Overriding Interests in Property: A Case Study of G's Equitable Interest, Schemes and Mind Maps of Law

Download Overriding Interests in Property: A Case Study of G's Equitable Interest and more Schemes and Mind Maps Law in PDF only on Docsity! 1 Cohabitees and The Problem of Unoverreached Beneficial Interests: Time for a Rethink? Prof. Mark Pawlowski* and Dr James Brown** *Barrister and Professor of Property Law, School of Law, University of Greenwich. ** Barrister and Reader in Law, School of Law, Aston University. Let us begin with the following scenario. The freehold title to a house is registered in the sole name of V, who has provided the entirety of the purchase price. His female partner, G, who has lived in the house with V for the last 10 years, is entitled to a beneficial interest in the property as a result of spending her savings on making significant improvements to the property adding considerable value to it. Her interest arises by virtue of a common intention constructive trust.1 V now wishes to sell the house to P (a purchaser). What options does P have which would allow him to take free of G's equitable interest? If G's interest is overreached, is it right that G should lose her interest in the house and instead acquire an interest in the proceeds of sale given she has been in occupation of the house as her home for the last 10 years and spent her own money on substantial improvements? In most cases, the sale will be able to go ahead without difficulty (V will have discussed the sale with G and both agreed to sell). However, where G contests the sale, the parties will invariably find themselves in a triangular cross-fire of interests with G wishing to remain in the property, V wanting to sell, and P anxious to buy. Similar issues will arise where the house is registered with leasehold title and V is seeking to assign his leasehold estate to P, and G has objected to the assignment. The problem is also not necessarily limited to a sale of the freehold or leasehold estate in the property. Section 2(1)(ii) of the Law of Property Act 1925 provides that “a conveyance to a purchaser of a legal estate in land shall overreach any equitable interest . . . affecting that estate”. The word “conveyance” is defined in s.205(1)(ii) of the 1925 Act as including a lease or mortgage, and s. 205(1)(xxi) defines “purchaser” as including a lessee or mortgagee. In our scenario, therefore, we can also envisage the situation where V, instead of selling the legal estate in the land, seeks to grant a lease of the house for valuable consideration (i.e., at a premium). Here again, G’s interest may be overreached leaving her with no right of occupation during the term of the lease. Her interest would be effectively removed from the land and converted (presumably) into a proportionate share of the rental yield generated from the lease. For the sake of completeness, it is also possible to envisage P as a mortgagee (i.e., a bank or building society) where V is seeking to remortgage his house in order to obtain additional finance.2 1 See, Lloyds Bank plc v Rosset [1991] 1 AC 107. 2 See, s.2(1)(iii) of the Law of Property Act 1925, (conveyance made by a mortgagee). 2 The mechanism of overreaching and overriding interests Overreaching is a mechanism designed to protect purchasers of the land. Provided the purchaser pays the purchase money to two or more trustees, he will obtain a transfer of the legal title free of any equitable interests arising under an express, resulting or constructive trust.3 All beneficial interests under the trust affecting the land are effectively overreached so that all the equitable co-owners are swept off the land and their respective interests converted into the proceeds of sale. The vendor, in turn, becomes the trustee of the sale proceeds and accountable to the beneficiaries in accordance with the size of their respective equitable interest(s). Where, however, payment by the purchaser is made to only one trustee (vendor), any equitable co-owner, who is not specifically mentioned on the land register, will have an "unoverreached" equitable interest which will remain in the land as his interest will not convert into the proceeds of sale. In our scenario, referred to above, G's equitable interest (arising by virtue of a constructive trust) coupled with her actual occupation of the house will give rise to an overriding interest which will be binding on P.4 P will, therefore, acquire the land subject to G’s interest in it. To avoid this problem, P will, typically, prior to exchange of contracts, insist on either G waiving her overriding interest in the land as against P, or absent such a waiver, insist that a second trustee (alongside V) is appointed to receive the purchase money so as to ensure that G’s interest is overreached and converted into the proceeds of sale. If G's interest is overreached, her overriding interest will no longer bind P. How does G acquire a beneficial interest in the house? The principles under which a non-owning cohabitee may acquire a beneficial interest in property which is in the sole legal ownership of his/her partner are well-rehearsed in the landmark cases of Lloyds Bank plc v Rosset,5 Stack v Dowden6 and Jones v Kernott.7 The two- fold requirements of common intention (express or inferred) coupled with detrimental reliance, necessary to support a constructive trust, are now firmly rooted in our law of property. In the express common intention category, very little detriment is required and a wide range of conduct may qualify to support a constructive trust. In Grant v Edwards,8 Sir Nicholas Browne- Wilkinson V-C opined that: “ . . . once it has been shown that there was a common intention that the claimant should have an interest in the house, any act done by her to her detriment relating to the joint lives of the parties is, in my judgment, sufficient to qualify. The acts do not have to be inherently referable to the house.” 