UNIT 2: PRIORITY AND THE DOCTRINE OF BONA FIDE PURCHASER FOR VALUE WITHOUT NOTICE
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main content
3.1 Priority
3.2 Bonafide purchaser for value without notice
3.3 Definition and meaning of notice
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignments
7.0 References / Further Reading
1.0 INTRODUCTION
In the last unit, we examined the maxims of equity, which are guidelines of the jurisdiction of Equity which have been developed throughout its history. In this unit, we will examine priority and the doctrine of bona fide purchaser for value without notice. The question of priority becomes important when there are two or more competing interests in property, more so, when the various competing interests cannot be satisfied by the total value of the property that is subject to these interests.
2.0 OBJECTIVES
By the end of this unit you should be able to:
(i) Explain Priority;
(ii) Discuss the doctrine of bona fide purchaser for value without notice; and
(iii) Define notice.
3.0 MAIN CONTENT
3.1 Priority
According to Maitland (Equity (Brunyate 2nd Ed.) 1949 p.125), 'It happens with unfortunate frequency that a man having title to land contrives by means of fraudulent concealment to get mon- ey from a number of different persons on the security of the land - then disappears - and the lenders are left to dispute among themselves as to the order in which they are to be paid out of the value of the land which is insufficient to pay all of them.'
There is a similar situation with regard to dealings with family property. It is a notorious fact that a piece of family land is being sold at different times to different persons. As Verity, Ag. P. ob- served in Ogunbambi v. Abowab (1951) 13 W.A.C.A. 222 at 223,
“The case is indeed in this respect like many which come before this court: one in which the Oloto family either by inadvertence or design sell or purport to sell the same piece of land at different times to different persons. It passes my comprehension how in these days, when such disputes have come before this court over and over again, any person will pur- chase land from this family without the most careful investigation, for more often than not they purchase a law suit, and very often that is all they get.”
We shall see that many of these cases raise the problem of priority: two informal sales of the same property at different times to two different persons would, prima facie, create equitable in- terests in the property in favour of the purchasers, while an informal sale followed by a formal sale would respectively create an equitable interest and a legal interest. In both cases, as between the rival claimants, priority will be determined by the relevant rules of law and equity.
3.1 Priority: The Temporal Order Rule
(i) Competing Legal Interests: Subject to some statutory provisions relating to registration of certain interests in land and some other rules which owe their origin and development to the Court of Chancery, the general principle is that priority is to be determined by the order in which the competing interests are created: Qui prior est tempore, potior est jure: he who is first in time is stronger in law. This temporal order of priority is equally recognised both at law and in equity. As between adverse claimants of a legal interest, he who is prior in time is stronger in law. The conflict in this case is, however, more apparent than real, for, where a le- gal mortgage has been created by the grant of a lease (see Jones v. Rhind (1869) 17 W.R. 1091), a subsequent legal mortgage of the same property can take effect only in the reversion, that is, after the expiration of the earlier mortgaged lease. See Mason v. Rhodes (1885) 53 L.T. 322.
Or, as was the case in Adu Kofi v. G. A. Adjei (1942) 8 WACA 198, where a landed property was sold at two different auctions under two different writs issued by different Tribunals of compe- tent jurisdictions. The court held that the plaintiff who bought the landed property in the earlier auction which was a day before the second auction had, in point of time, obtained a better title and that the subsequent sale to the defendant had no effect. In this case, it is obvious that the de- cision could not be otherwise unless the defendant could establish the invalidity of the earlier auction sale.
(ii) Competing Equitable Interests: Where each of the rival claimants has only an equitable in- terest in the property, provided the equities are equal, the basic rule ‘Qui prior est tempore potior est jure’ applies.
In Cave v. Cave (1880) 15 Ch. D. 69, a trustee, in breach of trust, purchased land with trust fund and the conveyance was made in his brother's name. However, the equitable right of the benefi- ciaries under the trust attached to the land. The brother made a legal mortgage to X and later an equitable mortgage in favour of Z. Neither X nor Z had notice of the beneficiaries right under the trust. As between the equitable rights of the beneficiaries and the equitable interest of Z, the former prevailed being earlier in time. But as between the beneficiaries' right and X's claim, the latter prevailed in accordance with the maxim that where the equities are equal the law prevails. Thus, equity not only follows the law, it also gives recognition to the superior strength of the law.
Similarly, in Assaf v. Fuwa (1954) 13 W.AC.A 232, where each of the rival claimants had only an equitable interest, the Judicial Committee of the Privy Council upheld the temporal order of priority.
Modifications of the Rule
Qui Prior Est Tempore Portior Est Jure
(i) Where there is equal equity the law prevails.
(ii) As between equal equities, the first in time shall prevail.
Two maxims of equity are of great importance in the determination of priority between rival ad- verse claimants to the same property. First, where there is equal equity, the law shall prevail. The import of this maxim is that as between adverse claimants, where one has the legal interest and the other has an equitable interest, the claimant of the legal interest will be preferred pro- vided there is 'equal equity'. Equality in this context does not mean or refer to priority in point of time, it means the non-existence of any circumstance which affects the conduct of one of the ri- val claimants, and makes it less meritorious than that of the other. See Bailey v. Barnes (1894) 1 Ch. 25, 36.
Thus, in Ajose v. Harworth (1925) 6 N.l.R. 98, the plaintiff who had earlier on obtained an equitable interest in the property in dispute, brought this action asking for a declaration that the property belonged to him as against the defendant Who had subsequently obtained the legal es- tate in the property. Van Der Meulen J. found that the defendant's conscience was clear and that there was nothing in the conduct of the defendant Which made his Claim, in the transaction, less meritorious than that of the plaintiff, since the equities were equal, the claim of the defendant, who had subsequently acquired the legal estate was held to prevail over that of the plaintiff whose claim was equitable. See further, Pilcher v. Rawling (1871-72) 7 Ch. Ap. Cas. 256.
