The floating obligation of mutual will contracts

Mutual wills refer to contracts not to revoke a will after the death or incapacity of the other contracting party. Usually, a couple agrees that the property of whoever is the last to die will go to a specified beneficiary. Importantly there must be some independent evidence of a contract between the persons making the corresponding wills: Gray v Perpetual Trustee Co Ltd (1928) 40 CLR 558; 34 ALR 238; [1928] AC 391.

However, where a surviving testator expresses ‘clear and satisfactory’ evidence that there was a contract with the other testator that they would leave mutual wills this has been considered to be admissible:

“…the admission by an owner of property that he is not entitled to a particular right or interest in that property is binding upon a person who succeeds merely to the interest of that predecessor in title.”

Nowell v Palmer (1993) 32 NSWLR 574 at 578

Typically, where there is a breach of a mutual will contract the aggrieved party can rely on the contract to obtain damages or specific performance. However, there is no privity of contract for beneficiaries who are not parties to the mutual wills contract. On the death of a party to a mutual wills contract, equity will recognise a constructive trust over the assets the subject of the mutual wills contract, with beneficiaries having an enforceable right against the constructive trustee.

“… A contract between persons to make corresponding wills gives rise to equitable obligations when one party acts on the faith of such an agreement and dies leaving his will unrevoked so that the other takes property under its dispositions. It operates to impose on the survivor an obligation regarded as specifically enforceable. It is true that he cannot be compelled to make and leave unrevoked a testamentary document and if he dies leaving a last will containing provisions inconsistent with his agreement it is nevertheless valid as a testamentary act. But the doctrines of equity attach the obligations to the property. The effect is that the survivor becomes a constructive trustee and the terms of the trust are those of the will which he undertook would be his last will.”

Dixon J in Birmingham v Renfrew at 683

Background

James Thynne (the deceased) a solicitor, died on 22 June 2011. The deceased married twice and the plaintiff, Harry Thyne (Harry), was born to the deceased’s first wife Catherine Reid. The deceased and Catherine Reid divorced in 1990.

In September 1996, the deceased married Victoria Sheringham the second defendant. Their son, Patrick Thynne (Patrick), was born in December 1996.

The deceased owned a property in Darling Point, Sydney and a farming business conducted on a property known as Elanora on the Pacific Highway at Valla, New South Wales.

The land at Elanora had originally been owned by the deceased’s parents but was transferred to the first defendant company (Jevny) on 9 December 1981.

Jevny has two shares on issue. One of them was transferred to Victoria on 2 November 2006, and the other on about 2 March 2012. She still holds those shares.

In his will dated 25 March 2011 the deceased appointed Victoria, and two others as executors and trustees of the Will which provides for several specific bequests to Harry, Patrick and Victoria. At the same time as making his Will the deceased signed a Memorandum of Wishes (the Memorandum), which was counter-signed by Victoria, who agreed to and acknowledged its terms.

Probate of the Will was granted on 25 March 2011. The Darling Point property was transferred to Victoria on 7 September 2012 under s 93 of the Real Property Act 1900 (NSW) (the Act).

Victoria has continued to operate the cattle and macadamia business on Elanora and has mortgaged the Darling point property to Westpac Banking Corporation as security for an overdraft facility.

The proceedings

On 27 July 2022, Harry commenced proceedings against Jevny and Victoria seeking a declaration that Victoria holds the Darling Point property on trust for Harry and Patrick on the terms expressed in the Memorandum.

On 27 October 2022, Harry lodged a caveat on the Darling point property, under s 74F of the Act. Under the Act, a person may lodge a caveat with the Registrar-General if they have a legal or equitable interest in land.

A caveat notifies other people that the caveator has a proprietary interest in the property and prevents others from dealing with the property without the caveator’s consent.

Victoria submitted that she is unable to refinance the mortgage whilst the caveat is registered on the Darling Point property. Elanora is experiencing financial difficulties and additional funds may be needed to ensure additional cash flow, pay for litigation and carry the farm through until the next harvest in 2023.

