Equitable Property Rights
1.1 The Function of Equity
In land law, as in many other areas of law, it is possible to distinguish between common law rules and equitable rules. Historically, the distinction is a simple one: common law rules were developed by the common law courts, equitable rules were developed by courts of equity. As a result of procedural reform in the late nineteenth century, there are no longer separate common law courts and equitable courts; rather, all courts must consider any relevant common law rules and equitable rules.
As Hackney has put it, the arrangement of having two separate sets of courts, often with overlapping and competing jurisdictions was ‘ludicrous’.1 Nonetheless, this arrangement, now abolished, left a very valuable legacy, not least in land law. As we will see in this chapter, and throughout the book, equitable interests in land are a crucial part of the land law system and the means of acquiring such rights give vital flexibility and often offer invaluable protection to parties who would otherwise be denied any redress. In Chapter 10, for example, we will examine in detail the equitable doctrine of proprietary estoppel, which can provide protection to B where B has relied to his or her detriment on A’s promise to give B a right in A’s land. That protection is available even if A has made no formal grant of a right to A, even if B has not registered any right, and even if there is no written agreement between the parties. From one perspective, the equitable rules thus seem to undermine the formality and strict requirements imposed by the common law and by statute for the acquisition of a legal property right, or for the formation of a contract for the sale or other disposition of an interest in land. It can be argued that the equitable rules undermine the certainty of clear legal rules and thus can even be said to depart from a core value of the rule of law. From another perspective, explored in the following extract, the equitable rules instead provide a vital ‘safety valve’ by giving the courts a means to prevent a party such as A from exploiting those strict legal rules. By performing this function, the equitable rules can, in exceptional cases, mitigate the potential harshness of those common law rules and thus reconcile the parties’ rights with general moral understandings by preventing behaviour which would ‘shock the conscience of the court’.2 Indeed, it can be argued that, if there were no such safety valve, it would be impossible to justify the strictness of the common law and statutory rules.
One limit to formalism is its vulnerability to evasion by opportunists. This is one reason to allow for equitable intervention.
The simple structures of the law are open to exploitation by opportunists […] Traditionally, equity concerned itself with ‘near fraud’, which is behaviour that is close to the line of fraud (p. 178) or may well be fraud but cannot be proved as such. Picking up on this notion, I have defined opportunism as such:
‘Behaviour that is undesirable but that cannot be cost-effectively captured – defined, detected, and deterred – by explicit ex ante rulemaking […] It often consists of behaviour that is technically legal but is done with a view to securing unintended benefits from the system, and these benefits are usually smaller than the costs they impose on others.’
[…] a major theme of traditional equity was to counteract opportunism. To do so equity needs to go beyond ex ante bright line rules, because it is difficult to anticipate all the avenues of evasion. Plugging nine out of ten loopholes is hopeless if all the evaders can rush through the tenth. Equity employs ex post standards, emphasizes good faith and notice, couches its reasoning in terms of morals, and is sometimes vague rather than bright line. To cabin such a powerful tool, equity courts were only supposed to act in personam and not in rem, and the substantive doctrines of equity counselled caution in undermining the law. Equity was not designed to root out every last bit of opportunism and courts recognized that equitable doctrines and remedies, not least injunctions, themselves could be exploited by opportunistic litigants unless courts were on their guard and were willing to stay the hand of equity.
Smith’s argument is a very interesting one, as it suggests that ‘doing without any equitable safety valve will be very difficult’3 as the rule of law itself demands that judges have some means of dealing with those whose actions, by exploiting the strict common law and statutory rules in ways widely regarded as unfair or immoral, can reduce people’s respect for, and willingness to follow, such rules. Smith also notes, however, that equity cannot be wholly discretionary, and is at its most effective when it prevents conduct which would be widely regarded as exploitative or otherwise immoral. This tension will be evident throughout the book when we examine equitable doctrines such as proprietary estoppel (in Chapter 10) or common intention constructive trusts (in Chapter 16). As far as land law is concerned, it is important to note that equity has clearly moved beyond any traditional limit of acting only ‘in personam’: it is clear that, if B has an equitable interest in land, that right is capable of binding not only A, but also later parties, such as C, acquiring a right in A’s land. This creates a further reason why care must be taken before allowing B equitable protection: an equitable right acquired by B, if it counts as an equitable interest in land, will also be capable of binding C-a party who, unlike A, may not have behaved opportunistically. The nature and development of equitable interests is considered in the next section.
1.2 The Development of Equitable Property Rights
In land law, one of the lasting contributions of those equitable rules is the concept of an equitable property right. In Chapter 5, section 1, we considered the fundamental distinction between a personal right and a property right: whereas a personal right can be asserted only against a specific person, a property right has a wider range of application. An equitable property right shares a very important feature with a legal property right: it does more than simply bind a specific person. For example, if A has a freehold or lease of land and then gives B an equitable property right, B has a right that is capable of binding not only A, but also C, a party who later acquires A’s land.
(p. 179) In the following extract, Lionel Smith discusses the development of equitable property rights. He makes the important point that these rights, unlike the legal property rights that we examined in Chapter 5, are necessarily based on A’s being under a duty to B.
I would argue that there are at least two examples of norms that are enforced routinely by Equity, but only sporadically by the common law, and that it is here that the true distinctiveness of Equity may lie. In other words, leaving aside the mass of detailed doctrine in both traditions, these are examples of situations in which Equity enforces a norm or value which the common law generally does not.
Respect for other people’s obligations
This section can be introduced with a simple normative problem. Imagine that John owns a boat. He lends it to Mary, promising her that she can keep it for one month. After one week, Eleanor offers to buy the boat from John. John accepts her offer and Eleanor becomes the owner of the boat. Is she required to allow Mary to retain possession during the rest of the one-month period? Reasonable people could differ. Many people would say that it depends upon whether Eleanor was aware of the arrangements between John and Mary, and some might think it was relevant whether Mary had paid for her one month of use, or whether it was in the nature of a gift.
In the Romanist tradition, the most fundamental distinction in private law is the one between obligations and property rights. A right of ownership binds everyone. Obligations bind only the parties to the obligation: the debtor is bound to the creditor. The common law, in the narrow sense that excludes Equity, basically follows this line. Both modern civil law and the common law in the narrow sense admit the possibility that someone can commit a wrongful act by interfering with the fulfilment of another person’s obligation. But short of that fault-based wrong, obligations do not have effects except on the debtor and the creditor. Equity takes a different view. Some obligations systematically have third-party effects, without recourse to the law of wrongs. These are obligations that relate to the benefit of particular property, or an interest therein.
This approach is seen in a crucial technique of legal reasoning that underlies much of the original jurisdiction of Equity. At the risk of leaving out much doctrinal detail, it can be stated in this way. If a person is under an obligation, and the obligation relates to the benefit of particular property or an interest therein, then another person who comes into possession or control of that particular property—even though he does so without any personal culpability—is not allowed to get in the way of the fulfilment of the obligation. The defendant can free himself of this constraint only by affirmative proof that he gave value in good faith without notice of the obligation, and that the interest he acquired was a common law interest and not an Equitable one only […] The representative of creditors is also caught, although he represents persons who are in good faith and who, for the most part, gave value.
This principle is not totally alien to the common law. First, as we have noted, the common law recognises that one person should not deliberately interfere in another person’s performance of his obligations. But in this tort context, it looks for a level of cognition on the part of the defendant that allows us to understand the defendant as having committed a genuinely wrongful act. In that setting, of course, it is irrelevant whether the obligation relates to specific (p. 180) property or not. More interestingly, in one crucial context, the common law did exactly what Equity does routinely: it said that if the obligation does relate to specific property, then a recipient of that property must allow the obligation to be performed, even though the recipient does not owe the obligation, and without any finding that the recipient acted wrongfully. That context is the lease of land. The lessee’s rights were enforceable against a transferee from the lessor, and later against all the world, first in damages only, but later by specific recovery.