The other maxim of equity which may modify the temporal order of priority is: 'as between equal equities the first in time shall prevail.' The rule applies as between rival claimants of equitable interests in the same property. However, the maxim as stated does not sufficiently explain its practical operation, all it does is to confirm the general principle. 'Qui prior est tempore portior est jure'. In this connection, the exposition of the rule by Kindersley V-C in Rice v. Rice (1853) 2 Drewry 73 at 78; 61 E.R. 646, is instructive. He said 'in a contest between persons having only equitable interests, priority of time is the ground of preference last resorted to; that is, that a Court of Equity will not prefer the one to the other, on the mere ground of priority of time, until it finds upon an examination of their relative merits that there is no other sufficient ground of preference between them, or, in other words, that their equities are in all other respects equal; and that, if the one has on other grounds a better equity than the other, priority of time is imma- terial.' (See also, Latec Investments Ltd v. Hotel Terrigal Property Ltd. (1965) 113 C.L.R. 265).
In the above case, a vendor of a leasehold property issued and endorsed receipt for the payment of the purchase money in the deed of conveyance, when in actual fact, no money had been paid; and, the title deeds in respect of the property were delivered to the purchaser, who, subsequently deposited it with the defendant to secure an advance, thus creating an equitable mortgage in fa- vour of the defendant who had no notice of the want of payment. The purchaser then absconded without paying either the plaintiff-vendor or the defendant-equitable mortgagee. The question was Who should be preferred: the vendor's equitable lien for the unpaid purchase money or the equitable mortgage of the defendant, it being established that the total value of the leasehold property was not sufficient to satisfy the respective claims of the vendor and the equitable mortgagee.
No doubt, the two competing equitable interests, abstractedly considered, are of equal value in respect of their nature and quality. However, the question, whether their equities are in other re- spects equal, or whether the one or the other has acquired the better equity, must depend upon all circumstances of each particular case, and especially the conduct of the respective parties. In this regard, the fact of the possession of the deeds, which the mortgagee acquired with perfect bona- fides, and without any wrong done to the vendor gave him, the equitable mortgagee a better equi- ty than that of the vendor, therefore, the equitable interest of the mortgagee was held to prevail. The decision will, however, be different if upon a comparison of the conduct of the two parties and a close examination of all the circumstances of the case there is nothing to give to the one a better equity than the other. The general principle governing determination of priority, qui prior est tempore portior est jure, can then be applied, that is, priority of time in terms of creation will give the better equity.
In Re King’s Settlement (1931) 2 Ch. 294 at 301, the settlor made a conveyance to his son and daughter-in-law. The deed of conveyance stated that they took as absolute beneficial owners in consideration of his love and affection for them. The son and the daughter-in-law at the same time executed a deed poll declaring trusts of the property in favour of the settlor and other bene- ficiaries. The conveyance and the title deeds were handed to the Son and the daughter-in-law, who purported to be absolute owners, created incumbrances on the property in favour of certain incumbrancers for value and without notice of trusts. The plaintiffs, who were beneficiaries un- der the trust, brought this action against the defendant equitable mortgagee, the defendant trus- tee, asking for a declaration that the defendant had no enforceable lien or charge on the proper- ty. The competition was, therefore, between the prior equitable interests of the beneficiary under the trust and the subsequent equitable lien of the mortgagee.
Farewell J. decided in favour of the equitable mortgagee. In the course of his judgement, he ob- served:
“I have now to decide between the equities of the beneficiaries, and of the incumbrancers, treating them both for the moment as equitable incumbrancers. Primafacie, the beneficiaries' equity, being earlier in date, ought to prevail. But when I find that their title is based on a document in a form wholly misleading and resulting necessarily in third parties being wholly misled as to the character in which the defendants (Trustee) take the property, I should be going against all equitable principles if I were to hold that the beneficiaries' eq- uity prevailed over that of other persons acting in complete innocence and misled by the settlor (one of the plaintiffs) through whom alone the beneficiaries claim, and I should be wrong if I allowed the equity of the settlor and his beneficiaries to prevail.”
The unusual form for the creation of the trust made the beneficiaries' equity less meritorious. The deed of conveyance indicated an absolute gift, there was nothing on the face of it to show that a'secret trust' had been engrafted. The case is, however, different from that where a trustee, in or- der to raise money for his own purposes, fraudulently creates an equitable mortgage in the trust property and deposit deeds of title with the equitable mortgagee who had no actual or constructive notice that any breach of trust had been committed and was not guilty of any conduct which would make his equity inferior to the equity of the beneficiaries. Here the equities are equal in every respect, that being so, that of the beneficiaries which is prior in point of time will prevail. See Capell v. Winter (1907) 2 Ch. 376, 381.
Fraud and Negligence
Fraud and negligence may, in certain cases, affect the above stated rules of priority. In Northern
Counties of England Fire Insurance Company v. Whipp (1884) 26 Ch. D. 482 at 482, Fry L.J. stated the following relevant principles. First, the court will postpone the prior legal estate to a subsequent equitable estate where the owner of the legal estate has assisted in or connived at the fraud which has led to the creation of a subsequent equitable estate without notice of the prior legal estate. Such assistance or connivance may be inferred from an omission on the part of the prior legal owner to use ordinary care in inquiring after or keeping title deeds, especially where such conduct cannot otherwise be explained. Second, where the mortgagee of the legal estate has constituted the mortgagor his agent with authority to raise money on the security of the mortgage, and the estate thus created has by the fraud or misconduct of the agent been represented as being the first estate.
However, a prior legal estate will not be postponed to a subsequent equitable estate on the ground of mere carelessness or want of prudence on the part of the legal owner. In Northern Counties' case (supra), C, the manager of a company had mortgaged his freehold estate to the company and handed over the title deeds to them. The deeds were kept in a safe of the Company. The safe had only one lock having duplicate keys, one of which was entrusted to C in his capacity as manager. Some time afterwards C took the deeds out of the safe without the mortgage, and handed them to W, to whom at the same time he executed a mortgage for money advanced to him by W who had no notice, actual or constructive, of the company's security.
The court noted that though there was great carelessness in the manner in which the company dealt with their securities, the carelessness was no evidence of any fraud as to postpone their prior legal estate to subsequent equitable estate of W. It was a carelessness likely to injure and not to benefit the company. Had the company combined with their manager to induce W to lend her money, the company's prior legal estate would have been postponed. Furthermore, the company did not constitute C as their agent with authority to raise money on the company's securities. It was, therefore, held that the mortgage of the company had priority over the mortgage to W.