3 Section 2(1)(ii) of the Law of Property Act 1925. 4 See, Schedule 3, para. 2, to the Land Registration Act 2002. G’s interest will not bind P if P can show that direct enquiry was made of G, prior to the purchase, as to her interest and occupational status, and G failed to properly disclose the truth of her position. If the land is unregistered, again having only one trustee, G would likewise have an unoverreached interest which would potentially bind P, if P has actual, imputed, or constructive, notice of G’s equitable interest: see, Kingsnorth Finance v Tizard [1986] 1 WLR 783 and Hunt v Luck [1902] 1 Ch 428. 5 [1991] 1 AC 107. 6 [2007] 2 AC 437. 7 [2012] 1 AC 776. 8 [1986] 1 Ch 638, at 657. 5 misrepresentation or some other vitiating factor. Lastly, G may sometimes be required to assign her equitable interest22 to V separately so as to avoid the difficulty of appointing a second trustee altogether. Similar options will be available to P assuming he is a mortgagee and our scenario is a re-mortgage situation, although typically, in this context, the mortgagee will insist that G sign a consent form in relation to her equitable interest so as to concede priority in favour of P as mortgagee.23 Law Commission proposals The Law Commission in its Working Paper No 106, (1988), Trusts of Land: Overreaching, and its subsequent Report published in 1989, Transfer of Land, Overreaching: Beneficiaries in Occupation,24 suggested three possible reforms so as to better protect the position of third parties such as G in our scenario. First, G’s interest should only be overreached if a second trustee is appointed who is either a solicitor or licensed conveyancer capable of affording protection to an equitable owner such as G by looking after their interests and possibly objecting to a sale. However, one objection to this would be the extra expense involved, as well as the possible reluctance of such professionals undertaking this additional responsibility in sales and remortgages. Would a solicitor have the time or inclination to act as a form of guardian of the equitable owner? Secondly, the Land Registration Act 2002 should be amended so as to allow G to register her interest by way of a notice, under s.32 of the 2002, as opposed to merely applying for a Form A restriction. This, however, would not prevent P (or a mortgagee) from applying for an order of sale of the house under s.14 of the Trusts of Land and Appointment of Trustees Act 1996. Moreover, it is unlikely that beneficial owners such as G would necessarily invoke registration as a safeguard given that such equitable interests arise informally and without any understanding of the land registration system. Thirdly, overreaching should only occur where all equitable owners of full age and in actual occupation of the property give consent to the sale/re-mortgage. This was considered by the Law Commission to be the preferred option as striking the right balance between beneficiaries and purchasers. The lack of consent, however, in any case where it was required, would not invalidate the conveyance, but merely take effect subject to the subsisting rights and interests which had not been overreached. The Law Commission's preferred option has admittedly not been free from criticism. It has been suggested that such radical reform would have the potential to hinder the smooth operation of the conveyancing process and effectively destroy the mechanism of overreaching and return the law to its pre-1926 state. The whole point, it has been argued, behind the creation of the concept of overreaching was precisely that a purchaser should be able to buy co-owned property without having to search for every equitable owner and obtain their consent. From a practical point of view, however, obtaining consent from all equitable owners would not necessarily involve a greater burden on potential purchasers. It should be noted that purchasers 22 See. s.53(1)(c) of the Law of Property Act 1925. Such an assignment must be made in writing signed by G. 23 Alternatively, the mortgagee may take the view that, if G has knowledge indicating acceptance of V’s re- mortgage application, she must be taken to have consented to it and conceded priority to the mortgagee. 24 Law Commission Report No 188, (19 December 1989). 6 already have a vested interest in making enquiries of occupiers to protect themselves against interests other than beneficial interests which might form the subject-matter of an overriding interest. Significantly, the Law Commission recognised this in their Report:25 "We do not expect our recommendation to necessitate enquiries and inspections going beyond what is already done at present." It should also be borne in mind that V would have the ability to apply to court, for example, under s.41(1) of the Trustee Act 1925, for leave to appoint a second trustee in the absence (or refusal) of consent. Although this has the potential to add some delay and expense to the sale of the property, it would have the obvious advantage of allowing the competing interests of G and V to be properly balanced in the light of all the circumstances. Should we simplify overreaching? Some would, no doubt, also argue that the current law on overreaching is satisfactory and that no reform is necessary in so far as G, upon sale, acquires a corresponding interest in the proceeds of sale. In any event, s.11 of the 1996 Act imposes a duty on V (as trustee) to consult G "so far as practicable" and “so far as is consistent with the general interest of the trust” give effect to G’s wishes. On the other hand, overreaching will occur even if V has not consulted G at all. Moreover, in our scenario, it is arguable that overreaching does