Sale of Joint Property When There is a Caveat - Case Study Example

TO: Senior Partner, Rachel Fleming FROM: Solicitor, Fleming & Wright Lawyers DATE: May 1, 2013 FILE NO: FWL/2013/06/15 RE: Sale of Joint Property when there is a Caveat FACTS: Lisa Brooks jointly purchased a house in Central Queensland with her de facto partner, Ryan Hume. The property was acquired in the name of Lisa’s florist company known as Sweet Temptations Pty Ltd. Her partner Ryan is a builder and has carried out renovations through his company called Hume Builders Pty Ltd. Ryan provided Lisa with invoices which reflected materials at cost. Lisa Brooks paid the invoices until she ran out of money and Ryan had to pay third parties a total of $30, 200 for services connected to the renovation. Ryan claimed that he had an equitable interest on the property and lodged a caveat on the property. The relationship between Lisa Brooks and Ryan has broken down and she wants to sell the property and move to Brisbane as her business has flourished and she wants to diversify into event management. Meanwhile Ryan has become very needy; he is suffering from stomach cancer as well as mental illness because his building business is facing liquidation. ISSUE Can Lisa Brooks sell property acquired in a joint venture with Ryan Hume in light of the fact that Ryan Hume has lodged a caveat on the property claiming he has an equitable interest? CONCLUSION Case law has incorporated equitable principles to establish that when property acquired by two parties in a joint venture is registered in the name of one of the parties, the party in whose name the property is registered acquires a legal interest in the property and holds an equitable interest in trust for the other party. In this case, Lisa Brooks possesses the legal interest to the house in Central Queensland but holds Ryan Hume’s equitable interest in the house in trust for him. She cannot therefore purport to sell the property on her own even if there was no caveat. Our client should make an application to the court for orders for sale of the property and division of the proceeds of the property in the ratio of the contributions that the parties have made towards the acquisition and renovation of the property. DISCUSSION General Principles Regarding Equitable Interests Equity is a legal system that came to remedy the deficiencies of common law. There are two types of interest in property: Legal interest and equitable interest1. Common law only recognized legal interest in property but equity stepped in to remedy the deficiencies through equitable interests to guarantee justice and fairness. It is important to put in writing agreements relating to ownership of property. In Khory V. Khouri2, Bryson JA stated that it must be apparent to any adult involving ownership of something important such as a home should be put in writing as the law requires that reasonable people must consider their own interests. Unfortunately people do not approach land and property deals with the seriousness or some people are ignorant about the legal requirements. It would therefore be unjust to recognise only the legal rights and interests that have been reduce in writing. Equitable relief is availed to aggrieved parties who fail to reduce their agreements into writing or those who fail to follow any other formal procedure. Those seeking equitable relief must however follow the relevant maxims and principles of equity. Assurances of land shall not be valid to pass an interest at law unless they are in writing and signed by the person making the assurance3. The law further provides that no interest in land can be created or disposed except in writing signed by the person conveying or creating the interest. The provision does not however affect the operation or creation of implied, resulting and constructive trusts.4. Dealings not registered in the manner provided for by the act cannot therefore pass any interest or estate in any land or render the land liable as security for payment of any sum of money. Equitable Relief When there is an undocumented agreement between the client with a friend or a business associate involving acquisition of any interest in land, as is the case between Lisa and Ryan, the first thing is determination whether there is a contractual agreement between the parties5. The aggrieved party may rely on the equitable doctrine of part performance. The high court of Australia has held that mere payment of the purchase price cannot be regarded as part performance under Australian law6. The fact that Ryan paid the remaining $ 30, 200 to third parties cannot therefore amount to part performance of the contract. The court further held that acts of performance need not be acts that the contract specifically requires must be done; they include any acts related to use of tenure of the land and those related to possession such as carrying out improvements7. Ryan renovated the house which amounted to an act of performance of the contract on his part. Contracts can be implied partly or wholly from the conduct of the parties to the contract8 Equity will not allow a Statute to be used as a Fraud Jurisprudence has established that equity will not permit use of a statute as an instrument of fraud. The maxim demands three requirements: certainty of intention; certainty of subject matter; and certainty of object9. The maxim creates a trust where property is held by one party on behalf of another when there is an express agreement that is not reduced to writing. Lisa and Ryan expressly agreed to purchase and renovate a house in Central Queensland together even though the agreement was not reduced into writing. Even though the property was registered in the name of Lisa’s company she holds Ryan’s interest in the property as a trustee. In ISPT Nominees Pty Ltd v Chief Commissioner of State Revenue10, Barrett J held that the aggrieved party claiming beneficial or equitable ownership of land may prove that the land was conveyed as a trust and is entitled to a declaration that the other party holds the land in trust even if the statute of frauds has not been breached. The doctrine applies when the owner of the legal interest asserts sole and absolute ownership of the property so as to defeat the beneficial or equitable interest of the other party. Courts do not interpret the word fraud in literal terms. Fraud