Gross negligence may deprive a legal owner of his priority. In Oliver v. Hinton (1899) 2 Ch. 264 at 273, the purchaser for value of the legal estate without notice of the prior equitable mortgage by deposit of the title deeds was postponed on the ground that his failure to ask for and obtain the title deeds which would have fixed him with notice, amounted to gross negligence sufficient to deprive him of the protection of the legal estate.
Similarly, in Akingbade v. Elemesho (l954) 1 All N.L.R 154, a purchaser who was in a position to know of the prior equitable interest but for his gross negligence in finding out the relevant facts was postponed. (See further, Ogunbambi v. Abowab (1951) 13 W.A.C.A. 222 at 225; Walker v. Li- nom (1907) 2 Ch. 264, in this case, the trustees failed to obtain the title deeds to the trust property, the prior interest of the beneficiaries under the trust was, therefore, postponed to that of the subsequent equit- able incumbrancer without notice). Thus, it is not essential that a purchaser for value without notice should have been guilty of fraud before he is deprived of the protection of the legal estate; it is sufficient that he has been guilty of such gross negligence as would render it unjust to deprive the prior incumbrancer of his priority. (Oliver v. Hinton at 274)
SELF ASSESSMENT EXERCISE 1
Define notice.
3.2 Bona Fide Purchaser for Value Without Notice
The doctrine of bonafide purchaser for value without notice provides the most fundamental dis- tinction between legal and equitable rights in property. The doctrine is equally important in the determination of priority between rival claimants of interests in property. The essence of the doc- trine is that where a defendant has a better equity or a superior title, a court of equity will not de- prive such defendant of any right of property, whether legal or equitable, for which he has given value without notice of the plaintiff's equity. See the following cases, Ajose v. Harworth (1925) 6 N.L.R. 98; Griffin v. Talabi (1948) 12 W.A.C.A. 370; Martins v. Molade (1930) 9 N.L.R. 53.
The plea of purchaser for value without notice becomes relevant where there is competition be- tween –
(i) legal and equitable interests,
(ii) two equitable interests, and
(iii) equitable interest and mere equity.
3.2.1 Bona Fide Purchaser of the Legal Estate for Value Without Notice
Much ‘as Courts of Equity break in upon the common law, when necessity and conscience re- quire it, still they allow superior force and strength to a legal title to estates.’ Per Lord Herd- wicke L.C. in Wortley v. Birkhead (1754) 2 Ves. Sen. 571 at 574. See further, L. & S.W. Rail- ways v. Gomm (1882) 20 Ch.D. 562, 586. Once the plea of bona fide purchaser of the legal es- tate for value without notice is sustained by the court, any other incumbrancers' claims or inter- ests will be postponed.
Both the test and the strength of the plea are illustrated by the decision of James L.J. in Pilcher v. Rawlins (1872) 7 Ch. App. 259 at 268.
“I propose simply to apply myself to the case of a purchaser for valuable consideration, without notice, obtaining, upon the occasion of his purchase, and by means of his pur- chase deed, some legal estate, some legal right, some legal advantage; and, according to my view of the established law of this court, such a purchaser's plea of a purchase for valuable consideration without notice is an absolute, unqualified, unanswerable defence, and an unanswerable plea to the jurisdiction of this court. Such a purchaser, when he has once put in that plea, may be interrogated and tested to any extent as to the valuable considera- tion which he has given in order to show the bona fide or mala fides of his purchaser, and also, the presence or absence of notice; but when once he has gone through that ordeal, and has satisfied the terms of the plea of purchase for valuable consideration without no- tice, then, according to my judgement, this court has no jurisdiction whatever to do any- thing more than to let him depart in possession of that legal estate, that legal right, that le- gal advantage which he has obtained, whatever it may be. In such a case a purchaser is en- titled to hold that which, without breach of duty, he has had conveyed to him.”
In Folashade v. Duroshola (1961) 1 All N.L.R. 87, the Federal Supreme Court reiterated that where an estate is affected by an equitable interest, a subsequent purchaser for value will not be affected by that equitable interest provided he obtained the legal estate, he gave value for the property and he had no notice of the equitable interest at the time (when) he gave his considera- tion. See further Cole v. Folami (1956) 1 F.S.C. 16; Griffin v. Talabi (1948) 12 W.A.C.A. 370; Okunubi v. Assaf (1951) 13 W.A.C.A. 226.
The fact that a purchaser had the legal estate conveyed to him is not sufficient to give him priori- ty. In equity, the claim of the prior equitable owner would be preferred if the purchaser of the le- gal estate had bought the property in dispute with knowledge of the prior equitable interest af- fecting the property. See Cole v. Folami (supra). However, where the purchaser claims to have bought the property for value without notice of any equities attaching to the land and such claim is not disproved, the legal title so obtained by the purchaser will not be disturbed; he takes free from any prior equitable interest affecting the property.
The following analysis of the plea is instructive:
- BONAFIDE: For the plea to succeed, the purchaser must establish his good faith. It is essen- tial that he must be innocent of any equity attaching to the property in dispute; that is, he must not be affected by any notice, actual, constructive or imputed, of a prior equity affecting the property.
- PURCHASER FOR VALUE: Since equity will not assist a volunteer, a purchaser who has not given value for the property takes subject to all prior equitable rights affecting the property. Value means money or money's worth. See Thorndike v. Hunt (1859) 3 De G. & 1. 563. Mar- riage consideration is of the very highest value; higher than that of money paid on a purchase. See Salih v. Archi (1961) A.C. 778, 793. A transfer of property in satisfaction of a pre-existing debt confers on the transferee the title of a purchaser for value. Such transferee gives valuable consideration just as much as if he had actually part with money; for, he has given up or parted with the right to sue in respect of the debt. See Taylor v. Blakelock (1886) 32 Ch.D. 562, 568. The mere fact that the value given by a purchaser is not adequate is not sufficient to defeat the plea of bonafide purchaser; it may, however, cast some doubt on the proprietary of the transac- tion.
