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Understanding Equitable Interest: Exploring the Principles of Equity

CEO Khai Intela
Image: Equitable Interest An equitable interest is a concept rooted in the principles of fairness and justice within the legal system. It represents an interest held by virtue of an equitable title or claimed on...

Equitable Interest Image: Equitable Interest

An equitable interest is a concept rooted in the principles of fairness and justice within the legal system. It represents an interest held by virtue of an equitable title or claimed on equitable grounds. This beneficial interest in property holds the right to acquire formal legal title. While this concept is prevalent in common law-influenced systems such as England, Canada, Australia, and the United States, it is important to grasp its essence and implications.

Equity: A Distinctive Set of Rights

Equity, as an overarching concept, distinguishes itself from legal or common law rights. It encompasses a body of principles that define what is fair and right. Originating in the English Court of Chancery, equity supersedes common and statute law when the two conflict. Unlike the rigid application of legal rights, equity allows a judge to determine what is just and fair in a given situation.

At the heart of equitable interest lies the example of a beneficiary under a trust. In a trust arrangement, the trustee holds the legal interest in the trust property, along with the accompanying rights and powers. However, the beneficiary holds an equitable interest in the same property, subject to the terms of the trust deed. The nature of the beneficiary's rights is a matter of ongoing debate and analysis.

According to Ben McFarlane, there are three principal theses regarding the nature of equitable rights:

  1. Equitable interest is a right against a right, rather than against a thing or a person.
  2. When party B holds a right against another party A, B's right is generally binding on anyone acquiring a right derived from A's right.
  3. B acquires a persistent right when A is duty-bound to hold a specific claim-right or power for B.

Rights and Obligations in Trust Law

The rights and obligations of beneficiaries, trustees, and third parties involved in a trust depend on the terms laid out in the trust deed. Trust law encompasses both mandatory and default law. The irreducible core, information rights, and the court's supervisory jurisdiction form elements of mandatory law, while default law can be modified or excluded through express provisions in the trust deed.

In the case of DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW), the High Court of Australia clarified that an equitable interest implies the existence of a legal interest held by another individual. When one person possesses both the legal and equitable interest in a property, the term "equitable interest" does not apply. This distinction emphasizes that an equitable interest is impressed upon a legal estate, rather than carved out of it.

Latec Investments Ltd v Hotel Terrigal Pty Ltd further illustrates the classification of equitable interests in New South Wales into three categories: equitable interest, mere equity, and personal equity. While mere equity arises from the unjust disadvantage faced by one party due to another's unconscionable behavior, it does not override a bona fide equitable interest, such as an equitable charge.

Equitable Interest in Land Law

In land law, an enforceable contract for sale confers an equitable interest on the purchaser of the land. This principle, established in Lysaght v Edwards, operates under the notion that equity considers deeds done as they should be done. Should a contract not meet the requirements of a deed, it can still be specifically enforced to transfer the equitable interest to the new purchaser. This doctrine of constructive notice ensures that interests not conveyed through a deed remain binding on future purchasers.

However, the impact of this rule has been weakened by the Law of Property (Miscellaneous Provisions) Act 1989 in the UK. It mandates that all contracts for the sale of land (which could be specifically enforceable) must be in writing, contain all agreement terms, and be signed by both parties. Contracts failing to meet these requirements cannot be specifically enforced, and thus, will not create or transfer an equitable interest in land.

In Conclusion

Understanding equitable interest and its implications is vital for individuals operating within common law-influenced legal systems. Rooted in principles of fairness and justice, equitable interest grants individuals a beneficial interest in property, protected by equitable remedies. By navigating the intricacies of trust law and land law, one can appreciate the distinctive nature and significance of equitable interest in various legal contexts.

Sources:

[1] Original Article

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