First dibs: a trustee’s power to recover vacant possession of property
A person seeking to regain possession of property can apply to a court for summary relief in circumstances where they have an interest in property which is being occupied without their licence or consent. The situation can become complicated, however, where the person in possession of the property and against whom the summary proceeding is brought claims an equitable interest in the property pursuant to a trust. In the case of Lu v Yu,[1] the Supreme Court recently considered such a circumstance and made some important comments about the interaction between trust law and possessory rights.
The facts
The plaintiff was the sole registered proprietor of property in Reservoir. The defendant occupied the property and had allegedly been living there for 17 years since the time of purchase by the plaintiff. The defendant did so ostensibly on the basis of a domestic arrangement with the plaintiff, an arrangement which the defendant alleged gave rise to an implied, resulting or constructive trust over the property in his favour.
The plaintiff applied for orders for possession pursuant to order 53 of the Supreme Court (General Civil Procedure) Rules 2015, a procedure ‘originally designed to remove squatters’.[2] Rule 53.01 relevantly states:
‘Application of Order
(1) Subject to paragraph (2), this Order applies where the plaintiff claims the recovery of land which is occupied solely by a person or persons who entered into occupation or, having been a licensee or licensees, remained in occupation without the plaintiff’s licence or consent or that of any predecessor in title of the plaintiff.
(2) This Order does not apply where the land is occupied by a mortgagor or successor in title and the claim is made by the mortgagee or successor in title.’
For the purposes of her application for possession the plaintiff alleged that the defendant had been living at the property, had not been paying rent, and that any licence upon which the defendant remained at the property had been revoked. Despite the plaintiff’s requests that he leave the property the defendant remained there on the basis he claimed an equitable interest in it.
The proceeding for recovery of the property was one of three proceedings between the parties; the defendant had brought a proceeding relating to the allegation of a trust as well as proceeding involving a caveat over the property.
The Court’s consideration
The matter was heard before Derham AsJ. His Honour considered the two main submissions which the plaintiff advanced in support of the application, namely that the plaintiff ought regain possession in circumstances where:
the defendant did not claim a possessory interest in the property; and
as trustee holding the property on trust for the defendant — if there were indeed a trust as the defendant alleged — the plaintiff was entitled to recover possession of the property as a trust asset and liquidate it in order to satisfy her indemnity.
His Honour dealt with those submissions as follows.
Could the defendant’s interest under a trust give rise to possessory rights?
The plaintiff submitted that nothing in the defendant’s supporting material filed in the proceeding (or in any of the related proceedings) evidenced a right to possession or occupancy of the property; at its highest, the defendant’s claim to an equitable interest entitled him to a share of the proceeds from any eventual sale of the property.
However, his Honour held that because the defendant had a claim to a resulting or constructive trust in respect of the property the claim was ‘inevitably one which could give rise to an order requiring [the plaintiff] to transfer to [the defendant] a registered interest in the land. That would prima facie entitle him to possession, albeit jointly or as a tenant in common with [the plaintiff]’.[3] In circumstances where the Court could foresee an equitable interest under a trust giving rise to a registered interest in the property — the latter bearing possessory rights — the defendant could not be precluded from asserting a claim for possession and the plaintiff could not succeed in her application on this argument alone.
Could the plaintiff’s right to possession as trustee prevail?
The plaintiff’s second main submission was one which his Honour considered ‘compelling’. As trustee under the alleged trust, the plaintiff held legal title to the property on trust for herself and the defendant (albeit in shares not specified at the time of the proceeding). The plaintiff pointed to the decision of the High Court in Octavo Investments Pty Ltd v Knight[4] as demonstrating the consequences which ought flow from this.
In Octavo, the High Court held that there are two classes of persons having a beneficial interest in the assets of a trust: the beneficiaries and the trustee. The Court also held that a trustee’s interest in the assets of a trust arises as a consequence of the trustee’s right to be indemnified out of those assets against personal liabilities the trustee incurs in that capacity. To secure this right, a trustee holds a charge over the trust assets.
Noting those principles, Derham AsJ stated that:
‘[T]he interest of the trustee to be so indemnified will be preferred to the interests of the beneficiaries, so that [the beneficiaries] are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied’.[5]
And that:
‘[F]or that purpose the trustee is entitled to possession of the property as against the beneficiaries’.[6]
Applying those matters to the case at hand, his Honour noted that permitting the plaintiff as trustee to recover possession of the property would not deprive the defendant of his interest in the property, nor would recovery of possession affect the defendant’s caveat over the property. Granting the plaintiff possession of the property would, in his Honour’s view, merely enable the plaintiff to exercise her right to indemnity as trustee.
While, strictly speaking, Derham AsJ did not rule on the matter nor award the plaintiff possession (and instead adjourned the matter for technical reasons relating to service of the application), his Honour noted that he would be inclined to make orders for possession on the return date. The Court’s comments in Lu v Yu stand, then, as a useful reminder of the way in which trust law operates to grant certain rights to a trustee in priority to those of beneficiaries — including where possession of property is at stake.
[1]: [2019] VSC 499.
[2]: Associate Justice Mark Derham, ‘Law Institute of Victoria Property Law Conference 2018 – Keynote Address’ (Speech, Law Institute of Victoria, 24 August 2018) 5 <https://www.supremecourt.vic.gov.au/sites/default/files/2018-10/livpropertylawconference2018keynoteaddress.pdf>.
[3]: Lu v Yu [2019] VSC 499, [20].
[4]: (1979) 144 CLR 360.
[5]: Lu v Yu [2019] VSC 499, [14](b).
[6]: Ibid [14](e).