- 3. LEGAL ESTATE: The doctrine requires that the purchaser must have obtained a legal estate. Having obtained the legal estate for value without notice, the pur- chaser takes free from all prior equities affecting the property. See the following cases Cole Folami (1956) 1 F.S.C. 66; Okunubi v. Assaf (1951) 13 WA.C.A. 226; Johnson v. Onisiwo (1943) 9 W.A.C.A. 189. The position may be constrasted with that of the pur- chaser of an equitable interest for value without notice of prior equities. In this case, the temporal order of priority applies; provided the equities are equal. See the following: As- saf v. Fuwa (1954) 13 W.A.C.A. 232; Phillips v. Phillips (1862) 4 De G.F. & J. 208; Cave v. cave (1880) 15 Ch.D.639.
The strength of the doctrine lies in the acquisition of the legal estate. See Soremekun v. Sodipo (1959) L.L.R. 32. If the purchaser is in the process of acquiring the legal estate at the time he receives notice of prior equitable interest affecting the property, he will be bound by such inter- est The position is the same even if the purchaser has completed negotiation and offered or paid the purchase money but the legal estate has not been conveyed to him. See Allen v. Knight (1846) 5 Hare 272.
Modifications
The emphasis on the acquisition of the legal estate is however subject to qualifications.
- Better or Superior right to Legal Estate:
Where a purchaser acquires an equitable interest without notice of the prior equitable interest affecting the property, and he, by virtue of his equitable interest, subsequently acquires a superior right to call for the legal estate, he takes precedence over the prior equitable interest. Acquisi- tion of a superior right to legal estate may arise where a third party without notice of the prior equity, acquires the legal estate as trustee for the subsequent purchaser who must have had no notice of the prior equity. See Stanhope v. Earl Verney (1761) 2 Eden 81. This qualification may be justified on two grounds –
(i) The beneficiaries and trustees of a trust are one;
(ii) Where the equities are equal, the law prevails.
In Taylor v. London and County Banking Co. (1901) 2 Ch. 231 at 262-263, Stirling L.J. said
'Now, a purchaser for value without notice is entitled to the benefit of a legal title, not merely where he had actually got it in, but where he has a better title or right to call 'for it. This rule was laid down in Wilkes v. Bodington (1707) 2 Vern. 599. It has accordingly been held that if a purchaser for value takes an equitable title only, or omits to get in an outstanding legal estate, and a subsequent purchaser for value without notice procures, at the time of his purchase, the person in whom the legal title is vested to declare himself a trustee for him., or even to join as a party in a conveyance of the equitable interest (although he may not formally convey or dec- lare a trust of the legal estate), still the subsequent purchaser gains priority.'
The above proposition was approved in Assaf v. Fuwa (supra). In that case, the Judicial Com- mittee of the Privy Council stated that before the claim of a better right to call in the legal es- tate' can displace the operation of the principle 'qui prior est tempore portior est jure' the clai- mant must show that the owner of the legal estate either (i) had declared an express trust of the legal estate in his favour or (ii) had joined in the conveyance to him of the legal estate, or (iii) had lodged the title deeds with him. If there is no such positive act by the owner of the legal estate, a claim to a better right to call for the legal estate cannot be sustained; mere inertia or passivity on the part of the owner of the legal estate will not be a substitute.
However, an established better or superior right to legal estate will not avail against a purchas- er for value of the legal estate without notice of prior equitable interest. The right to call for the legal estate is, no doubt, inferior to the actual purchase for value of the legal estate without notice. An agreement by A to sell to B creates an equitable interest in favour of B who, by vir- tue of the agreement, has the right to call for the legal estate. But if C, for value and without notice of B's prior equitable interest, acquires the legal estate from A, he takes free from the prior equitable interest of B. See Garnham v. Skipper (1885) 55 L.J. Ch. 263.
- 2. Subsequent Acquisition of Legal Estate. Where a purchaser of an equit- able interest in property that is affected by a prior equitable interest subse- quently acquires the legal estate, he takes free from the prior equitable inter- est provided at the time he obtains the equitable interest he had no notice of the prior equitable interest, and that the legal estate so obtained is not in breach of trust. See Bailey Barnes (1894) 1 Ch. 25, 26. Notice of the prior equita- ble interest at the time he obtains the legal estate is immaterial.
The position is clearly illustrated by Lindley L.J. in Bailey v. Barnes (supra at 36). 'The maxim Qui prior est tempore portior est jure is in [favour of a prior equitable owner], and it seems strange that they should, without any default of their own, lose a security which they once possessed. But the above maxim is, in our law, subject to an important qualification, that where eq- uities are equal, the legal title prevails. Equality, here does not mean or refer to priority in point of time, as is shown by the cases on tacking. Equality means the non-existence of any circumstance which affects the conduct of one of the rival claimants, and makes it less meritorious than that of the other. Equitable owners who are upon equality in this respect may struggle for the legal estate, and he who obtains it, having both law and equity on his side, is in a better situation than he who has equity only.
This doctrine is not confined to tacking mortgages. It also applies in favour of all purchasers of equitable interests for value without notice of prior equitable interests, who get in the legal es- tate. It does not however apply to an equitable owner who gets in the legal estate from a trustee who conveys the legal estate in breach of trust. See, Taylor v. London and County Bank Com- pany (supra).
- 3. Mere Equities: The distinction between a mere equity and an equitable in- terest is tenuous, hence the difficulty in ascertaining whether a right in property is an equita- ble interest or a mere equity. Yet the distinction cannot be avoided because of the attendant con- sequences. An equitable interest is an established interest in property while a mere equity is a property right inferior to an equitable See Phillips v. Phillips (1862) 4 De O.F. & J. 208: Latec Investments Ltd. v. Hotel Terrigal Property Ltd. (1965) 113 C.L.R. 265.
A mere equity is binding on a purchaser only if such mere equity is ancillary to or dependent upon the equitable interest acquired by the purchaser in the property. See National Provincial Bank Ltd. v. Ainsworth (1965) A.C. 1175. A purchaser of an equitable interest in land need not obtain the legal estate before he takes free from prior mere equity affecting the property provided he is a bonafide purchaser for value without notice just in the same way as a purchaser for value of the legal estate without notice takes free from prior equitable interest. See Phillips v. Phillips (op. cit).
