Do You Have an Equitable Interest in Property?

An equitable interest is a right which is recognised in the courts of equity, which allows an individual to benefit from, or control or influence property interests. This does not mean that the individual gaining the benefit holds legal title, or that they are entitled to complete ownership.

The law of equity acts to protect proprietary rights and claims which may arise because of conduct, agreements or relationships which the law considers to be important. Equity is intended to prevent unfair results in circumstances where granting a legal title would be unjust.

Trusts and Beneficiaries:

A common method of structuring investments and businesses in Australia is via trusts. The trustee holds the legal title, and the beneficiaries hold equitable interests in the assets or income of the trust. The specific rights granted are determined by the trust deed and the specific trust created. Therefore, when choosing to use a trust, it is essential to ensure the deed itself, and structure aligns with your goals.

Contracts to Buy Land or Businesses:

Upon exchange of a binding and enforceable contract for the sale or purchase of land or business, the buyer acquires an equitable interest in property. Vendors are not permitted to act in a manner inconsistent with the contract prior to settlement.

Loans, Mortgages and Security:

In registering a mortgage, financiers create a legal interest in the property, whereas an unregistered mortgage is usually an “equitable interest”. Personal property such as equipment, intellectual property (IP), or stock for example typically have security registered under the Personal Property Securities Act 2009 (PPSA). Enforcement steps in the event of default of the agreement and any rights to appoint receivers for example should be set out in the loan agreement.

Founders, Partners and Joint Ventures:

When creating a business, co-founders or partners commonly contribute money or IP before formal share transfers are completed. Disputes can arise concerning the legal vs equitable interest in the business if agreements are not properly prepared. To prevent confusion, a clearly drafted Partnership or Shareholders Agreement should be completed and executed.

Leases and Occupier Rights:

In some circumstances, a tenant who has contributed financially towards the fit-out of the premises or taken possession of the premises by relying on the pending lease, may have an equitable right if the landlord attempts to alter or back out of the lease. It is therefore recommended to ensure leases are properly drafted, executed, and registered prior to committing to fit-out costs to ensure any damages are minimised.

To adequately protect an equitable interest, it is best to ensure the context and details of the arrangements and obligations are properly documented and drafted. This can be accomplished in the form of a contract or deed for example. This reduces the possibility of disputes at a later time.

Registration of interests in property, via a caveat or PPSA registration for personal property for example are also important considerations. This ensures successors in title cannot defeat your security interest. Maintenance of evidence including contracts, emails, meeting minutes, notes or invoices is also important.

There are risks associated with equitable interests, and specific things which need to be avoided.

Torrens Registration:

Registered proprietors of land under the Torrens system have strong legal rights to ownership. As such, unregistered equitable interests may be superseded by later registered interests. This depends on the specific circumstances of a case. For example, a later registered interest that has prior notice of an equitable interest may fail.

PPSA:

The PPSA stipulates specific circumstances in which priority rules apply. Therefore, timely and accurate registration is essential to protect your interests.

Insolvency:

If a legal owner of property becomes insolvent, the security interest may be unenforceable against the external administrator. Consequently, it will be difficult to enforce undocumented claims in equity against a liquidator of a company or trustee in the event of personal bankruptcy.

Incomplete or Oral Agreements:

If the agreement is not in writing, this can make enforcement more difficult. The courts may enforce oral or partly performed agreements, however, this is complex as proving the terms of an agreement is difficult without appropriate documentation.

Time Limits:

An equitable claim should be enforced in a timely manner, as equity does not favour delay and this may weaken the claim as a result.

To protect your interests, whether it be legal or equitable, it is best to ensure the terms of the agreement, deed or contract are always in writing, clearly drafted and properly executed. This will ensure that all relevant claims can be adequately processed, and will protect your personal and business interests.

Our lawyers are highly experienced and provide quality service. If you need assistance with a property dispute or contract, please contact us.

This article was co-written by Lily Barnett (LLB), Legal Secretary.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.