When Mutual Wills and Caveats Collide: Lessons from Thynne v Sheringham [2023] NSWCA 181

In the recent New South Wales Court of Appeal decision Thynne v Sheringham [2023] NSWCA 181, the Court has once again clarified the complex intersection of mutual wills, constructive trusts, and caveatable interests. This case offers valuable lessons for estate planners, beneficiaries, and practitioners dealing with estate disputes and equitable interests in real property.

Background to the Dispute

The dispute arose following the death of James Bernard Thynne (the testator) in 2011. Under his will, Mr Thynne left his Darling Point residential property to his second wife, Victoria Diane Sheringham (the respondent), subject to a parallel agreement contained in a signed Memorandum of Wishes. This Memorandum provided that upon the respondent’s death, any remaining proceeds from the property (or any replacement property) were to pass equally to Mr Thynne’s sons, Harry Thynne and Patrick Thynne.

Importantly, the Memorandum acknowledged that the respondent might need to sell the property and use the proceeds for her own maintenance, the education and maintenance of Patrick, and the upkeep of both the Darling Point property and a farming property at Valla.

More than a decade later, Harry Thynne (the applicant) sought to challenge the respondent’s dealings with the property. He commenced proceedings in the Equity Division of the Supreme Court, asserting that the respondent was exceeding her powers under the agreement and that the property was held on trust for the ultimate beneficiaries — himself and his brother. As part of these proceedings, he lodged a caveat on the title to the Darling Point property, claiming an equitable interest.

The Supreme Court ordered the removal of the caveat. The applicant then sought leave to appeal to the Court of Appeal.

The Issues Before the Court

The appeal raised several interrelated legal issues:

• Whether the agreement created a trust or equitable interest in the Darling Point property immediately upon the death of the testator.

• Whether the applicant’s interest (if any) was sufficient to support the lodgement of a caveat under section 74F of the Real Property Act 1900 (NSW).

• The proper characterisation of the “floating obligation” described in Birmingham v Renfrew (1937) 57 CLR 666.

• Whether the respondent’s powers of disposition under the agreement extended to granting a mortgage over the property or using proceeds for investments, such as the farming business.

Key Legal Principles Considered

The Court examined the longstanding authority of Birmingham v Renfrew, in which Dixon J (as his Honour then was) described how agreements for mutual wills may create a “floating obligation” that crystallises into a trust upon the death of the surviving spouse. This obligation constrains but does not entirely prevent the surviving spouse’s dealings with the property.

As Ward ACJ and Kirk JA summarised:

"The ultimate beneficiaries under the agreement have an equitable interest in the property prior to the survivor’s death, which constrains the absolute ownership otherwise vested in the survivor when the testator dies" (at [9]-[10]).

However, the Court stressed that such interests do not necessarily give rise to a proprietary interest capable of supporting a caveat.

Basten AJA offered further clarity:

“The equitable obligation crystallises as a trust only at the date of the death of the survivor” (at [36]), quoting Dixon J’s analysis in Birmingham v Renfrew.

In this respect, the Court of Appeal affirmed that while mutual wills create enforceable obligations, these typically amount to personal (in personam) rights rather than proprietary rights.

The Applicant's Caveatable Interest Argument

The applicant argued that, based on the Memorandum, he possessed a vested equitable interest from the date of his father’s death, sufficient to support his caveat.

However, the Court rejected this argument for several reasons:

• The Memorandum explicitly allowed the respondent to sell the property and use proceeds for various purposes, including her own maintenance.

• The interest of the beneficiaries did not vest until the death of the surviving spouse or potentially earlier in cases of repudiation or fraud.

• The nature of the applicant’s rights prior to the respondent’s death were characterised as a mere equity or personal right, not a proprietary interest.

• The language of the caveat as lodged was inconsistent with the limited nature of any equitable rights the applicant may hold.

As Ward ACJ and Kirk JA concluded:

“The applicant has at present no caveatable interest in the Darling Point property” (at [15], [66]).

Whether Mortgage Dealings Breached Fiduciary Obligations

The applicant also argued that the respondent breached her obligations by:

• Using the Darling Point property as security for a loan.

• Using the proceeds of the loan for investment in the farming business.

The Court rejected both submissions:

• The power to sell necessarily implied the power to mortgage as a lesser form of disposition.

• The respondent’s use of funds for the farming business was within the permissible uses identified by the Memorandum, which contemplated maintenance of “the Farm” as both property and business.

Basten AJA remarked that the applicant’s attempt to separate maintenance of the land from the farming operations was “barely tenable” and “verges on incoherence” (at [65]).

Decision and Orders

The Court granted leave to appeal, given the complexity of the issues, but ultimately dismissed the appeal. The applicant was ordered to pay the respondent’s costs.

The Court summarised its orders as follows:

1. Leave to appeal granted.

2. Notice of appeal to be filed within seven days.

3. Appeal dismissed.

4. Applicant to pay the respondent’s costs.

Practical Implications of Thynne v Sheringham

This case provides several important takeaways:

• Caveatable Interests: An equitable obligation under a mutual wills agreement does not automatically create a proprietary interest capable of supporting a caveat.

• Nature of Constructive Trusts: The “floating obligation” described in Birmingham v Renfrew continues to be central to Australian jurisprudence on mutual wills. Such obligations generally crystallise upon the survivor’s death or earlier repudiation.

• Survivor’s Rights: Mutual wills often allow significant latitude to the surviving spouse, including the ability to sell property and use proceeds for personal maintenance and agreed purposes.

• Drafting Mutual Wills: Careful drafting remains crucial. Express terms concerning the extent of powers and permissible uses of estate assets can prevent disputes of this nature.

Conclusion

The Thynne v Sheringham decision reinforces the nuanced and evolving law surrounding mutual wills and constructive trusts in New South Wales. Practitioners advising on estate planning and trust disputes must be mindful of the fine distinctions between personal obligations and proprietary rights — particularly where real property and caveats are involved.