Examples of equitable interests are: estate contracts, a vendor's lien for unpaid purchase-money; equitable mortgages; restrictive covenants; interests of beneficiaries under trusts. Mere equities that will succumb to subsequent equitable interests include the right of a mortgagor to reopen a foreclosure order, the right to set-aside a conveyance for fraud, the right to set aside a deed for fraud or undue influence and the right to have documents rectified or set aside for mistake. See the following cases: Wright v. Dean (1948) Ch. 686; Mackreth v. Symmons (1808) 15 Yes. 329; Rice v. Rice (1853) 2 Drew 73; 61 E.R. 646; Re Nisbet and Potts' Contract (1905) 1 Ch. 391; Cave v. Cave (1880) 15 Ch.D. 639; Latec Investments Ltd. v. Hotel Terrigal Property Limited (1965) 113 C.L.R. 265; Bainbrigge v. Browne (1881) 18 Ch.D. 118; Garrard v. Frankel (1862) 30 Beav. 445;and Smith v. Jones (l954) 1 W.L.R: 1089.
Notice
The function of notice is not to create a property right, it is to prevent the holder of a superior title from using such title for a purpose that is inconsistent with good faith and honest dealings. See Re Nisbet and Potts' Contract (1905) 1 Ch. 391; Barker v. Stickney (1919) 1 K.B. 121. The importance of notice therefore is that it enables a court of equity to bind the conscience of a purchaser of a supe- rior title and forbid him to set up his superior title against prior owners of inferior interest affecting the property. (Lord Westbury L.C. in Buckland v. Gibbins (1863) 32 L.J. Ch. 391, 395). It is clear therefore that a purchaser of legal estate with notice of prior equitable interest affecting property takes subject to the prior equitable interest. See Assaf v. Oyinloye (1951) 20 N.L.R. 1.
Basis of the Doctrine
The doctrine of notice is relatively free from artificiality or technicality. Questions and problems arising from the doctrine have always been decided with reference to simple common sense, justice and fairplay. As Rhodes J., observed: 'The rules in respect to notice to purchasers of adverse titles or claims, other than such as is imparted by the records, are not founded upon any arbitrary provisions of law, but have their origin in the considerations of prudence and honesty which guide men in their ordinary business transactions.' See Lawton v. Gordon (18699) 37 Cat. 202, 206.
Indeed, it is very much true to say that the doctrine of notice is one of many cases in which equity has placed high premium on substance and in which, in the accomplishment of its ultimate purpose to do justice, brushes aside all matters of form or technically except when controlled by statutory re- quirements. (Lord Cranworth in Ware v. Egmont (1854) 4 De. G: M. & G. 460).
3.3 Definition and Meaning of Notice
Simply put, notice in equity is knowledge of existing fact. It may take one of three forms, viz, actual, constructive or imputed.
(i) Actual Notice:
This kind of notice speaks for itself. A purchaser has actual or express notice of prior interest, if, at the time when value was given by him, or at any time before the completion of the transaction, he was in fact aware of the existence of such interest. See Joyce, J. in Perham v. Kempster (1907) 1 Ch. 373 at 379; Hummani Ajoke v. A.Y. Oba (1958) W.N.L.R. 208, 210. Thus, actual notice consists of such personal know- ledge of a prior equity affecting property which a purchaser intends or proposes to buy.
The source of a purchaser's knowledge does not seem to be material: it may be direct or indirect. See Lawton v. Gordon op. cit.; Lloyd v. Banks (1868) 3 Ch. App. 488. The important thing to establish before a purchaser is fixed with notice of prior equity is that the purchaser had actual notice of such equity before he acquires his superior title. Notice acquired in a previous and distinct transaction is valid and binding provided it is not too distant to have escaped the memory of a prudent man of business. However, a purchaser will not be bound by notice whose source is wholly unreliable and would have been treated as such, by a reasonable and prudent man of business.
(ii) Constructive Notice:
The practical operation of constructive notice is consistent with the basis of equitable jurisdiction which is to prevent parties exercising their legal rights in an unconscionable manner. See G.B. Ollivant Ltd. v. Alakija (1950) 13 W.A.C.A. 63 at 67. The rule of equity is that
“where a purchaser has knowledge of any fact, sufficient to put him on enquiry as to the existence of some right or title in conflict with that he is about to purchase, he is presumed either to have made the inquiry, and as- certained the extent of such prior right, or to have been guilty of a degree of negligence equally fatal to his claim, to be considered as a bona fide pur- chaser. The presumption, however, is a mere inference of fact, and may be repelled by proof that the purchaser failed to discover the prior right notwithstanding the exercise of proper diligence on his part.” Per Selden J., in Williamson v. Brown (1857) 15 N.Y. 354, 362. See further Joyce J. in Berwick v. Price (1905) L.R. 1 Ch. 632.
Constructive notice is founded on the assumption that the purchaser had no personal knowledge of the prior interest or equity affecting the property which he proposes to buy. It is enough if it can be established that he, the purchaser, would have had notice had he made reasonable inquiry required in the circumstance of the transaction. Where there are sufficient facts calling for an en- quiry which would have disclosed the incumbrances affecting the property, and such enquiry is not made, the purchaser is bound by constructive notice of the incumberances. Failure to make such inquiry is attributed to want of good faith or gross negligence on the part of the purchaser, which in each case, destroys his bonafide.
First, a prudent purchaser will call for and investigate the title of his vendor. A purchaser who fails to make such inquiries will be fixed with notice of all incumbrances affecting the title, for, such incumbrances would have come to his notice had he made necessary inquiries. In Oliver v. Hinton (1899) 2 Ch. 264, the proceedings arose from an action to determine the priority of an equitable mortgagee by deposit of title deeds and a subsequent purchaser for value without no- tice of the mortgage. The purchaser, who had no notice of the prior equitable mortgage, had bought the property from the mortgagor. He did not ask for production of the title deeds; there was no inquiry as to the abstract of title which would have fixed him with notice of the equita- ble mortgage.