On 1 November 2022, Harry filed a Statement of Claim that Jevny holds Elanora on trust and has breached its fiduciary obligations. Similarly Victoria holds her title and interest in the Darling point property for him and Patrick in equal shares as tenants in common, and that in granting Westpac the mortgage she has breached that trust.

Harry seeks a declaration that Victoria is entitled to live at, or rent out, the Darling point property or such other property as is acquired with the proceeds of the sale.

Victoria instructed her solicitors to file and serve a lapsing notice for the caveat on Harry on 15 November 2022. Following the service of a lapsing notice unless a court order extending the caveat has been obtained and lodged with the Registrar General the caveat will lapse after 21 days.

On 17 November 2022, Harry was granted an order extending the operation of the caveat until further order, with the onus of persuading the Court that the caveat should continue in operation. Additionally Victoria could apply for the extension order to be discharged or varied.

Victoria submitted that the caveat had a detrimental effect on her and seeks an order under s 74MA that the caveat be removed, however, Harry has the onus of establishing that the caveat should be extended.

The Court referred Harrys motion for extension to the Equity Duty Judge on 13 December 2022 for further consideration. The Duty Judge referred the matter for hearing.

The Decision

Harry Bernard Thynne v Jevny Pty Limited and Anor [2022] NSWSC 1774 principally concerns whether a caveat lodged by the plaintiff is supported by a caveatable interest; if the caveat is supported, its removal should be ordered because its maintenance is against the balance of convenience.

The propositions are: (i) it is the disposition of the property by the first party under a will in the agreed form and upon the faith of the survivor carrying out the obligation of the contract which attracts the intervention of equity in favour of the survivor; (ii) that intervention is by the imposition of a trust of a particular character; (iii) the subject-matter is “the property passing [to the survivor] under the will of the party first dying”; (iv) that which passes to the survivor is identified after due administration by the legal personal representative whereupon “the dispositions of the will become operative”; (v) there is “a floating obligation” over that property which has passed to the survivor; it is suspended during the lifetime of the survivor and “crystallises” into a trust upon the assets of the survivor at death.

Barns v Barns (2003) 214 CLR 169 at [85] per Gummow and Hayne JJ.

A floating obligation exists on the Darling Point property that will crystallise into a trust on Victoria’s death. Therefore as Harry is not the beneficiary of a trust he does not have a caveatable interest on the Darling Point property.

 The Court rejected Harry’s submissions that the reference in the will to maintenance of the farm is to the land only, and that Victoria has no entitlement to mortgage the Darling Point property –  as opposed to selling or renting it – to support the Farm.

Under the will the deceased expressed that Victoria use reasonable endeavours to ensure that the farm operates on a financially stable and profitable basis from year to year, and not to sell it unless financially obliged to do so. Similarly, as Victoria can deal with the Darling Point property or its proceeds, and use them for her maintenance, the maintenance and education of Patrick, maintaining the Darling point property and the Farm, the value of the trust cannot be ascertained until Victoria dies. 

Importantly the Court rejected Harry’s submission that Victoria can sell the Darling point property to raise money to maintain the Farm but cannot mortgage it whether for her maintenance or that of Patrick or of the property itself. As mortgaging property involves a lesser disposition than selling it.

The Court held that even if Harry had established an equitable interest in the Darling point property, the terms of the caveat extend beyond any interest claimed.

Victoria argues that the Court should order withdrawal of the caveat in any event because the balance of convenience does not favour maintaining it.

In determining the balance of convenience the Court considers all the facts and circumstances of the case including:

  • the strength of the cavetor’s underlying interest;
  • whether the caveator’s interest would be destroyed or lose priority if the caveat was removed;
  • the owner refinancing or exercisising another valid right in respect of the land;
  • the prevention of a party with a superior registered interest applying to remove the caveat being prevented from exercising their legal rights; and
  • as a result of the value of the land being less than the mortgage debt no money would be available to the caveator.

However, the onus is always on the caveator to show that the balance of convenience is in the caveator’s favour

Although the Court held that Victoria’s evidence that the caveat should be withdrawn on the balance of inconvenience is somewhat thin, the onus was on Harry to submit evidence that favoured extending the caveat. The court stated that even if it had found a caveatable interest, it would have ordered the removal of the caveat.

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