Failure to observe formalities can lead to danger

Formal records are useful when dealing with land ownership to minimise risk of legal battles

PUBLISHED : Tuesday, 23 April, 2013, 12:00am
UPDATED : Tuesday, 23 April, 2013, 4:13am

If land law brings any image to mind, it might be that of a pile of title deeds. Formality has a very important part to play in land law. When it comes to something as expensive and important as land, certainty is important.

Having your name on the title deeds of a property allows you to prove you are the owner. For that reason, it is not usually possible to create or transfer an interest in land without some form of written instrument.

The instrument must also be registered at the Land Registry to create a further layer of transparency as to who owns a given piece of real estate. We rightly expect land ownership to be a matter of written record.

Sometimes, though, it might seem unjust to insist on formality. A might agree that B will be part-owner of a property even though only A's name will appear on the title deeds. A and B might be spouses, a cohabiting couple, a man and his mistress, family members, co-investors or just good friends.

But this agreement should be recorded in writing, in line with the emphasis on formality when it comes to land ownership. A failure to do so can mean that the parties' agreement or expectations will not be legally protected. If, however, B contributed to the purchase price or mortgage payments or suffered some other detriment through reliance on the agreement, it would not be fair to allow A to "escape" due to the failure to observe the formality or registration requirements imposed by land law.

There is a tension here between the values promoted by the need for a written record on the one hand, and a sense of fairness on the other.

In these cases, the law often holds A to the agreement despite its informality. When it does so, B is said to have an equitable or a beneficial interest in the property. A holds the property on trust for himself and B.

Quantifying the parties' interests in these cases can be tricky. Ideally, they would have agreed on how ownership is to be shared between them. Otherwise, the courts have to decide who owns what.

In this respect, the relative contributions of A and B to the purchase price or mortgage payments can be a useful guide in some cases, but not all. That is, if B contributed half of the purchase price then it can sometimes be inferred that B has a half share in the property.

But what of third parties who, for example, buy the property from A? Should they be affected by the agreement with B, in effect stepping into A's shoes as trustee of the property? Or do they take the property free of any rights that B may have? The same might be asked of a lender to A, who has taken a charge over the property as security for the loan.

Here the tension between the expectation that formalities have been complied with and fairness to B is even more acute. Giving effect to the informal agreement means that the title deeds (on which buyers or lenders reasonably rely) tell only part of the ownership story.

In general, the buyer or lender is not affected by A's agreement with B as long as the buyer or lender gave some kind of value to A and neither knew nor could reasonably be expected to have known of A's agreement with B.

Professor Michael Lower of the Faculty of Law at Chinese University teaches and researches land law