Guernsey: Trusts Of Land And Overreaching

Last Updated: 10 November 2011
Article by Michael Morris and Richard Lloyd

Trustees duties with regard to acquisition/disposal of property in England & Wales

Prior to the introduction of the Trusts of Land and Appointment of Trustees Act 1996 ("TLATA") there was no power for trustees to invest in land unless the trust deed expressly provided for the power to do so. It was either settled land or held as a trust for sale. The case law held that even if there was an express power for trustees to invest in land, it would not allow the trustees to purchase land for occupation by a beneficiary.

This all changed with the introduction of TLATA. Under section 6(3) the trustees of land have the power to purchase property in England and Wales and Section 6(4) enables this power to be exercised for the purpose of investment, occupation or for any other purpose.

The trustees must give consideration to the rights of the beneficiaries when exercising this power.

It should be noted that TLATA only applies to English law trusts. The powers of investment in land will be subject to the law of the proper law of the trust. In Guernsey, for instance the Trusts (Guernsey) Law, 2007 will apply and confers on the trustees of a Guernsey trust all powers of a beneficial owner.

Position of the Beneficiaries

Under TLATA trustees no longer have a duty to sell the land and therefore, beneficiaries are entitled to benefit from the land both in relation to occupation as well as in relation to the proceeds of sale.

Under section 11 of TLATA, trustees must consult the equitable owners and "in so far as is consistent with the general interest of the trust" give effect to their wishes. However, there is no requirement for any purchaser to ensure that the beneficiaries have been consulted. The only remedy for the beneficiaries if they are not consulted is to apply to the court under section 14 TLATA or sue the trustees after the sale.

The trust deed may however, contain a requirement that the trustees obtain the consent of the beneficiaries prior to the exercise of some or all of their powers (which may include the power to sell property). This requirement goes much further than consultation, and a restriction should be placed on the title to the Property at the Land Registry ensuring that the requirement is complied with.

If there is a requirement for the trustees to obtain the beneficiaries' consent and the land is unregistered land, then under section 16 TLATA, the purchaser will not be affected if the trustees failed to obtain the consent, provided that he was unaware of the requirement for consent.

The Position of the Trustees

Under section 6 TLATA the trustees have all of the powers of absolute owner. They will (or ought to) be the registered proprietor of the land at the Land Registry.

Under section 34 of the Law of Property Act 1925 ("LPA") there can be a maximum of four trustees. NB - LPA applies to all land in England & Wales regardless of the proper law of the trust.

Under section 27 LPA a purchaser of land will not need to be concerned about the equitable interests or the net proceeds of the sale of the land as these interests will be overreached provided that the proceeds of sale are:

A) Paid to two trustees; or

B) Paid to a trust corporation.

The proceeds of sale will then be held under the terms of the trust in place of the property for the beneficiaries. It should be remembered that the trustees do not have an obligation, only have a power to sell.

Overreaching rights under a trust

A purchaser can overreach any equitable interest that can be attached to the proceeds of sale (rather than the property itself) by paying the purchase price to either two trustees or a trust corporation. That purchaser will then take the property free of any such interests.

As good practice, where a trust is purchasing land it would be prudent to ensure that the property is registered in the name of at least two trustees (but no more than 4). This will avoid the need to appoint additional trustees at the time of sale.

"Trust corporation"

A trust corporation is defined in LPA as "the Public Trustee or a corporation either appointed by the court in any particular case to be a trustee or entitled by rules made under subsection (3) of section four of the Public Trustee Act, 1906, to act as custodian trustee"

In the majority of cases therefore, an offshore trustee will not be a trust corporation notwithstanding that it is a corporate trustee. In such cases, in order to override the equitable interests, the sale proceeds must be paid to at least two (but no more that four) trustees.

Examples of equitable interests

Finbar gives a property to his children, Sandra & Denise subject to the condition that his wife Wendy can enjoy the use of the property for the remainder of her life. The property is transferred into the names of Sandra & Denise. Wendy has a life interest in the property which would not be registered with the title to the property. If Sandra & Denise then decide to sell the property to Bernard, Bernard will take free of Wendy's interest PROVIDED THAT he has paid the sale proceeds to Sandra & Denise. Sandra & Denise are deemed to hold part of the sale proceeds as constructive trustee for Wendy and due to the loss of her life interest Sandra and Denise must provide funds to acquire accommodation (or comparable accommodation itself) for the rest of Wendy's life from the sale proceeds.

Hubert & Wilbur buy the property together, but it is only registered in the name of Hubert. Hubert then decides to sell the property to Barrington. Unless Barrington insists that a second trustee is appointed or Barrington obtains Wilbur's consent to pay the purchase money to Hubert only, Barrington will take the property subject to Wilbur's interest and Wilbur's interest is not overreached. The title to the property may give some indication of Wilbur's interest in the land (such as a matrimonial home right having been registered) otherwise, Wilbur's existence may be revealed by inspection of the property.

Example of offshore trust company Ownership

Smart Trust Limited is a Guernsey Fiduciary. Their corporate trustee is Smart Trustee Company Limited. Smart Trustee Company Limited is the sole trustee of the Greendale Trust the sole asset of which is Greendale Farm. The beneficiaries of the Greendale Trust are Bertie and Bernice who live in Greendale Farm. Smart Trustee Company Limited has agreed to sell Greendale Farm to Peter for £1 million. In order to override the beneficial interests of Bertie & Bernice, Peter insists on there being two trustees. Smart Trustee Company Limited must appoint Smart Nominees Limited (or in extremis one of its directors acting in a personal capacity) as co-trustee before the sale takes place. Peter buys Greendale Farm free of the interests of Bertie and Bernice, and any claim that Bertie & Bernice have is now in the sale proceeds and not Greendale Farm.

Conclusion

When selling property owned by a trust the trustees must ensure:

A) that they are selling the property free of any equitable rights; and

B) they can give the appropriate discharge by either having the requisite number of trustees or by appointing another trustee. When buying property from trustees ensure your solicitor makes the appropriate enquiries or your client may acquire more than just a new home!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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