Legal interests and equitable interests compared

Discretionary nature of equity

The fact that a right is recognised only in equity and not law is of practical significance, since all equitable rights are enforceable only at the discretion of the court. Thus although, since the Supreme Court of Judicature Acts 1873 and 1875, the rules of law and equity have both been administered by the same courts, it is still important to know whether one is dealing with a legal interest or an equitable interest. One has no absolute right to the protection by the courts of an equitable interest-remedies are at the discretion of the court.  In this context the old equitable maximum, that ‘he who comes to equity must come with clean hands,’ is of great importance. A person may be able to show that he has an equitable interest in land, but this would be of little use to him if he has ‘dirty hands’ and accordingly would be refused any remedy by the courts. For example, if he claims to have an equitable easement entitling him to walk across another estate owner’s land, he may find that he is refused a remedy to enforce his right of way if he has behaved improperly himself. Legal rights, however are enforceable as of right, and once the existence of the right is established it is not really open to the court to consider the merits of the situation before giving a remedy. Thus, if a person with a legal easement causes damages, the land owner may be able to claim compensation but the easement will still be enforced by the courts. 

Enforcement against third parties

  • A major difference between legal and equitable rights used to be found in the rules governing the enforceability of those rights against a third party, for example, against the purchaser of the estate which is subject to the rights. Thus while a legal easement over a piece of land could be enforced against a purchaser of land might not be enforceable against certain purchasers.

  • This was a rule which had its origins in the separate evolution of law and equity. Legal rights were said to be rights in rem; that is, rights in the land itself and hence generally could be enforced against any person who acquired an estate or interest in the land. This was expressed by saying that legal rights were ‘good against the world.’

  • By contrast, equitable rights were only rights in personam; that is, rights which were enforceable against certain categories of person, because it was considered to be fair or equitable that they should take subject to them. The rule which applied to equitable interests was that they bound everyone who took the legal estate except a bona fide purchaser for value of that legal estate without notice of the equitable interest. This rule is commonly referred to as the ‘notice rule.’

  • The origins of the notice rule derive from the case Maitland, Equity (1936) at pp. 112-115.  The court of Chancery worked through the list of people who might acquire the legal estate from a trustee: which of them in fairness should be bound by the beneficiary’s rights? Over the years, the courts decided that that it would be fair to enforce such rights against: those who inherit from the trustee; those who take the property from him as a gift (‘donees’); and those who buy the property from him either knowing about the beneficiary’s rights or deliberately closing their eyes to them.  At the end of this development, there was just one person against whom it would not be fair to enforce the beneficiary’s rights: someone who buys the legal estate in ignorance of the fact that it is trust property, despite having made all the appropriate enquiries, i.e. to use the technical phrase, the bona fide purchaser of the legal estate for value without notice. Although Maitland explains the doctrine of notice by reference to the trust, the courts applied it to all equitable interests.