The court held that the purchaser's title should be postponed on the ground that where no in- quiry as to title is made and no production of the deeds is asked for, the purchaser acquiring the legal estate cannot claim in priority to a prior equitable mortgage. It is settled law that a pur- chaser for value of the legal estate without notice or a prior incumbrance will be postponed if it is established that either he deliberately abstains from making investigation as to the deeds, or he is guilty of such gross negligence as would render it unjust to deprive the prior incumbrancer of his priority. See Akingbade v. Elemesho (1964) 1 All N.L.R 154. A purchaser need not be guilty of any fraud or dishonest conduct before being postponed to a prior equitable incumbrancer.
In Labinjo v. Olufunmise Suit No. LD/355/68 (unreported), the trustees of a trust under which the plaintiff was a beneficiary, sold in breach of trust, the trust property situates at 20 Glover Street, Lagos, to the defendant who claimed that he was a bona fide purchaser for value of the legal estate without notice. He, however, admitted under cross-examination by the plaintff’s counsel that he made no enquiries or caused any investigation to be made as to the interests (if any) which affected the title of his vendor. The court held that in accordance with section 3(1) of the Conveyancing Act 1882, the defendant had constructive notice of the plaintiff’s prior equitable interest. It was clear that the defendant would have had notice of the plaintiff's equita- ble interest had he made such inquiries and investigations which ought reasonably to have been made by a prudent man of business. Thus, the purchaser's claim of bona fide was destroyed by his failure to investigate. Therefore, he was held to be constructive trustee of the legal estate for the benefit of the plaintiff.
Second, where there is sufficient evidence disclosing that the purchaser of the legal estate had knowledge of facts which would enable him to acquire notice of prior equitable interest and which he could have acquired had he made further investigation, the purchaser will be deemed to have had notice. It will not be sufficient for the purchaser to show that he had no actual notice. See Ware v. Lord Egmount, op. cit.
In Ogunbambi v. Abowab (1951) 13 W.A.C.A. 222, the defendant claimed that he was a pur- chaser of the legal estate for value and without notice of the plaintiff's prior equity affecting the property. It was, however, established in evidence that he had, earlier on, sought to purchase the property from the plaintiff and that, upon his offer being refused, he sought and obtained a con- veyance from another party, whom he knew to be out of possession. He did not make any en- quiry or investigation which would have disclosed to him the nature of the interest which he had himself believed to be vested in the plaintiff from whom he had sought to purchase. It was held that the defendant could have acquired knowledge of the prior equitable interest of the plaintiff but for his gross or culpable negligence, he was, therefore, presumed to have had notice of the plaintiff's equitable interest.
Occupation of land by a person other than the vendor constitutes notice to the purchaser. See the following cases: Kabba & Anor v. D. S. Young (1944) 10 W.A.C.A. 135; Daniels v. Davison (1809)
33 E.R. 978; and Omosanya v. Anifowoshe (1959) 4 F.S.C. 94. Reason and common-sense demand that a purchaser should inspect land he intends to buy with a view to ascertaining (i) if there is any person in occupation, and (ii) the rights or interests which such person may have or posses in the land. In Hunt v. Luck (1902) 1 Ch. 428 at 433, Vaughan Williams L.J. described the position as follows: 'It means that, if a purchaser or a mortgagor is not in possession of the property he must make inquiries of the person in possession - of the tenant who is in possession - and find out from him what his rights are, and, if he does not choose to do that then whatever title he acquires as purchaser or mortgagee will be subject to the title or right of the tenant in possession.' A tenant in possession under an informal lease has equities which he could enforce against the vendor as well as against the purchaser from the vendor, (see Kabba & Anor v. D. S. Young, (supra)). There- fore, a person purchasing when there is a tenant in possession, if he neglects to inquire into the title or to inspect the land must take, subject to such right as the tenant may have. See Olowu v. Oshinubi (1958) L.L.R 21.
In Sanusi Imam v. Sanni Dawodu (1960) W.N.L.R. 150, the plaintiff had been digging and carrying away sand from the land since 1948 under a licence granted by one Onikoro family, the owners of the land. In.1956, the same family granted, in respect of the same land, similar licence to the defendant. In 1957, the plaintiff obtained a deed of grant of a lease from the same family under which the plaintiff could continue to dig and carry-away sand from the land. The plaintiff brought this action claiming exclusive right to dig and carry away sand from the land. He con- tended that the grant of 1957, gave him absolute legal estate in the land. In the course of his judgment, Duffus J., observed: 'The lease does in my view grant the plaintiff an exclusive right to dig sand in this river. This grants the plaintiff a legal estate but it must be subject to any exist- ing tenancy or equitable rights of which he had notice. I am satisfied that the plaintiff had actual notice of the defendant's occupation ... Apart from this, the defendant's possession and use of his rights to dig sand has been openly carried out, and possession of a tenant is notice to a purchaser of the actual interest he may have.
The equity of the tenant in possession extends not only to interests connected with his te- nancy, but also to interests under collateral agreements. See (G. B. Ollivant Ltd. v. Alakija (1950) 13 WAC.A 63, 67; Barnhart v. Greenshields (1893) 9 Moo P.C.C. 18). Thus, where a purchaser is presumed to be affected with constructive notice of the tenant's possession, he is fur- ther presumed to have had the notice of the contents of the instrument (if any) under which the tenant occupies the property. A purchaser who proposes to buy the reversion of a lease is bound to inquire on what terms the lessee is in possession. The mere fact that he is misinformed as to the contents of the lease may not be sufficient to relieve him of the duty imposed on a purchaser to make enquiry as may be reasonably necessary in the circumstance.'
In Patman v. Harland (1881) 17 Ch.D. 353, Jessel, MR. said:
“Now it has been argued before me that if the lessee, having this constructive notice, be told by the lessor that there is no restrictive covenant, that that representation will in equity do away with the effect of constructive notice. I entirely dissent from that proposition. Constructive notice of a deed is constructive notice of its contents …. If therefore you have notice of a deed relating to the title, and forming part of the chain of title, you have notice of the contents of that deed, and it is no excuse for not asking to look at it to say that you were told that the deed contained nothing which it was necessary for you to look at. Otherwise, in every case, you might be satisfied with a statement of the contents of the deed without going to look at it Of course, there may be cases when the deed cannot be got at or for some other reason where, with all the exercise of prudence in the world, you cannot see it, and then there may be no constructive notice; but that is another question; Where you know, it is no answer at all to be told that it does not prejudically affect your title.”