In Equity, however, this principle is ubiquitous, and routinely turns an obligation relating to a particular asset into a kind of property right, held by the beneficiary or creditor of the obligation, in the particular asset. Effectively, people are bound by other people’s obligations—not bound to perform them, but bound not to interfere with them.
In the following extract, Hackney also discusses how equitable property rights developed from an initial duty of A to B. In doing so, he uses the trust as an example. As we will see in this chapter, the trust is a classic example of a situation in which B has an equitable property right. A trust arises where A (the trustee) has a right (the trust property) and is under a duty to use that right for the benefit of B (or B and others, known as the ‘beneficiaries’), as well as a duty not to use that right for A’s own benefit.4 If another party has specifically set up the trust, that party is often referred to as the ‘settlor’.
In the course of the mid seventeenth to early nineteenth centuries, Equity5 was turned into a systematic body of principles as refined, rigorous and ultimately unyielding as anything produced by the common law […]
One consequence of the ‘regularisation’ of Equity was the creation of a law of property. The Chancellor had originally intervened by imposing personal obligations on particular defendants. So the early trustee of land would be under a personal obligation to administer the property for his beneficiary, but the trustee might still be seen as the owner of the land. The particular novelty of the trust is that the beneficiary need not have been a party to a transaction establishing the trust, yet he is still able to enforce it, and what is more, the person who does set up the transaction finds he has no standing to intervene to see that it is honoured. By the end of this period the beneficiary of the trust is perceived as having an equitable proprietary interest in the asset, not just rights enforceable only against the trustee. He can enforce his rights against total strangers, from whom he can demand the asset. This ‘exigibility’—demandability—is one of the characteristics of property. He can also alienate and pass a good equitable title. For some of the beneficiary’s protection his trustee will have to use the mechanism of the common law courts, and the beneficiary of the trust may have to invoke the assistance of the Chancellor to drive a reluctant trustee to take the necessary steps. But it is important to see that the trustee is no longer exercising rights. His common law ownership was made up of a set of rights, powers and duties. The Chancellor’s intervention has overridden or destroyed the rights, which the trustee can no longer exercise at (p. 181) his own election and for his own benefit, and has converted them into equitable duties, to be performed for the sole benefit of the beneficiary. No principle seems more central to the law of trusts than that the trustee may not derive a profit from the trust. There is today no sensible usage of ‘owner’ which can apply to the trustee, and every sensible usage which can apply to the beneficiary. The trustee has a legal title and access to common law courts and remedies, but he is a driven vehicle for the superior rights of his beneficiary. He litigates at common law in response to his equitable duties, and not to his common law rights, which have been subordinated. The trustee is now a manager in an institution which is a hybrid between the creation of an agency and the disposition of property.
2 The Concept of an Equitable Interest in Land
In Chapter 1, we considered the decision of the House of Lords in National Provincial Bank v Ainsworth.6 It was held that Mrs Ainsworth’s right, her ‘deserted wife’s equity’, whilst clearly a product of equitable rules, did not count as an equitable interest in land. Instead, it was simply an equitable personal right against her husband. As a result, Mrs Ainsworth could not assert that right against the bank, who had acquired a right in the land from her husband. That decision can be contrasted with the decision of the House of Lords in Williams & Glyn’s Bank v Boland.7 Mr Boland was registered as holding a freehold of a home in Ridge Park, Beddington, Surrey. Mr Boland and his brother were directors of a building company. To support the business, Mr Boland borrowed money from the Williams & Glyn’s Bank. The money was borrowed as part of a mortgage deal: to secure his duty to repay that sum, plus interest, Mr Boland gave the bank a legal charge over his home. When Mr Boland failed to repay the loan, the bank wished to sell the land. To get a good price, the bank knew that it had to sell the home with vacant possession. Because Mrs Boland refused to leave, the bank applied for an order for possession of the home.
The facts of Boland thus have much in common with those of Ainsworth. The crucial difference between the two cases was as to the content of the wife’s right. Mrs Boland did not attempt to assert a ‘deserted wife’s equity’ against the bank. Rather, because Mr Boland had acquired his freehold of the land with Mrs Boland’s financial assistance, he was under a duty to use that freehold not for his own sole benefit, but for the benefit of both himself and his wife.8 Mr Boland thus held his freehold on trust, and both he and his wife were beneficiaries of that trust. A beneficiary of a trust has an equitable interest, and so Mrs Boland, unlike Mrs Ainsworth, had more than a mere personal right against her husband. As confirmed by the House of Lords, Mrs Boland had an equitable interest in the land: a right capable of binding a third party, such as the bank, later acquiring a right from Mr Boland.
It is important to note that, as we will see in Chapter 14, section 5.1.1, the House of Lords considered whether the bank had a defence to Mrs Boland’s pre-existing equitable property right. The fact that an equitable interest in land is capable of binding a party other than A does not mean that such a right will always bind such parties. We noted in Chapter 5, section 1, that it is possible for a third party to have a defence to a pre-existing legal estate or (p. 182) legal interest; it is also possible for a third party to have a defence to a pre-existing equitable interest. We will consider such defences in detail in Part D of this book.
3 Rights under Trusts: The Content Question
Let us say that S, who has a freehold, wants to divide up his ownership of land by making B1 owner of the land for B1’s life, with B2 becoming owner on the death of B1. We know that S cannot achieve his aims by giving either of B1 or B2 a legal estate in land. This is because, as we saw in Chapter 5, section 3, the Law of Property Act 1925 allows for only two forms of legal estate in land: the freehold and the lease. S can, however, set up a trust, by transferring his freehold to A1 and A2 subject to a duty to use that freehold: (i) for the benefit of B1 during B1’s life; then (ii) for the benefit of B2 forever. In such a case, A1 and A2 clearly have a legal estate: a freehold. But, as noted in the Hackney extract set out in section 1 above, the trust imposed on A1 and A2 means that they cannot use their ownership rights for their own benefit: instead, they must use their freehold for the benefit of B1, then for the benefit of B2. So, whilst A1 and A2 have ownership, they are under equitable duties to B1 and B2; and those duties ensure that it is B1 and B2 who take the benefit of A1 and A2’s ownership.
This structure is made clear in the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA 1996).
(1) For the purpose of exercising their functions as trustee, the trustees of land have in relation to the land subject to the trust all the powers of an absolute owner.
(6) The powers conferred by this section shall not be exercised in contravention of, or of any order made in pursuance of, any other enactment or any rule of law or equity.
In our example, each of B1 and B2 has an equitable property right that allows her to take the benefits, for a slice of time, of ownership of land. Nonetheless, it would be inaccurate to say that either of B1 or B2 has an ‘equitable estate’. Firstly, the Law of Property Act 1925 (LPA 1925) does not use that term. As we saw in Chapter 5, s 1(1) of the Act sets out permissible legal estates and s 1(2) sets out permissible legal interests. Section 1(3) then states that: ‘All other estates, interests, and charges in or over land take effect as equitable interests.’ So, if we are to follow that terminology, we should treat all equitable property rights as equitable interests.
Secondly, and more importantly, in Chapter 5, section 2, we defined an estate as a property right giving its holder ownership rights. In our example in which A1 and A2 hold a freehold on trust for B1 and B2, it is not accurate to say that B1 and B2 have ownership rights; rather, A1 and A2 have ownership, and A1 and A2 are under a duty to use that ownership for the benefit of each of B1 and B2. As Maitland once put it, if a trust exists, equity does not say that the beneficiaries are the owners of the land, it rather says that the trustees are the owners, but adds that the trustees are bound to hold the land for the benefit of the beneficiaries.9 (p. 183) As a result, each of B1 and B2 can, in practice, enjoy the benefit of A1 and A2’s ownership. For example, if the land consists of commercial premises rented out to a business, the rent will be paid to A1 and A2, but A1 and A2 will be under a duty (depending on the exact terms of the trust) to pay that rental income to B1 during B1’s life.
