Priority of interests

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The law relating to interests in land (see interest in land) is complicated by the fact that many Legal Estate In Land are the subject of a number of distinct interests. For example, a particular piece of land may have the following interests, all running concurrently:

  1. an estate in fee simple, that is, a freehold;
  2. a Lease granted out of the freehold;
  3. a mortgage of the freehold by way oflegal charge;
  4. a contract to grant a mortgage of the lease (which may amount to an equitable lease);
  5. the burden of arestrictive covenant prohibiting the use of the land other than as a dwelling;
  6. the burden of an Easement of access preventing the proprietor(s) blocking shared passageways over the land;
  7. and so on

When land changes ownership, or when the prioprietor gets into financial difficulties and seeks to settle his creditors out of the proceeds of his land, questions very frequently arise about which interests take priority over which others. In many cases there is no real difficulty -- the rules are clear for simple cases. However, in complicated situations it rapidly becomes obvious how complex the rules on priority really are. MacKenzie and Phillips Textbook on Land Law (9th ed.), an elementary textbook, devotes 17 pages just to a discussion of the priorities of mortgages. In the Law Commission report Land Registration for the 21st Century, the authors report that the law relating to priority will not be changed substantially by the LRA2002, then take 20 pages just to explain what the changes are. In short, the law relating to priority of interests is complicated. Moreover, there are many questions concerning priority that we just don't know the answer to, because the issues have not be aired in court and the legislation is not clear enough.

The article attempts to explain the basic principles. It covers both RegisteredLand andunregistered land. The particular issues relating to mortgages -- which are covered by specific statutory provisions -- are dealt with in the article priority of mortgages. In general, the LRA2002 has made relatively few changes to this area of law. The main change is a general principle that interests of equal intrinsic priority will have their priority determined by the data of creation; this means that where previously we would have said where the equities are equal, the general principle now is that it does not matter whether the 'equities are equal' or not.

Registered land

In registered conveyancing, three classes of interest are recognized: interests created by registered disposition,overriding interests, andminor interests. So we must consider the following situations:

  1. Registered dispositions against other registered dispositions
  2. Overriding interests against registered dispostitions
  3. Minor interests against registered dispositions
  4. Overriding interests against other overriding interests
  5. Overriding interests against minor interests
  6. Minor interests against other minor interests

Registered dispositions against other registered dispositions

Registered dispostions include sale of the interest outright, creation of a long (i.e., registerable) lease, and creation of alegal charge. In practice, only the last is an issue of priority. A person who sells his legal estate twice has nothing to sell to the second buyer. A person can create multiple leases, so long as they don't overlap. There are rules about what happens if they do overlap (see lease of the reversion), but no issue of priority is involved. So we only need to consider registered charges.

The priority of legal charges is determined by the order of their registration. The order of creation is irrlevant. Example: freehold owner P grants a mortgage by deed to Q, then immediately a further mortage by deed to R. Both these mortages take effect as minor (equitable) interests until they are registered. Suppose R registers first by creating alegal charge. This constitutes a registered disposition. Q's interest is therefore postponed to R, even though Q's mortgage was created first.

Overriding interests against registered dispositions

An overriding interest (other than the grant of a short lease) takes priority over an interest created by a later registered disposition. This is no more than a the definition of 'overriding'. If the later registered disposition is a mortgage, then that mortgagee's interest is postponed to the owner of the overriding interest. Example: P's land is subject to the burden of a legal easement arising by Prescription. The easement is not entered on the register. P transfers his land to Q. Q is subject to the easement, whether or not he knew of it.

Minor interests against registered dispositions

A minor interest supported by an entry on the register takes priority over a later registered disposition. This is a straightforward application of the principles of land registration in LRA1925 and LRA2002. Example: P enters into a restrictive covenant in favour or Q, then creates sells his estate to R. P's covenant is enforceable against R, whether or not he knew of it (he should have known of it, if he did the conveyancing properly).

A minor interest that is not registered does not take priority over a later registered disposition for valuable consideration. Again, this is simply the definition of a 'minor interest'. Example: P grants a long legal lease to Q, then separately grants Q an option to purchase the freehold for a consideration of £1. P then sells the land to R. If Q did not register his estate contract as a notice or caution against P's title, he loses it completely to R.

Overriding interests against other overriding interests

The grant of a short lease does not take priority over earlier overriding interests. A lease that is too short to be substantively registered, although an overriding interest, takes effect as a registered disposition (s.19(2) LRA1925). This provision is intended to make the grant of a short lease have the same consequences as the grant of a long lease -- both are leases, even though they are not both registerable. Example: P enters into a restrictive covenant with Q, which is entered against P's title as a notice; P then grants a short lease to R. R is subject to the restrictive covenant, even though normally an overriding interest would take priority over a minor interest.

