What is Interest in land? The proper definition is that a right which a person has over another's land. There are 2 types of interest:
1. Legal interests
2. Equitable interests
These two interests are different from each other but both of them share a common feature- they are proprietary rights in land, which means that they are capable of binding third parties. It is different from the personal rights, which is not capable of binding third parties (eg, licences)
1. LEGAL INTEREST IN LAND
The list of interest which can be legal is:
(a) An easement, right or privilege in or over land for an interest equivalent to an estate in fee simple absolute in possession or a term of years absolute. This includes both easements (the right to use the land of another in some way or prevent it from being used for certain purposes, such as rights of way and rights of water and light) and profits a prendre (rights to take something from the land of another, such as fish, wood or grazing rights).
In order to be a legal, the right must be held either for an indefinite time (equivalent to a fee simple) or for a definite time (equivalent to a term of years). Therefore, an easement for life or a right of drainage granted until the road is adopted by the local authority cannot be a legal interest, must be equitable.
(b) A rentcharge in possession issuing out of or changed on land being either perpetual or for a term of years. Rentcharge is that someone gives the owner the right to a periodical sum of money secured on land independently of any lease or mortgage. For example, where the seller of land reserves an annual payment for it to secured by a rentcharge. These are commonly found in the Manchester and Bristol area.
Yet, there will be no new rentcharge can be created after 22 July 1977 and most rentcharges will be extinguished on 22 July 2037 or 60 years from the date of the creation.
(c) A charge by way of legal mortgage (a charge on land to secure a debt).
(d) Land tax, tithe rentcharge, and any other similar charge on land which is not created by an instrument.
(e) Rights of entry exercisable over or in respect of a legal term of years absolute annexed, for any purpose, to a legal rentcharge. A right of re-entry in a lease, if the tenant, for example, fails to pay the rent, is made an interest in land itself. It can be attached to a legal rentcharge to secure payments of the rent.
Assuming that the interest is within this list, then in order to be legal it must have been created by DEED, s52(1) LPA 1925. Whilst, s1(2) and (3) Law of Property (Miscellaneous Provisions) Act 1989 stated that:
An instrument shall not be a deed unless:
(i) it makes clear that it is intended to be a deed
(ii) it is signed by the person executing it and by a witness present at the same time who also signs it
(iii) it is delivered by the person executing it or by someone on his behalf.
COMPARING THE SCENARIO:
SCENARIO 1
Jacey agrees Casper by a deed that Casper can have a right of way across X's land for the rest of Casper's life.
To identify:
Step 1- Identify the right: an easement
Step 2- Legal or equitable?
As it is for life, it can only be equitable even if it is signed in a deed.
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SCENARIO 2
Jacey agrees with Casper that Casper can have a right of way across Jacey's land.
To identify:
Step 1- Identify the right: an easement
Step 2- Legal or equitable: It does not mentioned that the easement is for the rest of Casper's life, therefore we can assume that it is for ever. So, it can be either legal or equitable.
Step 3- Is it in a deed? If yes, then it is a legal interest.
* Note that sometimes the interest is not actually granted by deed but it is implied to it.
2. EQUITABLE INTERESTS IN LAND
The term equitable means that the right was originally only recognised by the Court of Chancery, which dealt with equitable rights and not by the Courts of Common Law.
Equity often applied where the application of the strict rules of common law would not have produced a just result. The effect was that equity often did not insist on the observance of formalities, such as the need for a right to be granted in a deed.
In order to decide if the right is equitable, you should ask:
(i) is it above the list of legal interest? If not, then it must be equitable
(ii) if it is in the above list, then was it created by deed? If not, then it must be equitable.
INTEREST UNDER TRUST
Trust, arises when property is held by one person (known as trustee) on trust for another ( known as beneficiary).
X (trustee) ---------------------------------------------------------> Y (beneficiary)
Many trusts met in land scenarios are not created by the parties specifically agreeing to set up a trust but in other ways. For example, by one party (Y) paying part of the purchase price of property which is actually held in X's name. Here, equity implies a trust in favour of Y.
The legal ownership and the benefit are split and the common law, apparently because it could not cope with the idea of splitting these two, refused to recognise trusts and allowed the trustee to ignore the rights of beneficiaries.
However, equity enforce trusts because this was a matter of conscience. Common example is that a trust is where a person (X) contributes to the purchase of land but the legal title is held in the name of Y. Y then will hold the trust of X in the absence of contrary intention.
INTERESTS NOT CREATED FORMALLY
If a contract has been made to create an interest in land then equity may, at its discretion, enforce it by decree of specific performance (court order which commands the performance of a contract) or restrain its breach by an injunction (court order which either orders a lawful act to be done or restrains an unlawful act). This is in accordance with the equitable maxim that 'equity looks on that as done which ought to be done'. This means that when a deed is required to create an estate or interest in land and there is no deed, equity may still regard the interest subsisting in land as an equitable interest.