It is therefore important to distinguish two cases. In the first case, A, a freehold owner of land, grants B a lease of that land. In the second case, A, a freehold owner of land, transfers that freehold to A1 and A2 to hold on trust for B1 and B2. In the first case, A can be seen as splitting, or carving up, A’s right to exclusive possession of the land: that right goes to B for the duration of the lease, before returning to A. In the second case, there is no such splitting or carving up. Rather, A’s freehold is transferred intact to A1 and A2, who acquire A’s right to exclusive possession of the land forever. In the second case, the rights of B1 and B2 therefore derive not from any splitting or carving up of A’s freehold, but rather from A’s imposition of a duty on A1 and A2. As an Australian judge once put it: ‘An equitable interest is not carved out of a legal estate but impressed upon it.’10 In the second case, the equitable interest is impressed upon the freehold of A1 and A2 because of the duty imposed on A1 and A2. That duty, owed to each of B1 and B2, relates to the freehold held by A1 and A2, as it limits the uses that A1 and A2 can make of the freehold. It ensures, in particular, that A1 and A2 must use the freehold not for their own benefit, but rather for the benefit of each of B1 and B2.
As far as the content question is concerned, that is the key feature of the trust: A must hold a right, and also be under a duty to B not to use that right for A’s own benefit, unless and to the extent that A is also a beneficiary of the trust. We saw that, in Williams & Glyn’s Bank v Boland,11 for example, Mr Boland held his freehold on trust for each of himself and his wife. As a result, Mr Boland was permitted, to a certain extent, to use his freehold to his own benefit: if the freehold was sold, for example, Mr Boland would be entitled to retain a proportion of the proceeds of sale for his own benefit. The presence of the trust, however, means that, in such a case, he would be under a duty to pay a proportion of those proceeds to Mrs Boland; and also that, when deciding whether to sell his freehold, he would be under a duty to take into account the wishes of his wife.
In analysing equitable interests in land, it is important to distinguish rights under trusts from other forms of equitable interest in land. Firstly, as we will see in Chapters 17 and 20, a special statutory regime regulates trusts of land, but does not apply to other equitable interests in land; secondly, as we will see in Chapter 11, section 2, a special formality rule applies to the acquisition of rights under trusts of land.12
To make this distinction between rights under trusts and other forms of equitable interest in land, we need to focus on the content of A’s duty. In a trust, A is under a duty in relation to the whole of a particular right held by A, such as A’s freehold or A’s lease. In contrast, if B has a different form of equitable interest, it seems that A is under a narrower, more specific (p. 184) duty: for example, if B has an equitable easement, A’s duty is simply to grant B an easement and A is otherwise free to use A’s freehold or lease for A’s own benefit.
It is important to remember that a trust will often have more than one beneficiary. We have already discussed the example where A1 and A2 hold a freehold on trust for B1 and B2, with a duty to use the freehold for B1’s benefit during B1’s life, and then for the benefit of B2. This example demonstrates one of the great advantages of the trust: it can be used to divide up the benefits of a right in almost any way.13 The next extract considers examples that do not involve land, but, as shown by our examples above, the flexibility of the trust also applies where the right held on trust is a freehold or lease of land.
Now that the idea of a trust is clearer, with its ingenious splitting of the ownership ‘bundle of rights’ into legal and Equitable ownership, it is possible to explore some of the enormous practical advantages of the trust […]
[… T]rusts enable proprietary interests to be divided along a time line. A trustee can hold a Rembrandt painting on trust ‘for A for life, then B for life, remainder to C’ (and death need not be the only marker along the time line). This arrangement gives each party (the trustee, A, B and C) some immediate proprietary interest in the painting, with all the protection this entails, even though B and C have to wait some time before they are entitled to possession of the painting. A contract could achieve a similar result, but again without the important protections that proprietary interests afford […]
[… T]rusts are enormously flexible in slicing up property rights in ways that would be inconceivable without the trust. Consider company shares. A shareholder who wishes to deal with his shares can only transfer full ownership or a security interest in the entire bundle of rights associated with the share. He cannot sell part of a share; he certainly cannot parcel out the different benefits inherent in shareholding to different transferees, giving one the right to dividends, another the right to vote and yet another the right to capital gains. Under the umbrella of a trust, however, all of this is possible. The owner (as settlor) simply has to specify the beneficiaries’ rights under the trust in the appropriate way.
In Chapter 20 we will look more closely at the ways in which a trust can be used to divide up the benefits of ownership over time (as in our first example). One question is, however, worth asking here: does the possibility of creating diverse equitable interests in land undermine the aim of s 1 of the LPA 1925? After all, as we saw in Chapter 5, section 3.3, part of the purpose of that provision is to protect third parties against the risk of being bound by complicated and unusual property rights. So, for example, it is impossible for B1 to have a legal life estate, or for B2 to have a legal estate giving B2 ownership of the land after B1’s death. Yet in our example above, in which A1 and A2 hold a freehold on trust for B1 for B1’s life, and then for B2, each of B1 and B2 has an equitable property right, capable of binding a third party who, for example, acquires the freehold of A1 and A2. So there may seem to be little point limiting the content of legal estates and interests in land if those limits can be evaded by simply setting up a trust.
(p. 185) The key point, however, is that where a party has an equitable interest, it is far easier for C (a third party later acquiring a right from A1 and A2) to have a defence to that pre-existing right. Indeed, in our example, if C acquires the freehold of A1 and A2, he may well be able to take free from the equitable interests of B1 and B2, even if C knows about those rights, and even if B1 or B2 is in actual occupation of the land when C acquires his right. This is because C may well be able to rely on a special application of the overreaching defence. We will explore this defence, which is regulated by s 2 of the LPA 1925, in Chapter 12, section 3.3, and in Chapter 19: it gives C valuable protection against the risk of being bound by a pre-existing equitable interest arising under a trust. It thus seems that, as far as the protection of third parties is concerned, the LPA 1925 has a clear, logical structure:
• in order to protect third parties such as C, s 1 limits the list of legal estates and interests in land;
• this means that particular arrangements (such as giving B1 a right to benefit from the land for B1’s life, with the right to benefit thereafter going to B2) have to take effect behind a trust, with each of B1 and B2 having only an equitable interest;
• s 2 then recognizes that C can use a special overreaching defence against a pre-existing equitable property right arising under a trust.
4 Rights under Trusts: The Acquisition Question
As we noted in section 1 above, any equitable property right depends on A being under an initial duty to B. So, the first step for B in showing that he has a right under a trust is to show that A is under a duty to him. In Chapter 5, section 4, we saw that it may be possible for B to acquire a legal estate in land by an independent acquisition—that is, through relying simply on his own, unilateral conduct. In contrast, it is impossible for B to acquire a right under a trust by relying on an independent acquisition. This is because B can acquire an equitable property right only when A is under a duty to B; and A cannot come under a duty to B simply as a result of B’s own, unilateral conduct.
In practice, however, the need to show that A is under a duty to B increases B’s chances of showing that he has acquired a right under a trust. This is because there are many different means by which A can come under a duty to B.14 We will discuss these means in Chapters 9–11. For example, if A makes a contractual promise to transfer his freehold to B, that contract, by itself, does not transfer A’s freehold: as we will see in Chapter 7, section 3, further formalities must be completed before B acquires A’s freehold. The contract between A and B, however, imposes a duty on A: a duty in relation to A’s freehold. As a result, as we will see in Chapter 9, the contract itself may suffice to give B a right under a trust of A’s freehold.
(p. 186) 5 Other Equitable Interests: The Content Question
5.1 A Longer List of Property Rights
In the following extract, Swadling considers one of the contributions of equity to property law: the recognition of a longer list of property rights.
