The question arises, however, if the occupier in possession of real property against whom summary proceedings are brought by the owner claims an equitable interest in that property pursuant to an implied constructive or resulting trust.

 

This question was considered by Associate Justice Derham in Lu v. Yu [2019] VSC 499.  In that case, the plaintiff, Lu, was the sole registered proprietor of a domestic property in Reservoir.  The defendant had occupied the property for 17 years since the plaintiff purchased it.  Yu argued that he had occupied the Reservoir property on the basis of a domestic arrangement with the plaintiff, Ms Lu.  As a result of that long-standing domestic arrangement, an implied resulting or constructive trust arose over the domestic property in Yu’s favour.

 

The domestic arrangement cooled and came to an abrupt end in 2019.  The plaintiff, Ms Lu, applied to the Supreme Court for an order for possession under Order 53 of the Supreme Court (General Civil Procedure) Rules 2015.  That rule is designed to remove squatters and trespassers from primarily residential real estate.  Ms Lu alleged that Mr Yu had been living in the house without her permission and had not paid her any rent.  The defendant, Yu, claimed an equitable interest in the property as a result of the implied trust.  These arguments set up an interesting battle between an owner’s right to possession of property against a squatter against the beneficiary of a trust’s equitable right under a trust to a trust asset.

 

Two issues had to be decided by Associate Justice Derham.

 

First, Associate Justice Derham made clear that the defendant occupier was not claiming a right to possession or a right to occupy the property.  He was only claiming an equitable interest under a trust or a right to share in proceeds from a sale.  Any argument by the defendant that he was entitled to a right to possession or occupancy as a result of his equitable interest was dismissed by the Supreme Court.  Associate Justice Derham conceded that the defendant occupier did have a claim to a resulting or constructive trust by virtue of the long-standing domestic relationship.  Such an equitable interest could give rise to the defendant beneficiary (under the trust) requiring the implied trustee (Lu) to transfer the registered interest in land to him.  That would ultimately give the defendant, Yu, a right to possession.  This conclusion is based upon the legal principle that a beneficiary has the power to force a trustee to give the beneficiary an interest as a joint tenant or a tenant in common with the trustee.

 

The second issue considered by Associate Justice Derham was whether or not the plaintiff trustee’s right to possession of the property under the Supreme Court Rules prevailed over the defendant beneficiary’s equitable right under the implied trust.  The court considered the previous High Court of Australia Authority in Octavo Investments v. Knight [1979].  In that case, the High Court of Australia decided that both a trustee and a beneficiary had beneficial interests in the assets of an implied trust.  This meant that a plaintiff trustee did hold legal title to the house in that case on trust both for herself and for the defendant beneficiary.  The High Court of Australia decided that the trustee’s equitable interest in assets of a trust arose because of the trustee’s right to be indemnified out of those assets in relation to any personal liabilities incurred by that trustee in administering the trust.

 

Applying the High Court of Australia Authority, Associate Justice Derham decided that the interests of the trustee to be indemnified from the assets of the trust (an equitable interest) were to be preferred against the equitable interest of the beneficiary to ultimately call for the trustee to transfer an interest in the land to the beneficiary.  Associate Justice Derham held that beneficiaries cannot call for the distribution of trust assets which were subject to the trustee’s right to indemnity until the trustee’s liabilities under the trust were satisfied.  In other words, in terms of the conflicting equities, the trustee’s right to indemnity triumphs over the beneficiary’s right to compel possession.

 

Accordingly, Associate Justice Derham made orders for possession of the house.  The beneficiary, Mr Yu, had to leave.  However, the sting in the tail for the trustee plaintiff was that although Ms Lu was entitled to recover possession, she could not deprive the defendant beneficiary’s interest in that property.  The Supreme Court would only allow the plaintiff trustee to exercise her right to indemnity.  Ultimately, when the trustee wished to dispose of the property, the defendant beneficiary’s rights would have to be acknowledged at that time.  The plaintiff trustee could, in theory, sell the property but the proceeds of sales themselves have to be held subject to the implied resulting or constructive trust.

 

In those circumstances, the defendant beneficiary should immediately lodge a Caveat to protect that beneficiary’s interest under the implied resulting or constructive trust.

 

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This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice. 

 

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