Customers frequently ask us about the difference between the legal estate and the beneficial interests in land. It can be a complex topic and the aim of this article is to provide what I hope is an easy to understand overview of the distinction between the two.
Land Registry registers only legal estates and the proprietor is registered as the owner of a legal estate. The register records the ownership of the legal estate in the property, not the underlying ownership (the ‘equitable’ or ‘beneficial’ interests). Accordingly a person dealing with registered proprietors can generally assume they have unlimited power to dispose of the property, unless there is a restriction or other entry in the register limiting their powers.
The owner at law may not be the same person as the beneficial owner. A beneficial owner is a person entitled to the benefit of the land and on their death the equitable interest may not pass in the same way as the legal ownership does. The register does not guarantee that the proprietor is the beneficial owner and that they own the land for their benefit.
So, what is the difference?
The legal estate
The term ‘owner’ in relation to land is generally understood to mean the legal owner and is normally the registered proprietor. When two or more people are registered as proprietor of the land they are known as ‘joint proprietors’. Their legal ownership of the land is truly ‘joint’ as the legal estate cannot be divided between them and each person cannot own a percentage share in that legal estate. There is no physical division in the land. When one joint proprietor dies, the legal estate in the whole of the land automatically vests in the surviving joint proprietor.
The equitable or beneficial interests
Think of the beneficial interests as being what the land turns into when sold – money. Money can be divided. Unlike the legal estate, the beneficial ownership can be split into equal or unequal shares. For example, a couple may have purchased a property with one contributing £25,000 and the other contributing £75,000, on the understanding their contributions would give rise to a beneficial interest for each of them in the land of 25 per cent and 75 per cent respectively.
Joint proprietors always own the registered estate on trust. A trust in land is the relationship between the legal owner(s) and the beneficial interest in the land. They can either hold it on trust for themselves or on trust for a third party.
If they hold it on trust for a third party this means that they, as legal owners, are not entitled to the equity at all and must pass this on to the person beneficially entitled to it. An example of this would be where parents are the registered proprietors of a property but they are holding it on trust for a child to whom a grandparent has left it to. Although the parents are the registered legal owners, they are not entitled to keep any monies from the sale of the property as the child is entitled to that. They are holding the property as trustees for the child.
If they hold it on trust for themselves, this means no one else has any beneficial interest in the property. They may have unequal interests, as in the example above, but they are the only ones with those interests.
Parties who hold land on trust for themselves can do so in two ways – as joint tenants in equity or as tenants in common. Remember, this still relates only to the beneficial interest.
Joint tenants in equity
If an equitable joint tenancy exists, the beneficial interest of any joint tenant (proprietor) will pass on death to the surviving tenant. The last survivor will then hold the land as sole legal and beneficial owner and, as a result, the trust will come to an end. On a sale of the land that person will then be entitled to receive the whole of the purchase money.
Tenants in common
Some people may not want their interest in the land to vest in the surviving tenant. If they decided to hold the land as tenants in common, on their death their share would vest in the beneficiaries under their will, for example their children or relatives. If the property was subsequently sold following the death of one of the proprietors, a second trustee would need to be appointed to sell it. This is because the purchase price needs to be paid to at least two trustees in order for the beneficial interest to be overreached. The trust would then attach to the proceeds of sale and the purchaser would take the property free from any trust.
Protection of beneficial interests
You may be wondering how anybody would know whether a legal owner is holding a property on trust or not. Under the Land Registration Act 2002, a restriction can be entered in the register of any property or land by anybody who has a sufficient interest in it. As well as generally safeguarding the interests of the beneficiaries of the land, restrictions may also control or limit the trustees’ powers in dealing with the property or land.
The duty of applying for any necessary restrictions falls on the trustees, though a beneficiary under the trust may also apply. There is one circumstance where the registrar is obliged to enter a restriction without an application. That is when registering two or more people as joint proprietors of a registered estate and there is no evidence to show they are holding it on trust for themselves as beneficial joint tenants.
Where more than one party has an interest in a registered estate, the general rule that decides the priority of each party’s claim is that each interest ranks in accordance with the date of its creation. Someone with an existing interest will not be affected by a later disposition. However, there is one important exception. Someone who acquires a registrable disposition for value will, by registering their interest, postpone the priority of any other interest that has not already been protected in the register.
Although the Land Registration Act 2002 reduced them, there are still some interests which can bind someone even though they bought the land for value and the interest is not recorded. These are known as ‘overriding interests’ and more information in relation to these can be found in Practice Guide 15.