A longer list
All rights recognized as property rights at common law are also recognized as such by equity. So, it is possible to have an easement, for example a right of way over land, both at common law and in equity. But there are also some rights recognized in equity as proprietary which at common law either do not exist at all or, if they do, are only recognized as personal rights. An example of the latter is the restrictive covenant over land. Others are contracts and options to purchase certain types of legal property rights. The mortgagor’s equity of redemption is an example of equity creating a property right where no corresponding personal right exists at law.
5.2 The List of Equitable Interests
It is possible to come up with a list of rights that, in addition to rights under a trust, count as equitable interests in land. Building on Swadling’s approach in the extract above, that list can be usefully split into two categories. In the first category are those rights that do not correspond to any legal estate or legal interest in land. Examples of such rights are: (i) the restrictive covenant (which we will examine in Chapter 26); and (ii) the mortgagor’s equity of redemption (see Chapter 28, section 5). Where registered land is concerned, we can also include: (i) an ‘equity by estoppel’ (see Chapter 10, section 4.3); and (ii) a ‘mere equity’.15 Under s 116 of the Land Registration Act 2002 (LRA 2002), those rights are expressly said to be capable of binding a third party acquiring a right in relation to registered land.
In the second category are equitable interests that do correspond to a legal estate or legal interest in land. Clear examples of such rights are: (i) equitable leases (see Chapter 22, section 3.2); (ii) equitable easements (as noted by Swadling in the extract above, and see further Chapter 25); and (iii) equitable charges (see Chapter 28, section 4.3). In each of those cases, B’s equitable interest arises because A is under a duty to grant B a recognized legal property right in land. The content of the equitable property right thus reflects the content of the legal (p. 187) estate or interest in question.16 The crucial difference is that A has not yet granted B the relevant legal estate or legal interest; rather, A is under a duty to do so.
In this category, we can also include what Swadling refers to as ‘contracts and options to purchase certain types of legal property rights’. Such equitable property rights can be broken down into: (i) estate contracts (see Chapter 9); and (ii) options to purchase. Where registered land is concerned, we can add a further right: (iii) the right of pre-emption. Under s 115(b) of the LRA 2002, that right is expressly said to be capable of binding a third party acquiring a right in relation to registered land. As we will see in section 6 below, equity’s contribution here again relates to the acquisition question, not the content question. To show that he has an estate contract, option to purchase, or right of pre-emption, B always needs to show that A has a legal estate. To show that he has an estate contract, B also needs to show that A is under an existing contractual duty to transfer that estate to B. To show that he has an option to purchase, B need only show that B has the option to impose a contractual duty on A to transfer A’s estate to B. And to show that he has a right of pre-emption, B only needs to show that, if A chooses to sell A’s estate, B has the option to impose a contractual duty on A to transfer that estate to B.
It is, therefore, possible to come up with the set of equitable interests in land illustrated in Table 6.1.
Table 6.1 Equitable Interests in Land
5.3 Limiting the Content of Equitable Interests
Whilst all equitable interests depend on A being under a duty to B, it is clear that B does not have an equitable interest in all cases where A is under a duty to B. For example, as we noted in section 2 above, the House of Lords held in National Provincial Bank v Ainsworth that, whilst Mr Ainsworth was under an equitable duty to Mrs Ainsworth, his ‘deserted wife’, that duty did not give Mrs Ainsworth an equitable interest.17
Equally, the content of those rights that do count as equitable interests is carefully controlled by the courts. This can be shown by the following extract, in which Lord Templeman (p. 188) considers the content of the restrictive covenant. As we will see in Chapter 26, it is possible to take issue with Lord Templeman’s reasoning, but, for our present purposes, it is important to note one key point. We saw in section 1 above that equitable property rights arose because of equity’s willingness to allow an obligation owed by A to B to affect a third party, C (see Table 6.1); as the following extract demonstrates, it is clear that equity does not allow all obligations to have that effect.
Facts: Walford House in Combwich, Somerset, was divided by its owner into a house and a cottage. The roof of the house overhung the cottage. In 1960, the former owner then sold a freehold of the cottage. When doing so, he promised the purchasers of the cottage ‘for himself and his successors in title […] to maintain […] such part of the roof of Walford House […] as lies above the property conveyed in wind and watertight condition’. After that, both the house and the cottage were sold on. By 1991, the freehold of the house was held by Ms Stephens, and the freehold of the cottage was held by Mr and Mrs Rhone. Mr and Mrs Rhone claimed that Ms Stephens was under a duty to repair the roof of the house, as a result of the covenant entered into by the former owner of the house in 1960. On that basis, they claimed compensation from Ms Stephens for damage that they had suffered as a result of the state of the roof and also asked for an order forcing Ms Stephens to ensure that the necessary repairs were done. The first instance judge found in favour of Mr and Mrs Rhone; but the Court of Appeal reversed that finding, holding that the promise made in 1960 did not give rise to an equitable property right, because it imposed a positive burden (a duty to do repairs) and so did not count as a restrictive covenant. The House of Lords upheld that finding.
My Lords, equity supplements but does not contradict the common law. When freehold land is conveyed without restriction, the conveyance confers on the purchaser the right to do with the land as he pleases provided that he does not interfere with the rights of others or infringe statutory restrictions. The conveyance may however impose restrictions which, in favour of the covenantee, deprive the purchaser of some of the rights inherent in the ownership of unrestricted land. In Tulk v. Moxhay (1848) 2 Ph. 774 a purchaser of land covenanted that no buildings would be erected on Leicester Square. A subsequent purchaser of Leicester Square was restrained from building. The conveyance to the original purchaser deprived him and every subsequent purchaser taking with notice of the covenant of the right, otherwise part and parcel of the freehold, to develop the square by the construction of buildings. Equity does not contradict the common law by enforcing a restrictive covenant against a successor in title of the covenantor but prevents the successor from exercising a right which he never acquired […]
Equity can thus prevent or punish the breach of a negative covenant which restricts the user of land or the exercise of other rights in connection with land. Restrictive covenants deprive an owner of a right which he could otherwise exercise. Equity cannot compel an owner to comply with a positive covenant entered into by his predecessors in title without flatly contradicting the common law rule that a person cannot be made liable upon a contract (p. 189) unless he was a party to it. Enforcement of a positive covenant lies in contract; a positive covenant compels an owner to exercise his rights. Enforcement of a negative covenant lies in property; a negative covenant deprives the owner of a right over property.
In the extract above, Lord Templeman could have supported his analysis by referring to the following statutory provision (emphasis added), which makes clear that there is a limit to the content of equitable interests.
Creation and disposition of equitable interests
(1) Interests in land validly created or arising after the commencement of this Act, which are not capable of subsisting as legal estates, shall take effect as equitable interests, and, save as otherwise expressly provided by statute, interests in land which under the Statute of Uses or otherwise could before the commencement of this Act have been created as legal interests, shall be capable of being created as equitable interests:
Provided that, after the commencement of this Act (and save as hereinafter expressly enacted) an equitable interest in land shall only be capable of being validly created in any case in which an equivalent equitable interest in property real or personal could have been validly created before such commencement.
It thus seems that, whilst s 1(2) of the Act limits the content of legal interests, s 4(1) does the same job for the content of equitable interests. Rather than setting out the permissible equitable interests, s 4(1) instead imposes a freeze on the development of new equitable interests. As noted by Briggs:18 ‘[Section 4(1)] seems clear enough […] If [particular rights] are to bind purchasers of land as proprietary interests, then they must be shown to have existed in pre-1926 land law […]’
It is certainly the case that the courts have developed no new equitable interests since 1926. Perhaps surprisingly, however, the courts have not supported that approach by relying on s 4(1). For example, we saw in Chapter 1 that, when finding in National Provincial Bank v Ainsworth19 that a ‘deserted wife’s equity’ did not count as an equitable interest, Lord Wilberforce did not refer to s 4(1), but instead explained that the content of the ‘deserted wife’s equity’ meant that it was unsuited to binding anyone other than the husband. In an important passage, Lord Wilberforce stated that: ‘Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability. The wife’s right has none of these qualities, it is characterised by the reverse of them.’20
Once it had been decided that Mr Ainsworth was not under a duty to allow Mrs Ainsworth to live in her current house, but instead simply had a duty to provide her with some accommodation, Mrs Ainsworth’s claim to an equitable property right was doomed to fail: she could not show that her husband’s duty to her related to his freehold. But Lord Wilberforce (p. 190) went further and set out criteria that can be used to analyse a claim that B has an equitable property right. To count as such a right, B’s right must be:
• identifiable by third parties;
• capable in its nature of assumption by third parties; and
• (to some degree) permanent and stable.
