Lack of capacity leads court to reject property transfer

In Ip v Chiang [2021] NSWSC 822, the administrator of the deceased’s estate (the plaintiff) sought equitable relief from the first defendant.

This arose from the transfer of the deceased’s residential property (the Redfern property) to the first defendant.

The plaintiff argued that the first defendant knew that the deceased did not have capacity, and in doing so, “tricked the deceased (an elderly cognitively impaired widower)”¹ into transferring to her the Redfern property through a ‘sham’ process of marriage, separation, property settlement and divorce.

Amongst other issues in this lengthy decision – due to the complex relationships and events surrounding the deceased – the court made a determination on the issue of capacity of the deceased.

Issues considered

The court was critical of several professionals with whom the deceased came into contact and in particular, the solicitor (Ms Zhang) who dealt with the first defendant and the deceased on a range of transactions.²

The court noted that Ms Zhang failed to appreciate any possibility of conflict between the deceased and the first defendant when implicitly acting for both parties or the first defendant alone.³

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The court found that the solicitor saw both the deceased and the first defendant together and appeared to have taken instructions from the first defendant primarily, “if not, only from the first defendant, subject to Ms Zhang’s formality of referring the deceased to Mr Chen for ‘independent legal advice’ on the Binding Financial Agreement”.⁴

The court further noted that the solicitor should have known that the deceased lacked capacity on numerous occasions and referred to one incident where the solicitor was explicitly on notice that the deceased was suffering from dementia.⁵

The court emphasised that the “deceased’s lack of sophistication, poor education and weak mind were patent”⁶ and could not have been failed to be noticed by the solicitor. The solicitor took no steps to satisfy herself that the deceased had capacity and an understanding to effect the business at hand.⁷

The court found that the deceased lacked capacity:⁸

• to marry the first defendant
• to execute a memorandum of transfer, the binding financial agreement and the memorandum of transfer pursuant to which the first defendant ultimately became the sole registered proprietor of the Redfern property, and
• to execute documents, and to give instructions, incidental to steps taken by the first defendant to acquire the Redfern property for herself.

It was also noted by the court that “an element of knowledge by the first defendant of the deceased’s incapacity might also be necessary”,⁹ but it was not necessary in this instance to explore an application of equitable principles relating to undue influence.

The court held that: “Justice can be done in the current proceedings by an application of the principles governing incapacity and those governing relief against unconscionable dealings operating in parallel.”¹⁰

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The court ordered in favour of the plaintiff and declared that, whatever interest the first defendant held in the Redfern property, as well as proceeds received by the first defendant from the sale of the property, was held by her upon trust for the deceased.¹¹

Grace van Baarle is an Ethics Solicitor and Manager of the Queensland Law Society Ethics and Practice Centre. Janelle Linato is a law student in the QLS Ethics and Practice Centre.

Footnotes
¹ Ip v Chiang [2021] NSWSC 822, 4.
² Ibid 140.
³ Ibid.
⁴ Ibid.
⁵ Ibid 142.
⁶ Ibid 209.
⁷ Ibid.
⁸ Ibid, 321.
⁹ Ibid 124.
¹⁰ Ibid 132.
¹¹ Ibid 336.