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1.5 Rights in Equity

(iii) Different characteristics of legal and equitable proprietary rights The distinction between legal and equitable proprietary rights is significant for a number of reasons, since each type of property right functions in a different way. If an equitable proprietary right has not been created, the legal owner of property will be its beneficial owner in the sense that they can obtain the benefits of the property, including its use and its fruits, such as the dividends paid in respect of shares. Once an equitable right has been created, however, the legal owner will no longer have the ben eficial ownership of the property; it is the equitable right-holder who has the beneficial interest and therefore has the right to receive the benefits of the property. In this situa tion, the legal owner will be obliged to administer and manage the property on behalf of the equitable right-holder. The legal owner of the property will determine how that property is to be used and is obliged to bring legal proceedings if it is destroyed or damaged. 123 Where the legal owner of property in which somebody has an equitable proprietary interest transfers that property to a third party who obtains legal title to it, normally the equitable right-holder retains their interest so that the third party will hold that property on trust for the equitable right-holder. The equitable proprietary right can, however, be defeated in two different ways: (1) If the legal owner of the property is authorized to transfer the property to the de fendant, the equitable interest in that property will be overreached and dissipated, but an equitable right will be transferred to any substitute property. 124 This is called the over reaching doctrine. So, for example, if Quentin holds shares on trust for Rachel, Susan, and Tariq, the terms of the trust document may state that the trustee is authorized to sell the shares. If Quentin sells the shares to Usman, then, because this is an authorized transac tion, legal title to the shares will be transferred to Usman, and Rachel, Susan, and Tariq will no longer have an equitable interest in the shares. Quentin will, however, have legal title to the purchase money, which will come within the terms of the trust, so that Rachel, Susan, and Tariq will then have an equitable interest in that money. (2) Where, however, property is held on trust and is transferred to a third party in breach of trust, the equitable proprietary right will not be defeated by virtue of the over reaching doctrine because the transaction was unauthorized. If, however, the property was transferred to a third party who was not aware that it had been transferred in breach of trust and the third party provided some value for the transfer, the equitable proprietary right will be defeated and the third party will have absolute legal title to the property. It is a fundamental principle of Equity that the receipt of property by such a person, known as a bona fide purchaser for value, will defeat any equitable interest in that property. Legal property rights will not, however, be defeated by receipt of the property by a bona fide purchaser for value, save where the property is money. 125 (iv) Hierarchy of rights A further key characteristic of equitable proprietary rights is that it is possible to plan for successive rights to property so that provision can be made for the present and future beneficial use of the property. © Oxford University Press

123 Leigh and Sillavan Ltd v The Aliakmon Shipping Co Ltd [1986] AC 785; MCC Proceeds Inc v Lehman Brothers International (Europe) [1998] 4 All ER 675. 124 See further Section 11.2.1(i), p. 359. 125 Miller v Race (1758) 1 Burr 452.

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