It is important to realize, however, that a right will not count as an equitable property right simply because it meets Lord Wilberforce’s criteria. For example, a positive covenant, such as that considered by Lord Templeman in Rhone v Stephens21 (see section 5.3 above), gives its holder a right that has all of the characteristics specified by Lord Wilberforce, but does not count as an equitable property right. So whilst these characteristics may be necessary if B’s right is to count as an equitable property right, they are clearly not sufficient.
6 Other Equitable Interests: The Acquisition Question
In section 4 above, we noted that, to acquire a right under a trust, B must show that A is under a duty to B. The same is true when B claims any form of equitable interest. For example, in Walsh v Lonsdale,22 which we will examine in detail in Chapter 9, Lonsdale had made a contractual agreement to grant Walsh a seven-year lease. Walsh did not acquire a legal lease because no grant was made. Nonetheless, the Court of Appeal held that Walsh had an equitable lease, arising as a result of Lonsdale’s contractual duty to grant Walsh the promised legal lease.
In each of Chapters 9 and 10, we will examine a general means by which B may acquire an equitable interest: the doctrine of anticipation in Chapter 9, and proprietary estoppel in Chapter 10. In other chapters, we will consider the acquisition of specific equitable interests: for example, in Chapter 22, section 3.2, we will consider the acquisition of an equitable lease; in Chapter 26, sections 2.5 and 3, we will consider the acquisition of a restrictive covenant. It is important to bear in mind that formality rules may regulate the acquisition of an equitable interest: for example, we will see in Chapter 7, section 3 that a contract for the grant of a seven-year lease (such as was relied on in Walsh v Lonsdale) is only valid if it complies with the formality rule imposed by s 2 of the Law of Property (Miscellaneous Provisions) Act 1989. The general formality rule applying to the acquisition of an equitable interest in land is set out by section 53(1)(a) of the Law of Property Act 1925:
Instruments required to be in writing
(1) Subject to the provision hereinafter contained with respect to the creation of interests in land by parol—
(a) no interest in land can be created or disposed of except by writing signed by the person creating or conveying the same, or by his agent thereunto lawfully authorised in writing, or by will, or by operation of law.
(p. 191) (b) […]
(2) This section does not affect the creation or operation of resulting, implied or constructive trusts.
In Chapters 10 and 11, we will examine a number of means by which B can acquire an equitable interest even in the absence of any writing. Chapter 10 is concerned with proprietary estoppel: we will consider the reasons why that doctrine does not require formality in Chapter 7, section 3.7, and in Chapter 10, section 2.4. In Chapter 11, sections 3 and 4, we will consider resulting and constructive trusts, which fall within the exception permitted by s 53(2).
7 The Relationship between Common Law and Equity
Many land law cases share a basic form: A, an owner of land, has some dealings with B; as a result, B acquires a right to make a particular use of A’s land. A then gives C a right in relation to the land: for example, by selling his freehold or lease to C, or by granting C a legal charge over the land. B wishes to carry on using the land, but C wants to prevent B from using the land in that way. For example, in National Provincial Bank v Ainsworth23 (see Chapter 1 as well as section 5.4 above), the bank (C) wanted to prevent Mrs Ainsworth (B) from continuing to occupy the home owned by Mr Ainsworth (A).
In such cases, it is important to ask if B’s right, acquired from A, counts as a property right. If it does, it is capable of binding C. If it does not, and is simply a personal right against A, B cannot assert that right against C (although, as we will see in Chapter 21, it may still be possible for B to assert a new, direct right against C, arising as a result of C’s conduct). To see if B’s right counts as a property right, we need to look at both the content question and the acquisition question. But in the past two chapters, we have seen that, as far as the content question is concerned, there are two sets of answers: one set is provided by the common law rules; another set, by the equitable rules. For example, a restrictive covenant does not count as a legal estate or interest in land, but it can count as an equitable interest (see section 5.3 above). As pointed out in the following extract, these differences raise an awkward question: does it make sense for common law and equity to give different answers to the same question?
[T]he fusion of law and equity is a topic that provokes strong reactions. But the question remains of what, exactly, is meant by fusion. One way of answering this is to give a short description of the essence of first, the anti-fusion school of thought; and second, the fusion school of thought.
(p. 192) According to the anti-fusion school of thought, the Supreme Court of Judicature Acts 1873–5 fused the administration of the courts but did not fuse the substantive law. Common law and equity sit alongside one another. Moreover, they can happily sit alongside one another. Clashes or conflicts or inconsistencies between them are very rare. Where they exist, and in so far as they are not resolved by the more specific provisions of the 1873–5 Acts, they are resolved by the general provision in section 11 of the 1873 Act which lays down that ‘equity shall prevail’. This is not to say that common law or equity is frozen in the position it was in before 1873. Rather common law and equity can independently develop incrementally. But one should not develop the law by reasoning from common law to equity or vice versa. To do so would cut across the historical underpinnings of the two areas; and a harmonized rule or principle that has features of both common law and equity but cannot be said clearly to be one or the other, would be unacceptable.
In contrast, the fusion school of thought argues that the fusion of the administration of the courts brought about by the 1873–5 Acts, whilst not dictating the fusion of the substantive law, rendered this, for the first time, a realistic possibility. While there are areas where common law and equity can happily sit alongside one another, there are many examples of inconsistencies between them. It is important to remove the inconsistencies thereby producing a coherent or harmonized law. In developing the law it is legitimate for the courts to reason from common law to equity and vice versa. A harmonized rule or principle that has features of both common law and equity is at the very least acceptable and, depending on the rule or principle in question, may represent the best way for the law to develop.
It is submitted that the latter view is to be strongly preferred. There are numerous instances of inconsistencies between common law and equity; and to support fusion seems self-evident, resting, as it does, on not being slaves to history and on recognizing the importance of coherence in the law and of ‘like cases being treated alike’ […]
[Burrows goes on to suggest that cases in which common law and equitable rules do differ can be placed into one of three categories:]
The first category is where common law and equity co-exist coherently and where the historical labels of common law and equity remain the best or, at least, useful terminology […]
The second category is where common law and equity co-exist coherently but, in contrast to the first category, there is nothing to be gained by adherence to those historical labels. If we are to take fusion seriously, the labels common law and equity in the areas of the law covered by this category should be abandoned at a stroke […]
The third category is more complex. It comprises probably most of our civil law. In this category, in contrast to both of the first two categories, common law and equity do not exist co-exist coherently. If we are to take fusion seriously, what is needed is a change in the law, albeit often only a small change, so as to produce a principled product which may combine elements of law and equity.
As Burrows notes, the ‘fusion’ debate provokes strong reactions. Certainly, his preference for what he calls the ‘fusion approach’ is not universally shared: for a robustly-expressed alternative view, see, for example, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies.24 Nonetheless, the central point raised by Burrows seems to be a valid one: where there is a difference between common law rules and equitable rules, we need to ask whether that difference can be justified. After all, history can explain why we have two different sets of rules, but, by itself, history cannot justify why we should keep them. If we apply that same (p. 193) approach to the law of property rights, we need to be able to justify the special rules, noted in this chapter, that apply to equitable property rights but not to their legal counterparts.