not sufficiently safeguard the interests of G who loses the enjoyment of the house despite many years of occupation and her significant capital contribution towards improvements. A more radical solution, not canvassed by the Law Commission, is to simplify the current law by allowing overreaching to take place where a purchaser/mortgagee pays the purchase money to only one trustee. (This approach would be similar to the Australian Torrens system of land registration premised on the notion of the indefeasibility of the land register). The reason for insistence on two trustees under s.2(2) and s.27(2) of the Law of Property Act 1925 is not entirely clear, although it appears to be rooted in the notion that this reduces the risk of mistake or fraud and provides a safeguard for equitable owners -"two heads (containing conscience and brains) ought to be better than one albeit not as good as four".26 It has been questioned, however, whether the addition of another trustee achieves this purpose. The “two or more trustees” rule does not eliminate fraud, it just reduces the risk of it – two trustees may still act together in a conspiracy to defraud the beneficiaries. On a broader note, mistake or fraud as to financial matters is not nowadays necessarily the worst worry for beneficiaries. A far more realistic concern is often with the enjoyment of the land itself which will, of course, be automatically lost by the process of overreaching. Such an approach could, of course, be coupled with appropriate safeguards to protect the interests of equitable owners in actual occupation of the property such as G in our scenario. This could be done in a number of different ways already mentioned earlier by: (1) amending the Land Registration Act 2002 so as to allow G to register her interest (as opposed to merely applying for a Form A restriction); or (2) allowing overreaching to occur only where all equitable owners of full age and in actual occupation of the property give consent to the sale/re- 25 ibid, at para.4.24. 26 Law Commission Working Paper No 106, (1988), Trusts of Land: Overreaching, at para. 3.1, 7 mortgage and, at the same time, providing P with the ability to seek a court order for sale under s.14 of the Trusts of Land and Appointment of Trustees Act 1996 in appropriate circumstances (e.g., where G's equitable interest is based only on a very modest expenditure on improvements or where G's occupation has been temporary). Needless to say, any court ordered sale would, of course, be an overreaching conveyance. Alternatively, V would also have the option of applying for the appointment of a second trustee under s.41(1) of the Trustee Act 1925 where it would be "inexpedient difficult or impracticable to do so without the assistance of the court". The writers' preferred solution, therefore, is to argue for an approach which would allow for the balancing of the competing interests of G and V so as to arrive at a solution which was appropriate in all the circumstances of the case. In this connection, s.15 of the 1996 Act already provides the court with a discretion as to whether or not to order a sale by reference to a non- exhaustive list of factors27 which include: (1) the intentions of the person(s) who created the trust; (2) the purpose for which the property subject to the trust is held; and (3) the welfare of any minor who occupies the property subject to the trust as his home. Significantly also, the court is required, under s. 15(3), to have regard to the "circumstances and wishes" of any beneficiaries of full age and entitled to an interest in possession in the property subject to the trust or (in case of dispute) of the majority (according to the value of their combined interests). Thus, although the breakdown of the parties’ relationship may initially point towards a legitimate reason for V to sell the property, this might exceptionally be countered by appropriate circumstances which militate against a sale or, at the very least, a postponement for an appropriate period of time. In particular, the court would be able to take into account the likely size of G’s equitable interest (given her improvements to the property) as well as her need for the property as a home for herself and any of the parties’ children. In essence, therefore, G’s consent would operate only as a partial bar which would not necessarily prevent a sale of the property, but instead trigger the court’s discretionary jurisdiction under s.14 of the 1996 Act. Conclusion In the writers' view, the appropriateness of appointing a second trustee in order to ensure overreaching is open to question. As we have seen, this simple administrative act can destroy G's rights of occupation of the family home in circumstances where she has a legitimate interest in protecting her beneficial interest otherwise than by simply relying on her transmutated entitlement to an equivalent share in the proceeds of sale. Ultimately, the question, in terms of any reform proposal, revolves around what the law is seeking to protect. Is it merely the equitable owner's financial outlay on the property, or is it also the continued enjoyment of the property as a home? If the former, overreaching already achieves this by preserving G's financial outlay in terms of a share in the proceeds of sale. If the latter, G's continued enjoyment of the house is curtailed by the artificial device of simply appointing a second trustee so as to overreach her equitable interest. What this then points towards is some form of restriction on overreaching (requiring G's consent to a sale) in the 27 Because the list of factors is stated to be non-exhaustive, other factors may play an important role in determining whether a sale of the property should be ordered (e.g., G is disabled and the house has been converted to meet her specific needs).