Jones and Palmer

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Trusts Of Land And Appointment Of Trustees Act 1996

Jackie Jones

and Warren Palmer

Copyright © 1997 Jackie Jones and Warren Palmer.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary

The Trusts of Land and Appointment of Trustees Act 1996 ushers in major changes to both land and trusts law. No longer does the law regard the primary reason for purchasing land as investment. The modern reality is that houses are bought for occupation by the buyers and only secondly for investment. With this in mind, the new Act consolidates and simplifies the law of trusts. From the re-naming of trusts of land, the abolition of the doctrine of conversion, the extension of powers and rights of both trustees and beneficiaries to the enhanced powers of the court to make orders in relation to the trust, the new law tries to bring trusts into the 21st century. Time will tell how effective the new law will be.

1. General Introduction

The Trusts of Land and Appointment of Trustees Act 1996 (hereafter TLATA) lays down fundamental reforms in the area of both land and trusts law. With the Act having come into effect on 1 January 1997, a knowledge of the most essential features of the Act is vital. The following review of the Act covers seven main areas of reform. Part I deals with conversion, the phasing out of strict settlements and concurrent interests. Part II details trustee's powers, beneficiaries' rights, the new powers of the court and provisions for the protection of purchasers.

The regime applies to trusts for sale, trusts of land, mixed trusts and bare trusts (overruling Re Wakeham [1945] Ch 155 on bare trusts), but excludes settled land (section 1). Trusts created before the commencement of the TLATA are also caught by it. Some of the provisions even extend to trusts of the proceeds of sale of land, especially in relation to orders the court may make under section 14 (replacing section 30 LPA 1925). The manner in which the trust was created is irrelevant (save where specified in the TLATA itself) and therefore includes express, implied, resulting or constructive trusts. The TLATA abolishes the doctrine of conversion, phases out strict settlements, enlarges the powers and rights of both beneficiary and trustee and extends the powers of the court.

2. Part I

i. Strict Settlements

Section 2 of the TLATA provides for the gradual phasing out of the "strict settlement" of land, by preventing the creation of new strict settlements.

This will come as no shock because they are now rarely used: whereas various old strict settlements linger on, new ones often only arise these days by accident. Today people are more likely to meet a strict settlement in the pages of a nineteenth century novel than in their own experience (cf its importance in, for example, "Dr Thorne" by Anthony Trollope, and as a significant underlying factor of most of Jane Austen's novels). As Professor Gray states (Gray 1987, p 610):

Land which is already settled before the commencement of the TLATA is still governed by the Settled Land Act 1925 (SLA). Although such land may be resettled (and remain within the scope of the SLA), with time the number of such settlements will dwindle. This may be because there is no longer any "relevant property...subject to the settlement" (TLATA s 2(4)). Or because the chain of successive interests laid down in the trust instrument has come to an end, and the remainderman has the fee simple absolute in possession. Or, simply, because the trustees of the settlement have opted for the greater flexibility and simplicity of a trust of land (this is permitted in certain circumstances: c.f. TLATA s 2).

That there is one rather than two methods of creating successive interests in land, and that careless drafting in such matters will no longer involve the complexities of the SLA are most welcome. What is noticeable about the new system of a trust of land, is that it derives almost all its features from the trust for sale rather than the strict settlement. The exception is the option available to the trustees to delegate various functions to the beneficiaries, so that, rather like a tenant for life, they have more dealings with it on a day to day basis. Unlike the tenant for life, the trustees retain the legal title. Also, such delegation of powers will not occur automatically, but only where all the trustees jointly grant a power of attorney (section 9).

Paragraph 5 of Schedule 1(5)enacts the demise of that historic institution of land law, closely linked to family settlements,. the entail, or fee tail. Any attempt to grant a new fee tail estate effects a trust in which the beneficiary takes absolutely.

ii. Co-ownership

The TLATA affects the law of concurrent ownership of land in several important ways. The new powers, rights and duties of both trustees and beneficiaries will be looked at later, as will be the implications of the abolition of conversion. Here we look at one of the main problems of the use of a trust for sale in co-ownership and how the TLATA addresses it.