It seems that these differences can be justified if we focus on the different effects of legal and equitable property rights. The list of legal property rights is shorter, and such rights are, in general, harder to acquire—but, if B has a legal property right, then he receives better protection. Firstly, as we will see in Chapter 12, section 3.6, it is far harder for C to have a defence to a pre-existing legal property right in land; where B has a pre-existing equitable interest, a number of additional defences may be available to C.
Secondly, as we saw in Chapter 4, section 1, a key feature of a legal property right is that it imposes a prima facie duty on the rest of the world. As noted in the following extracts, however, that does not seem to be the case with all equitable interests.
[E]quitable rights which might be seen as ‘proprietary’ behave in a slightly different fashion to those at common law. At common law, as we have seen, the right is exigible directly against anyone interfering with it. Thus, the holder of a common law easement can sue for damages and an injunction against any third party, be it a successor in title of the original grantor or even a complete stranger, who interferes with his right. This is not generally true for equitable property rights. Take, for example, the case of an option to purchase a fee simple estate in land […] such a right will generally bind transferees of the fee simple in question from its grantor, and so is classed as a property right. But it will not bind other third parties, such as squatters. Although a squatter will be bound by easements granted by the person he has dispossessed, he will not be bound by an option to purchase. Indeed, he could not be bound by any such right, for the burden of such a right entails a duty to convey the right contracted to be sold, and the squatter does not have that right. The only exception would seem to be the restrictive covenant, which has been held to bind persons other than a successor in title of the grantor.
[I]t is necessary to make a distinction between two version of the notion of rights in rem, both of which operate in law but which are often not clearly distinguished. The best way to see the distinction is not to focus on the right, but on the corresponding duties or liabilities. Under the first, ‘trespassory’ version of rights in rem, a right is protected by duties in rem that everyone owes to the right holder, which bind everyone unconditionally all the time. The best example is the case of the ownership of a chattel: all persons presently have a right not to interfere with your chattels. Of course there may be factual contingency here—I may be in no position to interfere with your Rolls-Royce at the minute because it is in the shop in Guildford, but that doesn’t mean I have no duty not to interfere with it in law. This notion of rights/duties in rem is the one normally spoken of by philosophers when they speak of rights of property binding all the world.
The second, ‘successor’ version is distinct but equally often encountered in the law. Such a right in rem is one which in principle, may bind all others, not because of the fact that each (p. 194) of us all presently owe a duty to the rightholder, but because of the fact that in principle all persons may become a successor in title or possession to property which is bound by the right-holder’s right. Here, the right-holder’s right is in rem, binds all the world, because it binds successors in title or possession to another distinct property, and the right holder’s interest runs with that property, and anyone, in principle, might be a successor in title or—possession to it […]
I will now look at the liability of third party recipients of trust property [… i]n doing so I will rely upon the distinction just drawn. It is one of the features of the particular property interest that exists in a trust fund that the trust reveals the distinction between the trespassory and successor versions of the right in rem in the following way: in so far as their proprietary rights are concerned, the trust divides the rights of the trustee and the rights of the beneficiary such that the trustee has all the trespassory rights in rem to the trust property, while the beneficiaries’ rights are purely successor rights in rem—rights to enforce the trust against successors in title to the trustee of any property which can be seen to constitute an asset of the [trust] fund.
It may, therefore, be the case that legal property rights and equitable property rights are conceptually, as well as historically, different. Each type of right differs from a personal right, as each is capable of binding a third party. If B has an legal estate or legal interest in land, we know that B’s right is then capable of binding any third party, as the rest of the world is under a prima facie duty to B not to interfere with the land. In contrast, if B has an equitable interest, all we can say for sure is that B’s right is capable of binding A and parties later acquiring a right from A: in other words, successors to A are prima facie bound, but we cannot say that the rest of the world as a whole is under a prima facie duty to B.
This possible difference in the effect of legal and equitable property rights can be related to the different content of each type of right. In particular, we have seen in this Chapter that an equitable interest in land depends on A’s coming under a duty to B. In the following extract, it is suggested that the difference between equitable property rights on the one hand, and personal rights on the other, is that in the former case, A’s duty to B relates to a specific right held by A. As a result, B is permitted to assert a right not only against A, but also against third parties who later acquire A’s right, or a right that depends on A’s right. B, however, is not permitted to assert a right against X, a third party who does not acquire any right from A, as, in such a case, it is not possible for B to trace A’s right into X’s hands.
This article proposes three principal theses about the nature of equitable property rights. The first is that such rights are fundamentally different not only from personal rights but also from the property rights recognised by common law. An equitable property right is neither a right against a person nor a right against a thing. Rather, it is a right against a right […]
The second thesis is that, whenever a party (B) has a right against a right of another (A), B’s right is prima facie binding on anyone who acquires a right that derives from A’s right […] Nonetheless, there remains a difference between a right against a thing and a right against a right. The key attribute of a right against a thing is its universal exigibility: if B has a right against a thing, B’s right is prima facie binding on the rest of the world. The key attribute of a (p. 195) right against a right can be labelled persistence: if B has a right against A’s right, B’s right is prima facie binding on anyone who acquires a right that derives from A’s right.
The third thesis is that B will acquire such a persistent right whenever A is under a duty to hold a specific claim-right or power, in a particular way, for B […]
[The approach taken in this article] it rejects a very common, not to say orthodox, view of the nature of equitable property rights. On that view, such rights are, in effect, a weaker, more vulnerable version of the property rights recognised at common law. Both types of right give their holder the power to exclude others from making use of a thing, but the equitable variety is weaker than its common law counterpart as it is generally vulnerable to the bona fide purchaser defence. That view, however, overlooks the genius of equity. That genius consists in its willingness to transcend, not to duplicate, the classic division between rights against things and rights against people. This has resulted in the concept of a right against a right. By recognising the distinctiveness of that concept, it is possible to avoid the orthodox, but unattractive, view that English law contains two competing laws of property.
In land law, this possible difference between the effect of legal and equitable property rights is often hidden. In most cases, B’s reason for claiming a property right is to assert that right against C, a party who later acquired a right from A. So, in National Provincial Bank v Ainsworth,25 for example, Mrs Ainsworth wished to show that a right she held against Mr Ainsworth could also bind the bank: a party later acquiring a right from Mr Ainsworth. In such a case, Mrs Ainsworth would be happy either with a right in the land itself (a right against a thing) or a right against Mr Ainsworth’s right: each type of right would be prima facie binding on the bank.
McFarlane and Stevens do acknowledge in their article that one particular equitable property right, the restrictive covenant, has departed from the ‘right against a right’ model as it has been allowed to bind C, even if C has not acquired a right from A.26 This occurred in a case where B was allowed to assert a restrictive covenant against a squatter:27 a third party who had not acquired his title to the land from A, but who had rather acquired that right independently,28 through his action in taking possession of the land. They argue, however, that the restrictive covenant has been allowed to operate in this anomalous way for particular policy reasons: to use the terms we discussed in Chapter 1, section 5.2, this is an example of courts giving more weight to the ‘utility model’ rather than the ‘doctrinal model’. A different argument has been made by Gardner, who accepts the key distinction between those property rights which impose a prima facie duty on the rest of the world and those which instead bind only A and successors of A, but points to the restrictive covenant in arguing that there is no reason why equitable interests should necessarily fall into the latter class of property rights.29
In the following case, B’s right was not a restrictive covenant; it was rather an equitable interest arising under a trust. On the facts of the case, it was important to know if B’s right was (p. 196) a right in a thing (prima facie binding on anyone interfering with the thing) or a right against A’s right (prima facie binding only on those later acquiring a right that derives from A’s right).