In Crayen v. Consolidated African Selection Trust Ltd (1949) 12 W.A.C.A. 443 at 448, the plain- tiffs took a lease of a property that was subject to an equitable lease of the defendant who was in possession. The defendant's lease agreement contained an option for renewal. When the defen- dant proposed to exercise his option to renew in accordance with the terms of his lease, the plain- tiffs brought this action claiming possession on the ground that they had no notice of the defen- dant's option to renew. In support of this contention, they relied on the information given to them by the lessor. Lewey, J.A., delivering the judgement of the West African Court of Appeal said:
'Having regard to the authorities and the circumstances of the present case, we hold that the appel- lants were put on enquiry by reason of the fact that they had notice of the respondents' lease. Had they inspected it, or made enquiries from the respondents they could have found that it contained an option for renewal. But as they neglected to do this and chose to rely upon the landlord's as- surance they must suffer the consequences, for the respondents, being in no fault, cannot be de- prived of their rights under their lease.'
Section 70(1) of the Property and Conveyancing Law (W.N.) 1959, requires a purchaser to inves- tigate the root of title of his vendor for the last 3O years, otherwise he is deemed to have notice of all equitable interests affecting the vendor's title to the property within the full statutory period of
30 years. However, where an intended lessee is prevented from calling for the title to the freehold or to the leasehold reversion, he will not be affected with notice of any matter or thing of which he might have had notice, if he had contracted that such title should be furnished. In addition, section 70(6) of the Law provides that a purchaser will not be affected with notice of any matter or thing of which, if he had investigated the title or made reasonable enquiries in regard to matters prior to the period of commencement of title fixed under section 70(1) or by any other statute, or any rule of law, he might have had notice, unless he actually makes such investigation or enquiries.
Section 194(1)(i) and (ii) of the Property and Conveyancing Law (W.N.) 1959, which is a substantial re- enactment of section (3)(1) of the Conveyancing Act 1881, a statute of general application re-stated the equitable doctrine of constructive notice, though in a negative form. According to the provision, a purchas- er shall not be prejudicially affected by notice of any instrument or matter or any fact or thing unless it is within his own knowledge, or would have come to his knowledge if such inquiries and inspections had been made as ought reasonably to have been made by him.
The general view of the provision seems to be that the doctrine of notice ought, not to be extended. In Eng- lish and Scottish Mechantile Investment Company v. Brunton (1892) 2 Q.B. 700 at 707-708, Lord Esher M.R said:
“when a man has statements made to him, or has knowledge of facts, which do not expressly tell him of something which is against him, and he abstains from making further inquiry because he knows the result would be- or, as the phrase is, he "wilfully shuts his eyes" - then judges are in the habit of telling juries that they may infer that he did know what was against him. It is an inference of fact drawn because you cannot look into a man's mind, but you can infer from his conduct whether he is speaking truly or not when he says that he did not know of particular facts. There is no question of constructive notice or constructive knowledge involved which is inferred. Constructive notice or knowledge, as I have said, is an equitable doctrine wholly; it is a doctrine not known to the common law, but it must now be dealt with and acknowledged by the courts which administer the common law It is, therefore necessary for us to see how far the doctrine extends and is to be car- ried out, and to consider its nature and limits as laid down by the judges who invented and have ap- plied it. Of late years, after the doctrine had been invented and put into form, the Chancery judges saw that it was being carried must farther than had been intended, and they declined to carry it further.”
No doubt, the doctrine of constructive notice is a dangerous one in that it is contrary to the truth; it is wholly founded on the assumption that purchaser does not know the facts; and yet it is said that constructively he does know them. Therefore, the doctrine ought not to be extended further, otherwise, it may defeat the end of justice which the judges who invented it wanted to serve. In Bailey v. Barnes (1894) 1 Ch. 25 at 35, Lindley L.J. gave expression to the judicial attitude limiting the application of the doctrine. He said, with reference to section 3 of the Conveyancing Act 1882. 'The Conveyancing Act, 1882, really does no more than state the law as it was before, but its negative form shows that a restriction rather than extension of the doctrine of notice was intended by the Legislature.'
The section is construed not to import a duty or obligation; for a purchaser need not make inquiry. The standard of diligence required of a purchaser is not a very high one, however, his conduct in the transaction must not fall below that of a reasonable man, having regard to what is usually done by me~ of business under similar circumstances. See further Taylor v. London and County Banking Company (1901) 2 Ch. 231, at 258-259.
(iii) Imputed Notice:
This is a kind of notice which is neither actual nor constructive to the purchaser, but which is imputed to him through the actual or constructive know- ledge of his agent is a settled principle that notice to an agent is notice to the principal. If we held otherwise it would cause great inconveniences, and no- tice would be avoided in every case by employing agents. See Sheldon v. Cox (1764) 2 Eden 224.
Notice will be imputed to a purchaser only through his bonafide agent. See Orasanmi v. Idowu (1959) 4 F.S.C. 40 at 42. A purchaser who instructed his agent to purchase a property at an auc- tion sale is affected by notice of an equity which has come to the knowledge of his agent in the course of the transaction. See G. B. Ollivant Ltd. v. Alakija (1950) 13 W.A.C.A. 63 at 67. A ven- dor is not an agent of the purchaser, therefore, notice to the vendor or his agent cannot be im- puted to the purchaser since the whole basis of the equitable principle of a bona fide purchaser for value without notice is to protect a purchaser from the fraud of his vendor. However, the pur- chaser will be bound by such notice if there is evidence that he had any such notice, actual or constructive. See Omosanya v. Anifowoshe (1959) 4 F.S.C. 94 at 99
Barristers and solicitors are, in most cases, agents of purchasers for the purposes of purchasing land. 'It has been said over and over again that notice to a solicitor of a transaction, and about a matter as to which it is a part of his duty to inform himself, is actual notice to the client. Mankind would not be safe if it were held that, under such circumstances, a man has not notice of that which his agent has actual notice of.' Per Lord Hatheley in Rolland v. Hart (1871) L.R 6 Ch. 678 at 681-2. See further Jared v. Clements (1903) 1 Ch.428. Notice or information acquired by a so- licitor in a previous transaction used to affect through the doctrine of imputed notice, his princip- al in a subsequent transaction. See Okunubi v. Assaf (1951) 13 W.A.C.A. 226 and Fuller v. Ben- nett (1843) 2 Hare.394. This rule is capable of producing untold hardship if notice in every trans- action that comes to the solicitor is imputed to his principals in subsequent transactions. The rule was modified in Mountford v. Scott.(1823) Turn & R 275; 37 E.R 1105.