For example, Jacey agrees to grant Casper a right of way over his land. This is not a deed. As in the above-mentioned example, it can be assume that it is to last for ever, as it does not say that it is for life. However, that lack of a deed would still be fatal to it being a legal easement. However, equity may come to rescue and declare it to be an equitable easement.
Yet, how to tell if there is a deed or just an agreement?
(i) The word 'grants' usually indicates a deed as this is the idea behind one: the right of way is granted by Jacey to Casper and not agreed by them.
(ii) The words 'agrees to grant' indicates just an agreement as it points to the future and this fits with the idea behind equity: it enforces a contract to grant an interest in the future.
Bear in mind that, referring to s2 Law of Property (Miscellaneous Provisions) Act 1989,
Contracts for the sale or other disposition of an interest in land made on or after 27 Sep 1989 must:
(i) be in writing
(ii) contain all the terms agreed my parties
(iii) be signed by all the parties.
Therefore, equity will enforce a contract for an equitable easement provided that it satisfies these requirements. Contracts made before that date do not require writing and there are several fairly cases in which this point has been important.
RESTRICTIVE COVENANTS
Restrictive covenants is, where a person covenants in a deed not to use his land in a certain way or to do something on his land, such as keep fences in repair or not build on the land.
These have only ever been enforced in equity.
DISTINCTION BETWEEN LEGAL AND EQUITABLE INTEREST
We often ask ourselves, why do we need to know or able to distinguish the difference between legal and equitable interest. The reason is that the differences between the interest will cause different effect which they have on the purchaser of the land. Note that if a person is not the purchaser, then that person takes the land with all equitable rights, such as inherited the land.
OVERREACHING
Overreaching is the process by which equitable rights which exist under a trust of a land are removed from the land and transferred to the money (the capital money) which has been paid to purchase the land. The effect is to give the purchaser automatic priority over equitable interest under a trust.
Under s.2(1) LPA 1925,
'A conveyance to a purchaser of a legal estate in land shall overreach any equitable interest or power affecting the estate, whether he has notice thereof. There are various instances where overreaching can take place but the relevant one here is,
s2(1)(ii): where the provision of s27 of the LPA regarding the payment of capital money are complied with, ie. the capital money is paid to at least two trustees or a trust corporation.
*Note that this vital restriction on overreaching: It can only take place if the transaction is made by at least 2 trustees or a trust corporation.
COMPARING THE SCENARIO
SCENARIO 1
sells the legal estate to
X---------------------------------------------------------------------------------------------------------------Y
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Z beneficiary under a trust
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Z beneficiary under a trust
SCENARIO 2
X and W -----------------------------------------------------------------------------------------------------Y
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Z beneficiary under a trust
Here, Y will not bound by Z's interest as the transaction was entered into by two trustees (X and W) and so Z's interest in the property is overreached and is transferred to the proceeds of sale. The effect is that Y need not concern himself about them but Z may claim against X and W for any share of the proceeds of sale which she feels belongs to her.
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Z beneficiary under a trust
Here, Y will not bound by Z's interest as the transaction was entered into by two trustees (X and W) and so Z's interest in the property is overreached and is transferred to the proceeds of sale. The effect is that Y need not concern himself about them but Z may claim against X and W for any share of the proceeds of sale which she feels belongs to her.
In City of London Building Society v Flegg,
where Mr and Mrs MB were the registered proprietors of a house but over half of the purchase price had been raised by Mr and Mrs F (Mrs MB's parents), who were also lived in the house. Accordingly, the house was held on trust for all four of them. Mr and Mrs MB then, without the acknowledge of Mr and Mrs F, raised two further charges over the property and then defaulted on the repayments. The lender sought possession and it was held that the interests of the parents had been overreached by the charges and their rights now only existed in the proceeds of sale.
The legal principle: The interests of beneficiaries in a trust of land are overreached if the transaction os entered into by two or more trustees.
where Mr and Mrs MB were the registered proprietors of a house but over half of the purchase price had been raised by Mr and Mrs F (Mrs MB's parents), who were also lived in the house. Accordingly, the house was held on trust for all four of them. Mr and Mrs MB then, without the acknowledge of Mr and Mrs F, raised two further charges over the property and then defaulted on the repayments. The lender sought possession and it was held that the interests of the parents had been overreached by the charges and their rights now only existed in the proceeds of sale.
The legal principle: The interests of beneficiaries in a trust of land are overreached if the transaction os entered into by two or more trustees.
The extent of overreaching has been extended in the following case, where:
In State Bank of India v Sood,
it was held that overreaching applies not only where capital money is actually paid but also where the mortgage was created as security for existing and future liabilities.
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