The of Walsh v Lonsdale - Case Study Example

The equitable lease Introduction: The case of Walsh v Lonsdale (1882 has introduced the doctrine of conversion in the matter of conveyancing of property, through the determination of the equitable interest in the property. The conversion of interest in land into equitable interests is based upon the contractual agreement that exists between the parties, even where a sale has not necessarily occurred. Common law adopts a more rigid framework where the determination of interests in property and conveyancing are determined through formal procedures, which must be satisfied in order that there is a recognition of the interest in the property. While equity and common law have traditionally remained separate bastions and equity was initially introduced to provide judicial flexibility in determining interests, it is increasingly testing the boundaries of common law, especially through means like the Walsh doctrine that allow equity to deem as enforced and completed, contractual provisions that may not have been fully completed under common law. The sale/lease agreement and equitable interest: The term “equitable lease” arises when a property is lease with an option to buy, which cannot really be constituted as a sale, since the title to the property remains with the seller and passes only after the specified purchase price has been paid. Thus the seller and buyer in this case have a landlord tenant relationship, with the landlord remaining the effective owner of the property while the tenant builds equity in the property. In the event the tenant/buyer defaults on the payment of rent, the landlord/seller can have him evicted and this is where the “equitable lease” agreement may crop up. The tenant/buyer essentially requests the courts to rule in his favor, by using its “equitable” powers to declare that a lease agreement is as good as a sale and thereby establish his right to remain in possession of the property2. Under common law, the obligation of the landlord will be to ensure that the tenant has the right to peaceful and exclusive possession of his property and he must not do “anything that substantially interferes with the tenants title to or possession of the demised premises or with his ordinary and lawful enjoyment of the demised premises”3. But, under common law, there are remedies available to a landlord for any breach of contract through non payment of rent and more provisions allowable for the forfeiture of leases. For example, a landlord could unilaterally terminate the contract in the event it is breached. He can also include a specific provisio in the lease that allows for re-entry and unless a waiver exists (in terms of the landlord having collected rent in advance for example) the forfeiture can be executed.4 Therefore the position at common law is that the property is not formally executed over to the tenant as yet and therefore in the event of any breach of contract, the landlord will have the right to re-enter and take possession of the property5. But under equity, where a formal contract exists and there is an issue of dispute between landlord and tenant, such as in non payment of rent for example, the landlord cannot as easily take over the property because the question of equitable interest will endow the tenant with some rights to possession of the property and the right to re-entry of the landlord may be restricted. Common law provisions allowing remedy for breach of contract will have to factor in the equitable interest of the plaintiff and may limit the landlord’s remedies. In determining whether the buyer/tenant has a valid cause of action, some of the factors that may be taken into consideration by the courts are: (a) How long has the tenant lived on the property? (b) What does the deed for the property look like – is it more like a lease or more like a contract for deed? (c) How much money did the buyer put down? (d) What is the extent of the tenant’s default? (e) How much difference exists between the buyer’s option price and the current market price? Many of these principles were originally established in the case of Walsh v Lonsdale in which conversion of property on the basis of equitable interests first arose. Equity vs Common law: The early developments in law had created two separate streams – common law and equity. The significant legislation that commenced the mingling of the streams of common law and equity was in the Judicature Acts of 1873 and 1875, wherein the two distinct court systems- the courts of equity and the courts processing common law merged so that there was one Supreme Court6. In this connection, Sir George Jessel clarified that the main object of the Acts was not the fusion of common law and equity, rather it was done with the idea of fusing into one tribunal all actions that came before the tribunal from the point of view of administration7. But in the case of United Scientific Holdings Limited v Burnley Borough Council8 (1978) AC 904, Lord Diplock’s indication on equity and common law, was as follows: “two systems of substantive and adjectival law formerly administered by courts of law and courts of equity….were fused…the confluent streams of law and equity have surely mingled now.” However, does this mean that the two systems of law have in fact fused? Judicial opinion in this context appears to support the proposition that common law and equity in the case of such equitable principles have effectively fused already.9 This was also the view shared by Lord Goff in the case of Napier and Ettrick (Lord) v Hunter 10 in which he stated: “No doubt our task nowadays is to see the two strands of authority, at law and in equity, moulded into a coherent whole.” It may be noted that where trusts in land are concerned, there is a distinct separation of the legal interest in a property vis a vis the beneficial interest. Therefore, under the common law, the title of the property would vest with the owner, while the tenant’s beneficial interest in the land will not entitle him to possession until formalities are complete, unless there is some compelling overriding interest. Under equity however, beneficial interest can determine possession as laid out in Walsh and there is no distinction between common law and equity, because equity will override common law. According to Section 41 of the Land and Property Act of 1925, there is a provision that: ‘stipulations in a contract, as to time or otherwise, which according to rules of equity are not deemed to be or to have become