Legal and Equitable Interests in Land — SQE1 FLK2 Land Law

Your client completed on Friday. The seller handed over the executed transfer, she paid the balance, took the keys and moved in that afternoon. Her solicitor has not yet sent the application to the Land Registry. On Monday she rings with two questions. Who owns the house at the moment, and can she grant her bank a legal charge over it? The answers are the seller, and no.

She has paid for a house she does not yet own at law, and cannot mortgage. That is the registration gap. This is Legal and Equitable Interests: what makes an interest legal rather than equitable, and what that difference does when somebody else buys the land. Keep your client in mind. We are coming back for her.

Here is the route. First the classification. Then the formalities: deeds for legal estates, and what the courts do to documents that fall short. Then contracts, and what an agreement without a deed is actually worth. Then equitable interests and their much lighter formalities. And finally third party protection, which is where the difference bites.

Start with why anyone cares. A legal interest, properly created and where necessary registered, binds the world. An equitable interest may not bind a purchaser at all unless it has been protected, or the purchaser has notice of it. So the only question a client really asks, will this bind whoever buys next, turns on which side of the line the interest sits.

The line is drawn by s 1 of the LPA 1925. Two estates are capable of subsisting at law: the fee simple absolute in possession, and the term of years absolute. s 1(2) then lists the interests capable of being legal, and it is a closed list. Everything not on it takes effect, by s 1(3), as an equitable interest only.

And here is the half people forget. Being on the list makes an interest capable of existing at law. It does not make it legal. It is legal only if it was also created with the right formality. Get that wrong and a right which could have been legal is equitable instead. That mechanism drives most of the questions here.

So the formalities. The general rule is s 52(1) of the LPA 1925. Every conveyance of land, or of any interest in land, is void for the purpose of conveying or creating a legal estate unless it is made by deed. A transfer of a freehold, the grant of a legal mortgage, the grant of a lease for more than three years: all of them need a deed.

What is a deed? The Law of Property (Miscellaneous Provisions) Act 1989, s 1, gives three requirements. It must make clear on its face that it is intended to be a deed. It must be validly executed. And it must be delivered. For an individual, validly executed means signed in the presence of a witness who attests the signature.

Two failures come up again and again. The first is a document that says nothing about being a deed. A transfer written out carefully, signed and witnessed, is still not a deed if nothing on its face shows it was meant to be one. Under s 52(1) it is then void for the purpose of conveying the legal estate.

The second is signing alone. An uncle who signs a document giving his niece a paddock, with nobody there to witness it, has not executed a deed. And because she gave nothing for it she is a volunteer, so she cannot fall back on equity either: equity will not perfect an imperfect gift.

Companies execute differently. Under s 44 of the Companies Act 2006 a company executes a document in one of three ways. By its common seal. By two authorised signatories, meaning two directors, or a director and the company secretary. Or by a single director signing before a witness who attests. One director signing alone is not enough.

Now try one. A garage is let by word of mouth for eighteen months, beginning at once, at £90 a month, which is the best rent obtainable, and no premium is paid. No deed anywhere. Licence, or legal lease? A legal lease.

That is s 54(2), preserved by s 52(2)(d). Three requirements, and you need all three. A term not exceeding three years. Taking effect in possession, so the tenant moves in at once rather than at a future date. And at the best rent reasonably obtainable, without a fine. Satisfy those and an oral lease is still a legal estate.

Contracts next, and the rule is strict. Under s 2 of the 1989 Act, a contract for the sale or other disposition of an interest in land can only be made in writing. It must incorporate all the terms the parties have expressly agreed in one document, or in each where contracts are exchanged. And it must be signed by or on behalf of each party. An oral contract for the sale of land is void.

So what counts as signed? Firstpost Homes Ltd v Johnson, 1995. A party must actually sign the document containing the terms, with the intention of authenticating it. A name merely typed in the body is not a signature, and signing a different document, there a plan, does not satisfy the section. More recent authority accepts that a name in an email sign-off may do it, where there is an authenticating intention.

