28 November 2013

A Typical Scenario
James is one year older than his brother Steve. After finishing school James goes to University to study accounting whilst Steve pursues a trade in plumbing. In 1995 at the ages of 24 and 25 respectively, the brothers decide to purchase a parcel of land to develop. Steve works in the building industry and feels confident he will be able to develop the land and James agrees. James is an up and coming accountant at a city firm and is progressing well. Steve however ran his own plumbing company from the age of 22 which went into liquidation after a year of operation. As a result of this Steve suggests to his brother that the property be registered in James' name. James does not mind but is concerned about servicing the loan. Steve alleviates his brother's concern by telling him he will contribute to the loan repayments.

The brothers agree and purchase Blackacre for $400,000. James pays a $40,000 deposit whilst Steve does not make any direct contribution to the deposit. This is because James owes Steve $20,000 which was lent to him for the purchase of a car two years prior. Both James and Steve makes regular payments towards the loan.

After 2 years they decide to knock down the existing dwelling and redevelop the land. Steve is experienced in this sort of work and takes care of the construction. James the accountant has access to private equity and is able to obtain cheap funding for the development. Construction of the dwelling is completed in or about 1999 which coincides with James' pending marriage to Jenny. James discusses with Steve the possibility of moving into the dwelling until he can purchase another property. He indicates to Steve that it will be a short term deal until his funds come through and that he is prepared to pay rent to Steve for half the property. Steve reluctantly agrees and James pays rent for about 2 months before the payments stop. Steve is a little embarrassed to raise the matter and does not make an issue of the rental payments.

In or about 2005 Steve commences a de facto relationship with Sarah. The loan on Blackacre is almost paid off and both James and Steve have progressed in their respective fields. Sarah and Jenny don't get along and one day at a family gathering at Blackacre there is a falling out. Steve and Sarah go home where she tells him that half of Blackacre is his and that James should be paying rent whilst he stays there. She tells Steve that they should be living there not James and Jenny and that his brother now has enough money to purchase another property somewhere else.

Although Steve considers what Sarah says, he decides not to do anything about it. Steve has wanted to sell Blackacre for sometime because he needs the money to purchase his own dwelling but hasn't wanted to kick his brother out. James has been maintaining Blackacre and paying council and water rates which are in his name, but has been living for many years rent free.

A week later Steve meets with his brother with the intention of trying to resolve the differences between their partners. James immediately blames Sarah for the argument and insists to Steve that she has to apologise to Jenny. Steve is unhappy with the proposal and feels it's simply another way for James to gain superiority over Steve. Steve has always felt a little inferior to his brother because he did not go to university and is younger. The brothers have an argument during which Steve tells James he wants to sell Blackacre. James says that Blackacre is registered in his name and that it belongs to him. What are Steve's remedies?

The Remedies

Since Steve is not a registered owner of Blackacre, he does not have legal title. However depending on how the above facts are interpreted by the court he may have a number of equitable remedies.

Deposit & Beneficial Interest
The foremost issue for the court to determine is who paid the deposit and in what proportions. Steve will no doubt assert he made a contribution to the deposit equal to his brother's because James owed him money. James may assert the monies lent to him by his younger brother were for an unrelated matter (purchase of a car) and at a different time and not for the purchase of Blackacre. Whilst Steve may have been of the view that the monies owned to him by James are in lieu of his share of the deposit, there was no discussion between the brothers about this issue. There was however a clear agreement about the purchase of the property. Accordingly, in considering whether Steve made a contribution to the deposit the court will consider such issues as the relative age and financial position of the parties, the amount of money lent to James, any discussions, agreements or conduct in relation to those funds and whether they were returned or anticipated to be returned to Steve.

The question of who paid the deposit and in what proportions is pivotal as the extent of the beneficial interests between the parties is to be determined at the time of purchase.¹

For if the Court determines Steve made a contribution to the deposit equal to that of James, this will give rise to a resulting trust and the order that will likely follow is that James holds 50% of Blackacre on trust for Steve.² However the court may come to the conclusion that there was no specific agreement between the parties in relation to the purchase of the property (unlikely) but still make an order that James holds some portion of Blackacre on constructive trust. The court may take this view if it feels that it would be unconscionable for James to assert legal right over Blackcacre to the exclusion of James³ however a constructive trust is a remedy of last resort.⁴

Occupation Rent
In the event the court makes such an order and based on the scenario that James has lived at Blackacre rent free for some years to the exclusion of Steve, the next issue to determine is whether Steve is entitled to recover an occupation fee from James, being rent for his occupation of the premises. If the Court forms a contrary view and finds the monies lent by Steve do not form part of the deposit on Blackacre, Steve's interest in the land will be something less than ownership. In this instance Steve will not have a proprietary interest in Blackacre and will not be eligible to recover an occupation fee but may be eligible to make other claims.

Improvements
Because of his experience in the building industry, Blackacre was redeveloped under Steve's care. Steve was not paid for this work or any of the plumbing or gas work he did. The supervision and other works that Steve performed to Blackacre significantly increased the value of the property. As such, Steve is entitled to claim on an equitable account from James the costs of that work but is not entitled to claim the increase in value of the property. If the court finds that Steve did perform this work and was not paid, the order that will likely follow is a charge over Blackacre to the value of the work performed.

Loan Repayments
Steve and James have been making steady loan repayments for the entire time and the loan is almost extinguished. If the Court accepts that Steve has made loan repayments the order that will likely follow is a charge over Blackacre to the value of the repayments. It is important to understand that payment of loan instalments is not the same as payment of the purchase price of property and does not give rise to equitable ownership.⁵ However payment of loan instalments will certainly give rise to an account between the parties which may give rise to an equitable charge.⁶

What is a Charge?
A charge is a mortgage which one party registers over another's property akin to a mortgage a bank lodges against land when it lends money to the purchaser. An equitable charge is one that arises as a result of equity where as the common bank mortgage is by contract and consent between the parties. In the event Steve can demonstrate his contributions to Blackacre, he may be entitled to a equitable charge.

Mersal & Associates specialise in property disputes. If you are being denied your rightful share of a property or are involved in a property dispute we can assist. Call us today to arrange an appointment.

1. Calverley v Green (1984) 155 CLR 242 at 252.
2. Ibid.
3. Muschinski v Dodds (1985) 160 CLR 583, Baumgartner v Baumgartner (1987) 164 CLR 137.
4. Farah Constructions v Say-Dee [2007] HCA 22.
5. Calverley v Green (1984) 155 CLR 242 at 257.
6. Huen v Official Trustee in Bankruptcy 248 ALR 1.