Notes and Questions 14.1

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exemption by equity from the fundamental principle that once a property interest comes into existence it should not be set aside in favour of later interests. The doctrine of notice should therefore be seen as a compromise solution, a balance struck between conflicting needs to preserve pre-existing entitlements and to provide the certainty necessary for an efficient market in property interests to operate. This explains the requirement of good faith and the fact that the exemption extends only to purchasers. If the only justification for disturbing pre-existing entitlements is to promote marketability, there is no reason in principle to favour donees (they are not players in the market) nor those who act in bad faith (markets can operate well enough without them). The issue then becomes one of drawing the balance between equitable interest holders and good faith purchasers, often both innocent victims of a fraud or deception perpetrated by a seller who has a pre-existing proprietary relationship with the equitable interest holder.

In Pilcher v. Rawlins (1871–2) LR 7 Ch App 259 (Extract 14.1 below), the court took the view that, if the good faith purchaser neither knew nor had the means of knowing about the prior equitable interest (i.e. was without notice in the technical sense we consider below), a court of equity had no jurisdiction to interfere with the legal title he had acquired from the seller. The purchaser’s conscience was not affected in any way and so equity had no grounds for intervening. But it is worth noting that the court considered that to be the correct outcome not only as a matter of jurisdiction but also as a matter of fairness. If anyone could be said to be at fault here apart from the dishonest trustee, they said, it must be the person who initially chose to enter into an ongoing property relationship with a trustee who turned out to be dishonest, rather than the complete stranger who later comes on the scene.

However, it is clear even from Pilcher v. Rawlins (and overwhelmingly confirmed by later cases) that the court of equity did not intend the doctrine of notice to be a flexible doctrine, to be applied only after balancing levels of fault on the part of each interest holder in each case. That would largely remove the benefit of certainty of outcome that the rule was indeed to provide. The doctrine of notice is intended to be inflexible, so that purchasers and interest holders know in advance what they need to do in order to safeguard their respective interests. The fairness and effectiveness of the doctrine need to be assessed with this in mind.

14.3.1. Notice

This is central to the doctrine. ‘Notice’ bears a special meaning here. As pointed out in Pilcher v. Rawlins, it covers not only what the purchaser actually knows (actual notice) but also what he should have known (constructive notice) and what any agent of his knows or ought to have known (imputed notice). The modern formulation appears in section 199(1)(ii) of the Law of Property Act 1925:

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Occupation has a dual role in the concept of constructive notice as it applies to purchasers and mortgagees of land. There is a general rule, sometimes referred to as the rule in Hunt v. Luck, that purchasers and mortgagees of land have constructive notice of the interests of anyone who is in occupation of the land (assuming the occupation is reasonably discoverable, as we see in Kingsnorth Trust Ltd v. Tizard). This is because, as noted above, it is not unnaturally assumed that any reasonable person buying or taking a mortgage over land would actually go and look at it (or at least send an agent), and the presence of someone other than the seller in occupation of the land should alert them to the possibility that the occupier might have rights in the land.

However, although the courts have traditionally seen this as the rationale for the rule in Hunt v. Luck, this favouring of occupiers over purchasers can also serve to mark the distinction between those who value their interest as thing and those who value it as wealth (adopting Rudden’s terminology, as discussed in Extract 2.3 above). In other words, people who have an interest in land that they also occupy are those most likely to regard the monetary value of their interest as an inadequate substitute for the interest itself (consider, for example, the case of Mr and Mrs Flegg in City of London Building Society v. Flegg, extracted at www.cambridge.org/ propertylaw/). Purchasers, on the other hand, can usually be compensated in money terms if they have to take subject to a prior interest. In any case, where the issue is whether a particular interest is enforceable against a particular purchaser or mortgagee, the loser will nearly always be entitled to claim damages from the seller in compensation. Since damages would generally be adequate compensation for a purchaser or mortgagee but inadequate compensation for the priorinterest holder who is in occupation, this provides an additional justification (in theory at least) for a general rule that purchasers and mortgagees take subject to the interests of prior-interest holders in occupation. In practice, in unregistered land this argument has an air of unreality about it because such cases tend to arise where the seller/mortgagor has disappeared or is insolvent, so that there is no prospect of anyone recovering anything from her. However, we return to this argument in Chapter 15 in the context of registered land, where the existence of a state indemnity fund opens up the possibility of alternative ways of compensating the loser.

14.3.2. Good faith

In order to take advantage of the doctrine of notice, a purchaser must show not only that he had no notice of the interest but also that he acted in good faith. In Midland Bank Trust Co. Ltd v. Green [1981] AC 513, Lord Wilberforce confirmed that this requirement is indeed separate from and additional to the requirement that the purchaser must be without notice. In the context in which it was said, it makes sense. Lord Wilberforce was considering whether a requirement of good faith should be imported into the Land Charges Act 1972 so that a purchaser who would otherwise have taken free from a prior interest (i.e. because it was not