But a contract that does comply is worth a great deal, which brings up the classic. Walsh v Lonsdale, 1882. The parties sign a single document containing all the agreed terms. The contract is one equity will specifically enforce. And equity treats as done that which ought to be done.

So an agreement for a five-year lease, signed but never made by deed, is not nothing. There is no legal term. But there is an equitable lease for five years on the agreed terms. As between the parties it beats any periodic tenancy the law would imply from possession and rent. The landlord cannot end it by notice to quit.

Equitable interests arise in four main ways. An express trust, where the legal owner holds for a beneficiary. A resulting trust, where one person provides the purchase money and the property goes into another's name, so equity presumes no gift. A constructive trust, built on the common intention of the parties, inferred from conduct. And proprietary estoppel.

Estoppel has three elements. An assurance that the claimant has or will have an interest in the land. Reasonable reliance on it. And detriment suffered in consequence, such that it would be unconscionable to go back on what was said.

Thorner v Major, 2009. A farmworker worked for his cousin for years for little pay, encouraged by the cousin's conduct to expect he would inherit the farm. The House of Lords held the assurance need not be express or precise. It is enough that it was clear enough in its context. The remedy aims at the minimum equity to do justice.

Formalities for equitable interests are lighter, and there are two to keep apart. Declaring a trust of land needs writing signed by the person able to declare it: s 53(1)(b). Disposing of a subsisting equitable interest needs writing signed by the person disposing of it: s 53(1)(c). Neither needs a deed. Signed writing is the whole of it.

Get it wrong and the disposition is simply void. A woman who announces to the family that her half share now belongs to her brother, and signs nothing, has disposed of nothing. She still owns it.

Then the escape hatch, and it matters more than the rule. Section 53(2) provides that none of that affects the creation or operation of resulting, implied or constructive trusts. So a constructive trust can arise from the parties' dealings with no writing at all. That is what saves the cohabitant who paid towards the deposit and the mortgage but never signed a thing.

Which brings us back to your client. Under s 27(1) of the LRA 2002, a transfer of a registered estate is a registrable disposition, and does not operate at law until the registration requirements are met. Completion does not pass the legal estate. Until she is registered the seller remains proprietor and holds on a bare trust for her, and she holds the whole equitable interest.

So she cannot grant a legal charge, having no legal estate to grant one out of. And note the contrast. In unregistered land the legal estate passes earlier, on execution and delivery of the conveyance, and the buyer then applies for first registration.

Last, third party protection, where all of this pays off. A has an interest. B buys the land. Does B take free? That depends on two things: whether the title is registered or unregistered, and whether the interest is legal or equitable.

Registered land first. Under s 29 of the LRA 2002, a registrable disposition for valuable consideration, completed by registration, postpones any interest whose priority is not protected. So if you hold an equitable interest, enter a notice on the register. Fail to, and the buyer who registers takes free of it.

But s 29 is expressly subject to Schedule 3, the overriding interests, and paragraph 2 is the one that matters. An interest belonging to a person in actual occupation overrides the disposition, with no entry on the register at all. It is why a beneficial interest can bind a bank that lent against the house.

Paragraph 2 has two exceptions, and questions are built on both. First, where enquiry was made of the person with the interest before the disposition and they failed to disclose it when they could reasonably have been expected to. Second, where the occupation was not obvious on a reasonably careful inspection and the purchaser had no actual knowledge.

There is also overreaching, a different mechanism altogether. Pay the capital money to at least two trustees, or to a trust corporation, and a beneficial interest is swept off the land and onto the proceeds of sale. It stops attaching to the land at all.

Unregistered land is where people go wrong, because there are two systems and not one. For interests registrable as land charges, registration has replaced the doctrine of notice entirely. So try this one.

A right of way over a workshop yard is granted in signed writing but not by deed, so it takes effect as an equitable easement. It is never registered as a land charge. The workshop is sold at full value to a buyer who had watched the neighbour using the track and knew all about it. Is he bound? No.

An equitable easement created after 1925 is registrable as a Class D(iii) land charge under the Land Charges Act 1972. Unregistered, it is void against a purchaser of a legal estate for money or money's worth. Midland Bank Trust Co Ltd v Green, 1981. Knowledge is beside the point, however complete. That is the deliberate effect of making registration the test instead of notice.

