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8.2.8. Restrictions on the power to create future interests

If I am the holder of a property interest in a resource and the property interest is in possession and is of unlimited duration, then I am free to exploit or preserve the resource as I like (subject to rules about not harming others etc.). I can consume, preserve or alienate the capital, and use or save or otherwise exploit as much of the income value as I like. In classic economic theory, this promotes the most efficient use of the resource in which I have the interest: if someone values it more highly than I do because he could use it more efficiently, there are no obstacles to prevent its transfer from me to him at a price advantageous to each of us.

However, if I exercise my freedom to do as I like with the resource by creating successive limited interests in it, then I am limiting the freedom of action of my successors to make use of the resource in the way they consider most appropriate. Unsurprisingly, therefore, there have always been limitations on the power of an owner to fragment ownership by dividing it up into successive interests of limited duration. These rules – the most important of which is the rule against perpetuities – are outside the scope of this book, but essentially they involve restricting the owner’s right to create unlimited successive future interests by invalidating the offending future interests. For an analysis of these rules, their present effect and utility, and recommendations for their reform, reference should be made to Law Commission, The Rule Against Perpetuities and Excessive Accumulations (Law Commission Report No. 251, 1998).

8.3. Legal and equitable interests

In this jurisdiction, all property interests can be categorised as either legal or equitable. There are three questions to be considered here. First, what does the distinction between legal and equitable mean? Secondly, which interests are legal and which are equitable? And, thirdly, what are the consequences of categorising an interest as legal rather than equitable?

8.3.1. Origin of the legal/equitable distinction

Equitable interests were originally those property interests that were recognised by the Chancery courts but not by the common law courts. There were several circumstances in which the Chancery courts would regard someone other than the legal title holder as having a proprietary interest in a thing. These can be divided into two main types – the ‘failed formality’ type of interest, and the ‘novel’ type of interest.

8.3.1.1. Failed formality interests

This is essentially a matter of title and is dealt with in detail in Chapters 10 and 12, but for present purposes the important point is that the common law would (and still does) require various specific formalities to be complied with before it would