Facts: The largest peace-time explosion in Britain occurred in the early morning of 11 December 2005 at the Buncefield oil storage terminal in Hertfordshire. The explosion was caused by the careless overfilling of a fuel storage tank, for which the defendants were responsible. The destruction and damage extended to fuel storage and pipeline facilities used by Shell. As a result, Shell suffered serious loss through its temporary inability to supply fuel to customers in the South East of England. Shell sought to recover compensation from the defendants. The defendants conceded that their negligence had caused Shell to suffer economic loss, but argued that they owed no duty of care to Shell. This argument was based on the fact that Shell did not hold legal title to the damaged facilities, nor to the land on which those facilities stood. The legal title to the land and facilities was held by two service companies on trust for four beneficiaries, including Shell. The defendants’ argument succeeded at first instance, where David Steel J held that the general rule that there is no duty to avoid carelessly causing economic loss applied: Shell’s equitable interest in the damaged property did not prevent the application of that rule. Particular reliance was placed on the decision of the House of Lords in Leigh & Sillivan Ltd v Aliakmon Shipping Co Ltd (The Aliakmon),30 in which Lord Brandon found that a beneficiary of a trust of goods could not bring a claim against a party who had carelessly damaged those goods, stating that: ‘in order to enable a person to claim in negligence for loss caused to him by reason of loss or damage to property, he must have had either the legal ownership of or a possessory title to the property concerned at the time when the loss or damage occurred’.31 The Court of Appeal, however, upheld Shell’s appeal. Waller LJ delivered a judgment of the court, to which its other members (Longmore and Richards LJJ) also contributed.
[Counsel for Shell] accepted that Lord Brandon in The Aliakmon32 had confined the right to sue for negligent loss of or damage to property to a person who had “the legal ownership of or a possessory title to” the relevant property but he submitted that Lord Brandon was not intending to rule out the owner in equity at any rate if that equitable owner had (as Shell had) joined the legal owner to the proceedings […]
The first proposition [of counsel for the claimants in The Aliakmon] in relation to equitable ownership in The Aliakmon was that the owner in equity was entitled to sue in tort for negligence anyone who by want of care caused his property to be lost or damaged, without joining the legal owner as a party to the action. Lord Brandon responded that that proposition could not be supported. He explained this response by saying:33
“There may be cases where a person who is the equitable owner of certain goods has also a possessory title to them. In such a case he is entitled, by virtue of his possessory title rather than his equitable ownership, to sue in tort for negligence anyone whose want of care (p. 197) has caused loss of or damage to the goods without joining the legal owner as a party to the action: see for instance Healey v Healey.34 If, however, the person is the equitable owner of the goods and no more, then he must join the legal owner as a party to the action, either as co-plaintiff if he is willing or as co-defendant if he is not. This has always been the law in the field of equitable ownership of land and I see no reason why it should not also be so in the field of equitable ownership of goods.”
In this passage Lord Brandon appears to contemplate that joining the legal owner will suffice to enable the beneficial owner to sue for his loss or, perhaps more accurately, that once both the legal owner and the beneficial owner are parties to the action they can recover, subject to the rules of remoteness of damage, for all the loss which they have suffered.
[Counsel] for Total submitted that that was too simplistic a view of what Lord Brandon was saying. First, Lord Brandon would not have used the words “legal ownership” [in the quotation set out in the facts of the case, above] if beneficial ownership (albeit together with the legal ownership) was enough. Secondly the point of requiring the legal owner to be a party to the action was (as was the case in The Aliakmon itself) to enable recovery to be made for physical loss or damage to the goods not to enable a claim for the negligent infliction of economic loss suffered by the beneficial owner which he would never be able to mount in his own name and on his own behalf.
It is fair to say that Lord Brandon’s speech in The Aliakmon does not resolve the question which divides the parties in this case […]
In the absence of any directly applicable authority, it is necessary to look in a little more detail at the exclusionary rule and the rationale for it. The rule is set out in Clerk & Lindsell on Torts35
So on the facts of this case Total, who has admittedly damaged the pipelines owned by [the service companies], submits that it owes no duty to Shell who has a contractual right to have its fuel loaded into, carried and discharged from the pipelines. If Shell were a complete stranger to the transaction that would be understandable but Shell is not a complete stranger. It is the (co-) beneficial owner of the pipelines and the contract to use the pipeline is only an incident of its beneficial ownership (albeit a necessary incident, since it is a co-owner of the pipelines with others who also wish to use it). On the face of things, it is legalistic to deny Shell a right to recovery by reference to the exclusionary rule. It is, after all, Shell who is (along with BP, Total and Chevron) the “real” owner, the “legal” owner being little more than a bare trustee of the pipelines […]
The editors of Clerk & Lindsell on Torts, summarise the position by saying:36
“To allow all claims for such economic loss would lead to unacceptable indeterminacy because of the ripple effects caused by contracts and expectations. Proximity requires some special relationship between the defendant and the person suffering relational economic loss, one which goes beyond mere contractual or non-contractual dependence on the damaged property.”
Beneficial ownership of the damaged property goes well beyond contractual or non-contractual dependence on the damaged property and does indeed constitute a special relationship of the kind required by the editors. It is, in fact, a closer relationship in many ways than that of a bare trustee having no more than the legal title.
(p. 198) At 143–4
We must confess to being somewhat influenced […] by what Lord Goff of Chieveley in White v Jones called “the impulse to do practical justice”.37 It should not be legally relevant that the co-owners of the relevant pipelines, for reasons that seemed good to them, decided to vest the legal title to the pipelines in their service companies and enjoy the beneficial ownership rather than the formal legal title. Differing views about the wisdom of the exclusionary rule are widely held but however much one may think that, in general, there should be no duty to mere contracting parties who suffer economic loss as a result of damage to a third party’s property, it would be a triumph of form over substance to deny a remedy to the beneficial owner of that property when the legal owner is a bare trustee for that beneficial owner.
The judge understandably relied on The Aliakmon to dismiss Shell’s claim but, for the reasons given, The Aliakmon does not conclude the argument about equitable ownership once the legal owner has been joined […] It leaves the question open for this court to determine and we would reverse the judge on this aspect of this case and hold that Shell can recover for its provable loss or, if formality is necessary, that [the service companies holding the land on trust] can recover the amount which Shell has lost but will hold the sums so recovered as trustees for Shell.
The reasoning of the Court of Appeal in Shell UK v Total UK is, perhaps, rather surprising.38 A number of previous decisions, not only The Aliakmon, seemed to establish that if A holds a property right on trust for B, and the property is taken or damaged by X, then, assuming B did not have possession of the property, only A can bring a claim against X.39 On this model, any damages recovered by A will then be held on trust for B, but A’s claim against X is based on X’s breach of a duty owed to A. This means that if, as in Shell UK v Total UK, B suffers consequential loss as a result of X’s breach of duty, that loss is not recoverable from X. After all, if A has a property right, A can in theory declare that he holds that right on trust for an unlimited number of people; can all of those people then recover their consequential loss from X if X has the misfortune carelessly to damage A’s property?
The defendants were given permission to appeal to the Supreme Court, but the case was settled before any such appeal was heard. There may have been a number of alternative bases on which Shell’s claim could have been allowed. First, it was accepted by the first instance judge that, if Shell could show that it had suffered loss which was ‘particular, substantial and direct’ as a result of the explosion, a claim in public nuisance would be available.40 Such a claim can be made in respect of purely economic loss and does not depend on the claimant having any legal, or even equitable, property right. Second, it may have been possible for Shell to argue that it had a legal property right by virtue of its possession of the land and facilities, such possession arising because the service companies were acting as agents for Shell and the other beneficiaries, and their possession was thus attributable to Shell and the other beneficiaries.