may be construed by insistence of the legal owner on absolute ownership of the property so as to defeat the rights of the other party11Fraud is not limited to dishonest conduct as it is defined in equity as any conduct that is offensive to the conscience of the offended party. In Calverley v Green12, it was held that where two people contribute unequal amounts of money or shares towards the purchase of a property but the property is conveyed in both their names, equity presumes that the parties hold the legal estate as trustees for themselves as tenant in common in proportional shares to their contribution. In Ryan v Dries13, it was held that purchase money includes both the incidental expenses and the purchase price. In the case, the court defined purchase money as the total money spent on purchase and repair or renovation of the property. In Currie v Hamilton14, the court held that if the parties take a joint mortgage to purchase a property then the loan amount will be treated as equal contribution by both of them. Payment of outstanding amounts by one party does not affect the legal or equitable interest of the other party. Presumption of a Resulting Trust Joint acquisition of a property can lead to presumption of a resulting trust. A resulting trust is implied by the court when the court determines that one party holds property for the beneficial interest of the other party15. It is however possible for a party to rebut the presumption of a resulting trust. In Nelson v Nelson16, the High Court of Australia ruled that the presumption of advancement can rebut the presumption of a resulting trust. The court defined the principle of advancement to mean that in equitable relationships, any benefit that accrues to one party at the expense of the other party may be recognized as the legal interest is more advanced than the equitable interest and has to be given priority in some cases. Constructive Trust The court may also identify a constructive trust based on common intention. The three essential elements of a common intention in creating a constructive trust were established by O’Bryan J in Hohol v Hohol17. He held that the first element is that the parties must have formed a common intention of joint ownership of the property at the time of purchase and it may be in form or express words or it may be implied from the parties’ conducts. The party claiming a beneficial or equitable interest must show that the other party has acted to his or her detriment; and the third element is that it would be fraud for the other party to assert that the aggrieved party does not hold a beneficial interest in the property. Common intention may also arise after acquisition of the property and maybe inferred from conduct of the parties where there is no written agreement18. Constructive Trusts in De Facto Relationships The recent development in Australian equity and trust law is a constructive trust based on a failed joint endeavour established to cater for de facto relationships. The constructive trust was established in Baumgartner v Baumgartner19, which established the general equitable principle to restore to the contributions made by a party to a joint venture which fails if contributions were made in circumstances in which there was no intention for the other party to enjoy them. In such constructive trusts there is no need to prove existence of a common intention. The parties must however show: that there was a joint venture between them; that the claimant contributed some amounts to the property for the purpose of that joint venture; that the joint venture failed and that ownership of the property is disproportionate due to the contributions; and that it would be unconscionable if the party holding the legal title of the property or the disproportionate part to claim all the rights to the property. In such constructive trusts, the court is flexible to determine the remedy. For instance in Baumgartner v Baumgartner, the Australian High Court ruled that equity favours equality and considered the proportion of resources that the parties had contributed towards acquisition and maintenance of the property. The court determined that the parties had made contributions to the property in the ratio of 55: 45 and made the following orders; A declaration that both that the appellant held the legal interest in the property for himself and held the equitable interest in trust for the other party in the ration of 55: 45; An order for sale of the property; a declaration that each party was entitled to receive a certain amount from the proceeds of sale in the respective ratio of contributions ; and a declaration that each party was entitled to have lien over the money realised from the sale in order to secure the entitled amount. In Muschinski v Dodds20, the court held that the jointly acquired property should be sold and the parties should be repaid amounts from the sale of the property in their respective contributions. If Lisa purports to sell the property on her own, the doctrine of equitable estoppel will operate here to stop her. Summary When the case law from the Australian High Court is evaluated and analysed, it is clear that acquisition and renovation of property in a situation where parties are in a de facto relationship and where circumstances have led to failure of the joint venture leads to creation of a constructive trust. Under a constructive trust, it would be unconscionable and unequitable for the party who holds the legal interest in the property such as our client to sell the property alone in disregard of the equitable interest of the other party. Recommendation Since Lisa wants to sell the property and the other party has lodged a caveat on the property, the most appropriate step would be for our client to file a suit in court seeking sale of the property on the grounds that the joint venture has failed and the de facto relationship has broken down. The court will lift the caveat and issue orders for the sale of the property. The proceeds from the sale will be divided between our client and Ryan Hume in ratio of their contributions to the acquisition and renovation of the property. After receiving her share, our client can move to Brisbane. Due to the fact that Ryan Hume is mentally ill, the court will appoint a trustee to hold his share of the proceeds in trust for him. Read More