For interests outside that system, the doctrine of notice survives. A bona fide purchaser for value of a legal estate without notice takes free of prior equitable interests. Legal interests bind regardless. And notice comes in three kinds: actual, constructive and imputed.

Actual notice is knowing, however you came to know, and you cannot escape it by deliberately not asking. Constructive notice is what you would have found on the inspections and enquiries you ought to have made. Someone other than the seller living in the house puts you on enquiry, and Hunt v Luck, 1902, tells you who to ask. Enquire of the occupier. The seller's account of her status will not do.

Imputed notice is your agent's knowledge treated as yours, most often your solicitor's, and it binds you even if he never passes it on. One exception, in s 199 of the LPA 1925: knowledge an agent conceals as part of his own fraud is not imputed.

One last rule, and the most surprising. Wilkes v Spooner, 1911. Once a bona fide purchaser for value without notice takes free, the equitable interest is destroyed. It cannot revive against anyone taking title through him. Not against a later buyer who knows all about it, and not even against a donee. The remedy is against whoever wronged her, not against the land.

A word on how SQE1 tests this. You will not be asked to recite a section number or a case name. You get a scenario, five answers, and one instruction: pick the best. Here the sections do most of the work, and the wrong options are usually a plausible formality attached to the wrong kind of interest.

If you keep only three. s 52(1) with s 53 beside it: a legal estate needs a deed, an equitable interest only signed writing. Walsh v Lonsdale, because a specifically enforceable agreement is an equitable lease and not nothing. And Midland Bank Trust Co Ltd v Green, because an unregistered land charge is void however much the buyer knew.

Four traps. One: capable of being legal is not the same as legal. An easement is on the s 1(2) list, but the one granted in signed writing is equitable, and only the one granted by deed and completed by registration is legal. Read the formality, not just the right.

Two: do not demand a deed for an equitable interest. Signed writing is all s 53 asks, and s 53(2) does not even ask for that where a resulting, implied or constructive trust is involved. Three: completion is not registration. In registered land the legal estate passes when the buyer is registered, not when the keys change hands.

Four: in unregistered land, work out first whether the interest is registrable as a land charge. If it is, notice is irrelevant and the only question is whether it was registered. If it is not, the doctrine of notice governs and the buyer's knowledge is everything. Then a habit for the exam. Name the interest, name the formality it needed, and only then ask who is bound.

Quick check. A woman holds five rights. A beneficial share in her brother's house, from paying part of the price. A right of way over a neighbouring farm, granted by deed and completed by registration. The benefit of a covenant restricting building on the field behind her house. A signed contract to buy a plot next year. And an uncle's assurance, relied on for years, about his workshop.

Which is capable of existing as a legal interest? Three candidates. One: the beneficial share, because she provided part of the price. Two: the benefit of the covenant, because it controls what may be built. Three: the right of way, granted by deed and completed by registration. Pause here if you want a moment.

The answer is three. Only the interests listed in s 1(2) of the LPA 1925 can be legal, and then only if created with the right formality. An easement held for an interest equivalent to a fee simple absolute in possession, or a term of years absolute, qualifies. But it must be granted by deed and, the title being registered, completed by registration.

Option one fails because a beneficial share under a trust is not capable of subsisting at law at all. Option two fails because the benefit of a restrictive covenant is not on the s 1(2) list either. Nor are the remaining two: an estate contract and an estoppel claim were never capable of being legal.

Five things to take away. One: s 1(2) is a closed list, and by s 1(3) everything off it is equitable only. Two: being on the list is half the test, because the interest is legal only if it was created with the right formality.

Three: a deed for a legal estate, signed writing for an equitable interest, and s 53(2) means no writing at all where a constructive or resulting trust does the work. Four: completion does not pass the legal estate in registered land, which is why your client could not mortgage the house she had paid for.

Five: in unregistered land, ask whether the interest was registrable as a land charge before you ask what the buyer knew. If it was, and was not registered, it is void against him. Next time, Registered Land.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.