(p. 199) The result reached by the Court of Appeal may therefore not be too surprising; but its reasoning has attracted a great deal of criticism.41 It is the first and thus far only decision in which, in effect, B’s interest under a trust has been held binding against a stranger, rather than against a third party later acquiring a right from A. The difficulty is that the court equated the position of a beneficiary of a trust of land with that of an owner of land, stating that it would be ‘legalistic’ to deny Shell’s claim simply because it had an equitable interest in the land rather than a legal estate or legal interest. To use the language of McFarlane & Stevens in the extract set out above, that analysis seems to adopt the ‘very common, not to say orthodox, view’ that the only difference in the effect of legal and equitable property rights is that the latter are subject to a greater range of defences. It overlooks the argument, developed in the extracts set out in this section, that at least some equitable property rights are conceptually different from legal property rights, as such rights can bind only A and A’s successors, whereas legal property rights can bind the whole world. It is true that the Court of Appeal did impose a condition on Shell’s claim: the service companies, as trustees, had to be joined to the claim against Total. This requirement preserves a formal difference between legal and equitable property rights. The surprise in Shell UK v Total UK, however, is that Total could be made to pay not only for the value of the destroyed or damaged property but also for the consequential loss suffered by Shell, but no by the service companies.
1. How did equitable property rights develop?
2. Why might the term ‘equitable estate in land’ be misleading?
3. Why might a party with a freehold or lease decide to set up a trust of that right?
4. Is the limit on the number of permissible legal estates in land, imposed by s 1 of the Law of Property Act 1925, undermined by the variety of different rights which may be enjoyed by a beneficiary of a trust of land?
6. In what ways do equitable property rights have a different effect from that of legal property rights?
Bright, ‘Of Estates and Interests: A Tale of Ownership and Property Rights’ in Land Law: Themes and Perspectives (eds Bright and Dewar, Oxford: OUP, 1998)Find this resource:
Edelman, ‘Two Fundamental Questions for the Law of Trusts’ (2013) 129 LQR 66Find this resource:
Gardner, ‘ “Persistent Rights” Appraised’ in Modern Studies in Property Law Vol 7 (ed Hopkins, Oxford: Hart Publishing, 2013)Find this resource:
Hackney, Understanding Equity and Trusts (London: Fontana, 1987, ch 1)Find this resource:
Harris, ‘Legal Doctrine and Interests in Land’ in Oxford Essays in Jurisprudence (3rd series, eds Eekelaar and Bell, Oxford: OUP, 1987)Find this resource:
McFarlane, The Structure of Property Law (Oxford: Hart Publishing, 2008, Parts B & C1)Find this resource:
McFarlane and Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1Find this resource:
Smith, ‘Fusion and Tradition’ in Equity in Commercial Law (eds Degeling and Edelman, Sydney: Lawbook Co, 2005)Find this resource:
Worthington, Equity (2nd edn, Oxford: OUP, 2006, ch 3)Find this resource:
1 Hackney, Understanding Equity and Trusts (London: Fontana, 1987) ch 1.
2 The phrase used as a threshold for equitable intervention, through proprietary estoppel, by Lord Walker in Cobbe v Yeoman’s Row Management Ltd  1 WLR 1752 at .
3 Smith, ‘Property, Equity, and the Rule of Law’ in Private Law and the Rule of Law (eds Austin and Klimchuk, Oxford: OUP, 2014) p 246.
4 It is possible for there to be trusts in which A, as well as being a trustee, is also a beneficiary of the trust: see for example Williams & Glyn’s Bank v Boland  AC 813, HL, which we will discuss in section 2 of this Chapter. In such a case, A is permitted to use the trust property for his own benefit (but only to the extent that he is a beneficiary).
5 [The author uses Equity with a capital E to refer to the body of specific rules developed by courts of equity and to distinguish those rules from the general concept of ‘equity’ with its broader sense of what is fair.]
6  AC 1175.
7  AC 813.
9 Maitland, Equity – A Course of Lectures (2nd edn, Cambridge: CUP, 1936) p 17.
10 Per Brennan J in DKLR Holding Co (No 2) Ltd v Commissioner of Stamp Duties (1982) 149 CLR 431 (High Court of Australia). See Swadling, ‘Property’ in Burrows (ed) English Private Law (Oxford: OUP, 3rd edn, 2013) 4.145–4.150. This view also fits with the historical development of the trust: see N Jones ‘Trusts in England after the Statute of Uses: A View from the Sixteenth Century’ in Itinera Fiduciae: Trust and Treuhand in Historical Perspective (eds R Helmholz and R Zimmerman, Berlin: Duncker & Humblot, 1998) p 190: ‘The interest of [a beneficiary of a trust] depends upon the interest of the trustee: the creation of a trust is a process of cumulation, and not division’.
12 That rule is set out in s 53(1)(b) of the Law of Property Act 1925; it differs from the general formality rule applying to the acquisition of equitable interests in land, set out in s 53(1)(a) of the same Act.
14 This point is noted by Smith, ‘Fusion and Tradition’ in Equity and Commercial Law (eds Degeling and Edelman, 2005) p 34. See, also, Chambers, ‘Constructive Trusts in Canada’ (1999) 37 Alberta Law Rev 173.
15 One example of a ‘mere equity’ is an equitable power to rescind a transfer of a right, arising because that transfer was the result of an innocent misrepresentation made by the transferee: see Bristol & West Building Society v Mothew  Ch 1, 22–3, per Millett LJ. In such a case, when the transferor exercises his power to rescind, he or she acquires a full equitable interest; but, before then, he or she has only a ‘mere equity’: a power to acquire an equitable interest. For further discussion see McFarlane, The Structure of Property Law (2008) pp 224–7; O’Sullivan, ‘The Rule in Phillips v Phillips’ (2002) 118 LQR 296.
16 There can, however, be a slight difference. To count as a legal interest in land, an easement or charge must last forever (like a freehold) or for a certain, limited period (like a lease). As a result, if A gives B a right of way that is due to last only for B’s life, that right, even if passes the content test for an easement (see Chapter 25, section 2), cannot count as a legal easement. Nonetheless, it can count as an equitable easement: see ER Ives Investments Ltd v High  2 QB 379, 395, per Lord Denning MR.
18 ‘Contractual Licences: A Reply’  Conv 285, 290.
19  AC 1175.
20 Ibid, 1248.
21  2 AC 310, HL.
22 (1882) LR 21 Ch D 9, CA.
23  AC 1175.
24 Heydon, Leeming, and Turner Equity: Doctrine and Remedies (5th edn, London: Butterworths, 2015) ch 2.
25  AC 1175.
26 (2010) 4 Journal of Equity 1, 13–14.
29 See Gardner, ‘ “Persistent Rights” Appraised’ in Modern Studies in Property Law Vol 7 (ed Hopkins, Oxford: Hart Publishing, 2013) 321, at 345–7 and 354–7. For different criticisms of the argument of McFarlane and Stevens, focussing instead on the nature of an equitable interest under a trust, see Penner, ‘The (True) Nature of a Beneficiary’s Equitable Proprietary Interest under a Trust’ (2014) 27 Canadian Journal of Law and Jurisprudence 473.
30  AC 785.
31 Ibid, 809.
32  AC 785.
33 Ibid, 812.
34  1 KB 938.
35 (London: Sweet & Maxwell, 19th edn, 2006), [8.115].
36 Ibid, [8.116].
37  2 AC 207, 259–60.
38 For discussion of the decision, and of its departure from previously accepted rules as to the operation of equitable interests under a trust, see, for example, Edelman, ‘Two Fundamental Questions for the Law of Trusts’ (2013) 129 LQR 66, 67–72.
39 See Lord Compton’s Case (1586) 3 Leo 196; Earl of Worcester v Finch (1600) 4 Co Inst 85; MCC Proceeds Inc v Lehman Bros  4 All ER 675.
40  EWHC 540 (Comm) at 434.
41 In addition to Edelman, ‘Two Fundamental Questions for the Law of Trusts’ (2013) 129 LQR 66, 67–72, see also Turner, ‘Consequential Loss and the Trust Beneficiary’  CLJ 445; Low, ‘Equitable Title and Economic Loss’ (2010) 126 LQR 507; Rushworth and Scott, ‘Total Chaos’  LMCLQ 536.
42  AC 1175.
43 See Gray and Gray, Elements of Land Law (5th edn, 2009) p 97.