Now, information acquired by a solicitor in one transaction cannot affect, through the doctrine of imputed notice, his principal in a subsequent transaction. Section 136 subsection 1 (ii) of the Conveyancing Act, 1882, (a statute of general application) now provides that a purchaser shall not be prejudicially affected by notice of any instrument, fact or thing unless in the same transac- tion with respect to which a question of notice to the purchaser arises that it has come to the knowledge of his solicitor or other agent, as such, or would yet come to the knowledge of his solici- tor or other agent, as such, if such inquiries and inspections been made as ought reasonably to have been made by the solicitor or other agent. See similar provision in section 194. (1)(ii)(b) of the Property and Conveyancing Law (W.N.) 1959.
This section has been judicially construed in ln re Cousins (1886) 31 Ch.D.671 at 677. In the course of his judgment, Chitty J. said: “There must be something which comes to the knowledge of the solicitor as such and in the transactions. The words ‘come to the knowledge’ are not unimportant and seem to me to afford the answer to the argument that Banks had knowledge because he formerly knew. The section says "come to the knowledge" and I cannot impute to him that the knowledge had come to him in this transac- tion because he knew it on the former occasion. To do that would destroy the section. Every word of it requires careful weighing and the result is (1) that it must be in the same transaction, (2) the matter must come to the knowledge, and (3) must come to the knowledge of his Solicitor as such viz, as solicitor of the mortgagee.”
In Okunubi v. Assaf (1951) 13 WACA 226 at 231, the West African Court of Appeal held that notice that comes to the knowledge of a solicitor in a previous transaction cannot be imputed to a purchaser in a subsequent transaction. A solicitor is not under any duty to communicate his knowledge in a previous transaction to the purchaser when the latter subsequently becomes his client. However, when the same so- licitor acts for both parties to a transaction, any notice he acquires is imputed to both parties, unless there are facts disclosing that he has conspired with one to the detriment and disadvantage of the other, in which case, that other will have the protection of the doctrine of bona fide purchaser without notice. See Sharpe v. Foy (1868) 4 Ch. App. 35.
In Ohiaeri v. Yussuf & Ors. (2009) 6 NWLR (Pt. 1137) p. 207, the Court held that:
“It is only a subsequent bonafide purchaser of a legal estate for value without notice that can take priority over someone who had acquired a prior equitable interest over the property. And “without notice” means that the purchaser must have no notice of the existence of the equitable interest, that is, he must have neither actual notice nor constructive notice nor imputed notice. If the purchaser employs an agent such as a solicitor, any actual or constructive notice which the agent receives is imputed to the purchaser. In the instant case, there was uncontroverted evidence that the same solici- tor who brought the 2nd and 3rd respondents together and facilitated the sale of the property to the 2nd respondent was also the agent of the appellant and facilitated the conveyance of the property by the 3rd and 4th respondents to the appellant. Therefore the notice, actual or constructive, of the prior equitable interest by the solicitor was imputed to the appellant. The appellant could not claim protec- tion under the doctrine of innocent purchaser for value without notice.”
The equitable doctrine of notice was evolved to prevent parties exercising their legal rights in an uncons- cionable manner (Ollivant Ltd. v. Alakija (1950 13 W.A.C.A. 63), but the doctrine will not be carried to such an extent as to defeat an honest purchaser or prevent a bona fide purchaser from dealing freely with his property. See Lord Cranworth in Ware v. Egmout (1854) 4 De G., M. & G. 460. Thus a person who derives his title from a purchaser with notice takes free of the equity. Notice to the vendor or his agent is no notice to the purchaser or vendor's successor in title unless the purchaser is himself bound by such no- tice. See Onasanya v. Anifowowshe (supra).
A person who derives title from a bonafide purchaser without notice takes free of the equity notwithstand- ing that he had notice of the equity. See the following cases: Barrow’ case (1880) 14 Ch. D. 432 at 445; Experte Sandys (1889) 42 Ch. D. 98 at 110; and Wilkies v. Spooner (1911) 2 KB 475. However, a trustee, who, in breach of trust, sells trust property to a purchaser without notice, and who, subsequently purchases the property from the purchaser, will be deemed to hold the property subject to the trusts. Equity will not allow a person to profit from his own fraud. See Barrow’s case (supra).
SELF ASSESSMENT EXERCISE 1
Discuss the doctrine of bona fide purchaser for value without notice.
4.0 CONCLUSION
The doctrine of constructive notice is a dangerous one in that it is contrary to the truth; it is wholly founded on the assumption that purchaser does not know the facts; and yet it is said that constructively he does know them. Therefore, the doctrine ought not to be extended further, otherwise, it may defeat the end of justice which the judges who invented it wanted to serve. The equitable doctrine of notice was evolved to prevent parties exercising their legal rights in an unconscionable manner. But the doctrine will not be carried to such an extent as to defeat an honest purchaser or prevent a bona fide purchaser from dealing freely with his property.
5.0 SUMMARY
In this unit we have considered priority and the equitable doctrine of notice. You should now be able to: explain Priority; discuss the doctrine of bona fide purchaser for value without notice; and define notice.
6.0 TUTOR-MARKED ASSIGNMENT
Explain the doctrine of notice.
7.0 REFERENCES / FURTHER READING
Hackney J., (1987) Understanding Equity and Trusts; London: Fontana press
Jegede M. I. (2007rep.) Principles of Equity; Ibadan: Unique Design/Prints