The assignment of a short lease has the same effect as the assignment of any other overriding interest. Note that the words of s.19 refer to the 'grant' of a lease, and are silent about what happens when the owner of a short lease assigns it to someone else. Example: P grants a short lease to Q out of his freehold. Q enters into a contract with R to assign the lease, then changes his mind and assigns to S for valuable consideration. S takes the lease free of R's rights under the estate contract with Q. How can R protect his rights? He can't enter a notice against anything, because the lease he wants to enter it against is unregistered. The inescapable conclusion is that R's only form of protection is to enter a class C(iv)land charge against Q. In other words:

The assignment of an overriding interest is subject to the same priority rules as that of unregistered land. At least, this is the interpretation favoured by the Law Commission. An overriding interest, by definition, cannot be registered anywhere, against anyone's title. Conequently, if it amounts to an interest in land, it is an interest in unregistered land. Having said that, the short lease is probably the only form of overriding interest that would ever be assigned in such a way as to raise the suggest of aland charge.

Overriding interests created earlier in time have priority over those created later. If this were not the case, then the person who takes the benefit of an overriding position would be in a better positin than the person who takes the benefit of a legal estate (a registered disposition is subject to earlier overriding interests). Presumably, the rule about equality of equities applied here as well, until the LRA2003 came into force.

Overriding interests against minor interests.

An earlier minor interest takes priority over a later overriding interest Although there is no clear authority, this is believed to follow from general principles embodied in the LRA1925. An overriding interest is, by definition, one that overrides a registered disposition. There is nothing about an overriding interest that is intended to override any other kind of interest. This applies whether or not the minor interest is registered. Example: P1 and P2 holds freehold land on trust for Q. After 30 years, an easement arises by prescription in favour of neighbour R. R cannot enforce the easement against the beneficiary Q, because their minor interest has priority.

An overriding interest takes priority over an earlier unregistered minor interest when there is a disposition of the legal estate. This, again, follows from general principles -- the disposition supresses any unregistered interests, but does not affect overriding interests. Consequently, the overriding interest is retained, over a higher priority minor interest which is lost. Example: in the situation above, if P1 and P2 sell their legal title to S, Q's interest is lost, and R can now enforce the easement.

Minor interests against other minor interests

Where the interests arise from disposition of beneficial interest, priority is determined by notification to the trustees. This is rule in dearle v hall (1828), as extended by s.137 of the Lpa (1925). Example, if P is the beneficiary of atrust of land, and he mortgages this interest to Q, then assigns it to R, whether the mortgagee Q can enforce against R depends on whether he notified the trustees before R did. Note that this situation does arise occasionally in practice. P cannot create a legal mortgage, as he does not own a legal estate. Consequently none of the usual methods of protecting the priority of a mortgage is available to Q.

Except for beneficial interests, priority is accorded by the order of the interests' creation. Until the LRA2002 came in to force, we would have said Where the equities are equal, the first in time prevails. Where the equities are not equal, such as where the owner of the earlier interest has obtained it fraudulently, or been negligent in its protection, then the court may have allowed a later interest to prevail. However, because this rule applies whether or not the minor interest is registered, it is not negligent to omit to register it.

Unregistered land

Here we must consider three classes of interest: Legal interests other than the puisne mortgage, Interests that may be registerable as LandCharges (which includes the puisne mortgage), and other interests. By a process of exclusion 'other interests' must include beneficial interests that do constitute land charges, such as an interest under atrust of land. Again, there are special rules relating to mortgages: see priority of mortgages.

Legal interests against equitable interests other than registerable land charges

A legal interest takes priority over an equitable interest, regardless of the order of creation. Legal interests are good against the world. That is, legal interests (except apuisne mortgage) take priority over equitable interests. Example: P grants a legal lease by deed to Q, then grants a mortgage over his freehold in favour of R, by depositing the title deeds with R. R can enforce his rights against the lessee Q, because Q has a legal interest.

Legal interests against land charges

An interest registered as a land charge takes priority over a conveyance of the legal estate. For example, if P creates an equitable mortgage in favour of Q, and Q registers this interest as a (class C(iii)) land charge, and then P sells his legal estate to R, Q can enforce the mortgage against R.

An unregistered class C(iv), D, or F charge takes priority over a conveyance of the legal estate except for money or money's worth. For example, if P contracts to sell his legal estate to Q, then sells it instead to R, Q's estate contract is not enforceable against P. However, if R inherited the estate, the mortgage would be enforceable.

An unregistered class C(i), (ii) or (iii) charge takes priority over a conveyance of the legal estate for value. 'Value' includes marriage consideration.

Everything else

Equitable interests are enforceable against everyone exception abona fide purchaser without notice. This does not apply to interests that are registerable as land charges.

Where the equities are equal, the first in time prevails. Where the equities are not equal, a court may give priority to a later interest.

Land and Property Law