of the essence of the contract, are also construed and have effect at law in accordance with the same rules’. Thus there is a clear indication here that a rule of equity must be adopted within the body of legal rules, hence there is no clear distinction that may be made between equity and common law principles and there is inevitable tension between the two. The case of Walsh v Lonsdale: The case of Walsh v Lonsdale10 (1882) 21 Ch D was one of the first cases to be heard after the Judicature Act that in effect set up and in the case of a lease, George Jessel MR stated clearly as follows: “there are not two estates as there were formerly, one estate at common law by reason of the payment of rent from year to year and an estate in equity under the agreement. There is only one court and the equity rules prevail in it.” Thus, in this case, George Jessel MR has held that equitable interest will override common law on the issue of possession rights and conversion of the property. Moreover, the Land registration Act, by including over riding interests has in effect, treated the two systems of equity and common law almost as one and the Land Registration act of 2002 has also allowed certain interests in land by not recognizing much distinction between the two, thereby allowing rights to title for those adversely possessing land, which under common law would be actionable through other remedies that would rest in favor of the landlord/owner rather than the tenant. Lord Browne Wilkinson has further clarified that the English law is now a single law that comprises both legal and equitable interests , therefore in respect to property, a person owning any kind of property had a right on the property which was a right in rem and was not restricted to a right in personam.11 The impact of Walsh: How does equity conflict with common law? Equity is a function of judicial discretion that started off as a means to introduce some flexibility in common law, however, it has now developed its own set of operative principles. The maxim of equity that was applied in the case of Walsh was that equity looks upon that as done which ought to be done. Therefore in the case of a lease, when there is an enforceable obligation that is implied but which has not yet been formally executed, equity will enforce it as if the obligation has already been completed. While the common law will be rigid in terms of the formalities that are requiring in order to transfer the title and interest on a property, equity will not. Therefore, the positions in common law and equity are different. Common law will not recognize the equitable interest on the land until the due formalities have been completed, hence under common law, a contract for a sale/lease will become completely enforceable with title reverting to tenant only after all formalities have been completed. However in equity, the beneficial interest of the tenant will significantly impact upon his/her rights to possession and conversion of the property. In the case of Walsh v Lonsdale, the principle outlined above was applied by stating that a specifically enforceable contract to grant a lease will be treated in equity as if it was a lease, even if there is no deed and/or registration. However the conditions laid out are as follows: (a) the formalities of a contract must be satisfied in accordance with Section 2 of the Law of property (miscellaneous Provisions) Act of 1989. (It may be noted that by the new Land registration Act of 2002, Section 91 (which is not yet in force) will also have to be satisfied before an enforceable contract is deemed to exist). (b) The contract must be specifically enforceable12, therefore there must be no illegality and the claimant must satisfy the maxim that he must approach the court with “clean hands”13 (c) There must be a breach of the terms of the head lease. Moreover, further to Walsh, on grounds of proprietary estoppel (which is again a development in equity), there could be grounds for the existence of a lease even when there is no contract. The recent rules on adverse possession that have come into effect with the new Land Registration Act of 2002 provide an indication of the manner in which such proprietary rights will operate in equity. Thus, in effect, the formalities required under common law are abrogated through equity, undermining the operation of common law. The principles laid out in the Walsh case underlying the doctrine of conversion have created tension and conflict in the area of conversion of the equity in land into personalty through an agreement for sale, even if the land had not yet been sold. This has created conflicts in ownership and the determination of the various interests that may exist on the land and the question of personalty, posing the dilemma of determining who exactly will have an overriding interest on the property. For instance, in the case of Williams and Glyns Bank Ltd v Boland14 , a trust for sale meant that the defendant had an equitable interest in a property, while the bank as the mortgagee of the legal estate also had an interest as the legal owner. In determining the question of whether or not Mrs Boland had an overriding interest15, the issue of conversion arose. Had her interest already been converted to personalty or did she have an interest in the land, which would entitle her to an overriding interest under the LPA? Thus the doctrine of conversion mooted in Walsh has created conflicts by blurring the boundaries in conveyancing and the assignment of equitable interests, especially in cases where a sale had not actually taken place( as in a sale/lease agreement) and where equity’s maxim of enforcing what should be done as actually having occurred results in a situation where rights that are being protected in land may not yet formally exist. Thus in the case of Williams, it was held that the Walsh doctrine should be applied only to the extent that conveyancing is to take place immediately and it should not be extended into other areas. The Trusts of Land and Appointment of trustees Act of 1996 has replaced the trusts for sale of land with trusts for power of sale. This is a compromise between the rigid position of common law that deems a conveyance as having been completed only when formalities are completed as opposed to a purely trust based equitable principle perspective which will assign the interests even before the land is sold and merely on the basis of an agreement. Therefore under the TLATA16 the interest in the land will remain a mere interest and will