What is an Equitable Interest?

An equitable interest in property belongs to someone who has obtained equitable title to it or is awarded the interest as part of an equitable relief. It’s a remedy available to a court that wants to ensure fairness and in cases where the plaintiff may not have legal rights under common law. The owner of the interest is often not in possession of it. Those who take possession of it, such as a purchaser, are subject to equitable interest if they had notice of it. One group that often has this type of interest in real property are the beneficiaries of a trust. While a beneficiary doesn’t have a possession or legal title to the real estate because the trust itself is often the holder of title, the beneficiary has a right in equity if the property is sold or if the beneficiary is harmed due to fraud by the trustee.

One area of real estate transactions in which the equitable interest claim is raised by plaintiffs are in rent-to-own arrangements. In a rent-to-own agreement, the tenant agrees to rent the property for a term, and prior to the end of the term the tenant has the option to purchase the property for an agreed upon price. When tenants fail to pay rent during the term, landlords often have the right to file eviction lawsuits. A tenant who has a rent-to-own agreement will often ask the court to award him or her equitable relief by granting an equitable interest in the property. If the court agrees, the landlord would have to pursue foreclosure instead of an eviction.

Courts often rule that individuals have an equitable interest in property when they enter in a sales contract. If the holder of title acts in bad faith as it relates to property in his or her possession and under contract, courts may be able to provide equitable relief to the purchaser as a result of the contract, as long as the buyer paid some form of compensation. An equitable interest is often implied in sales contracts as well. For example, a buyer who pays a significant down payment for property at auction will often want to insure it until the property is paid for in full and transferred. An insurance company may insure the property by implying that the buyer has an equitable interest in it.

Buyers are often required to research public records to ensure that there are no liens or other interests in the properties they want to purchase. They are often subject to equitable interest unless there was notice and they had no knowledge of such an interest in the property. Holders of equitable title should record them to put the public on notice of their interest.