not be enforceable until the power is exercised and has been made applicable to all trusts in land. One modern case that has brought up the tension between equity and law in the modern setting is that of Tinsley v Milligan17 (1994) 1 ACV 340. This case dealt with the issue of the title to the property being affected by illegality, which would have invoked action on the basis of violation of the common law. However in this case, it was held that the equitable interest in a property means that a claimant can exercise his/her right on a property even when they have been acquired illegally, provided the evidence on illegality is not a requirement in order to establish title. . Does the maxim, “he who comes to equity must come with clean hands” apply in this case? In this case, the defendant took up the title of the property in order that the other woman could fraudulently claim housing benefits. In a later dispute, the woman with the title sought to evict her partner, but the Court held that the defendant had the right to equitable ownership. Therefore, this case serves to establish that even in instances where the title to the property is associated with illegality, the equitable interest will prevail. Therefore, although the case of Tinsley sought to establish a balance between illegality and unjust enrichment, in effect it has created confusion and more tension between common law and equity by sanctioning illegality in order to uphold the equitable interest. It has been difficult for the precedent set in this case to find wide application. The issue of illegality arose again in the case of Tribe v Tribe12 , where the tenant sought to avoid cost on a series of dilapidations, and in this case the court held that the illegality was not justified and the principle of advancement was not considered appropriate. However, it must be noted that the father (David Tribe) was able to recover the shares in the property in spite of the fact that he had planned a fraudulent act. Common law will not tolerate fraud and this is therefore, yet another instance of conflict between the two areas of law. In view of the Court’s pronouncements on illegality, this case appears to suggest that contrary to juridical pronouncements of Lord Diplock and others, there is still a distinction that exists between common law and equity, and this continues to remain a source of conflict. Conclusion: When equity was first developed, it provided an attractive and flexible option to the rigidity of common law by allowing remedies for those who were unable to obtain it from the law. The advantages inherent in equity are largely due to the fact that it is flexible and can offer creative judicial solutions in the event of disputes, however this area of law has become increasingly regulated and the maxims of equity have increasingly mandated the administration of the equitable rather than the common law remedy in the adjudication of disputes. While common law has formed the basis of the legal system for many years, recent encroachments by equity into all areas of common law are increasing, and recent developments in land law appear to suggest that its influence is growing and posing more conflict with common law. There are several maxims of equity such as coming to the court with clean hands and behaving in an equitable manner and not delaying in the seeking of equity. This is intended to provide a basis wherein the claims raised in the respective cases may be evaluated fairly and decisions rendered in support of the real victims. However, in reality, as the case of Tinsley shows, these maxims of equity may be overridden by judicial discretion in some cases, thereby creating an increasing conflict with common law and blurring the clear distinctions, rules and regulations that exist within the body of common law. There are several measures that have been introduced into property law on equitable principles, such as the recognition of restrictive covenants and proprietary estoppel, including the rights to adverse possession, all of which constitute developments in equity at the expense of common law. An equitable remedy is administration on the basis of judicial discretion and allows a wide latitude in its exercise. As stated by Lord Denning in the case of Hussey v Palmer13 the development of a constructive trust is “imposed by law wherever justice and good conscience require it.” As a result, the determination of equitable rights in a property that are accorded to a tenant who has been on the property for a long time may arise in conflict with the rights of the property owner to evict the tenant from his land and foreclose on the property, which is his right under common law.. Therefore in conclusion, it may be observed that based upon the doctrine that has been laid out in Walsh, equity functions as if the common law principles have already been complied with and to convert property where it is deemed equitable to do so. Despite the fact that common law may require execution of all the terms of a contract before the rights accruing under such contract may be availed of, equity steps in to override this requirement through the Walsh doctrine. Equity deems as enforceable that which has not yet become fully enforceable under common law, because it remains only partly fulfilled and ha snot yet been completed . This is the crux of the impact of the Walsh doctrine in common law, because it has enabled equity to step into those areas which are neither white or black, but gray. Common law hinges upon an all or nothing principle in contract enforcement, but equity enforces as if fully completed, the terms of a contract for sale that are only partially completed. Bibliography Cases: Coatsworth v Johnson (1886) 55 L.J.Q.B. 220; M&B(L) 82 Hussey v Palmer (1972) 1 WLR 1268, CA, Napier and Ettrick (Lord) v Hunter (1993) AC 713 Southwark LBC v Tanner [2001] 1 AC 1 Salt v Cooper (1880) 16 Ch D 544 Tribe v Tribe (1996) Ch 107 Tinsley v Milligan (1994) 1 ACV 340 United Scientific Holdings Limited v Burnley Borough Council (1978) AC 904, Williams and Glyns Bank Ltd v Boland (1981) AC 487 Warmington v Miller (1973) QB 877 Walsh v Lonsdale (1882) 21 Ch D Legislation: Landlord and Tenant (Covenant) Act of 1995 Land Registration Act of 1925 Books/Articles: Ashburner, 1933. “Principles of Equity” 2nd edn, Butterworths at p 18 Lord Evershed in (1948) JSTPL 180 Moffat, Graham Trusts Law: texts and Materials Fourth edition, Butterworths Royle, Richard (2003) Briefcase on Land Law. 4th edn. Cavendish Publishing Read More