The trust for sale included a duty to sell but a power to postpone sale (unless excluded in the trust deed: section 25 Law of Property Act 1925). But this emphasis on sale of the property was usually inappropriate in family situations. Thus, the courts had to use their discretion to achieve a fair result.

The TLATA avoids this problem as there is no duty to sell under a trust of land, merely a power of sale. All land subject to a trust will be held on a "trust of land" (TLATA s 1). Existing settlements are excluded, but land already held on express or implied trusts for sale are included within the provision. Although it is still possible to create express trusts for sale, as a subset of the trust of land, this will rarely be appropriate for domestic situations, and even here the power to postpone sale cannot be excluded. This means that there is no longer a problem posed by an imperative duty to sell, in situations where that was the last thing intended.

iii. Conversion

The TLATA abolishes the doctrine of conversion (section 3). Under this doctrine the beneficial interest under the trust for sale was deemed to be an interest in the monetary value of the land. Equity regards as done that which ought to be done and the imperative duty to sell the land under a trust for sale meant that in the eyes of Equity the beneficiary had merely an interest in the notional proceeds of sale.

If applied strictly this doctrine was awkward for the beneficiary, whose position was far more vulnerable than someone who had an interest in the land itself. However, particularly in domestic situations, the courts were reluctant to follow the doctrine to its logical conclusion, and allowed beneficiaries rights in respect of the land in spite of it.

Some of these rights have been incorporated into the new TLATA: for example, the right to occupy the land (see sections 12 and 13). Nonetheless, it is desirable that conversion be laid to rest as the courts have sometimes relied on loopholes in the text of the law to avoid its consequences. For instance, in Williams & Glyn's Bank v Boland [1981] AC 487 where there are strong dicta against the doctrine, the court relied on the fact that the Act requires "an interest in respect of the land" rather than an interest in land itself. Other statutes may be more rigid and courts might have been reluctant to allow it to be "an interest in land" in the face of the doctrine.

3. Part II

i. Trustees' Powers

One of the most important features of the TLATA is the nature of the trust of land. No longer is there a duty on the trustees to sell the land, there is simply a power to do so if desired. This perhaps reflects the fact that the reasons why trusts are set up nowadays are not the same as in 1925. The modern house buyer will be well aware of the negative equity traps generated in the late 1980's and will therefore purchase a home primarily for occupation for himself and any partner and/or family, and only secondly for investment purposes.

a. General powers - sections 6 and 7

The new law extends the powers of trustees in a number of ways. One of the most significant changes is that it is no longer necessary for a settlor to detail what powers the trustees are to have - sections 6 and 7 automatically apply, unless expressly excluded (section 8(1)). Section 6 has the effect of giving the powers of an absolute owner to the trustees and any or all of these powers can be delegated to the beneficiaries.

Before the TLATA there was no power to invest in land unless the settlor expressly so authorised in the trust instrument, it was settled land or held as trust for sale . Re Power's WT [1947] Ch 572 held that even an express power for the trustees to invest in land did not allow them to purchase a property for the occupation of the beneficiary. The TLATA reverses this situation. Section 6(3) states that the trustees of land and trustees of the proceeds of sale have power to purchase a legal estate in any land in England and Wales. Section 6(4) enables this power to be exercised by trustees to purchase land for investment or for occupation of any beneficiary or, indeed, for any other reason. The trustees must, however, have regard to the rights of the beneficiaries when exercising any of these powers (section 6(5)). Section 7 even allows the trustees to partition the land between the beneficiaries if they are of full age, are absolutely entitled in undivided shares and consent (see s 7(3)).

b. Settlor's wishes - section 8

There is one get-out clause however. Section 8 permits the settlor to exclude any of the trustees' powers. This includes the power of sale, thereby effectively tying up the land for as long as the perpetuity period allows. The aim behind the strict settlement, therefore, could be resurrected.

c. Powers of delegation - section 9

The TLATA significantly extends trustees' power to delegate powers of management to beneficiaries, repealing section 29 LPA 1925. Section 9(1) (which boasts nine sub-sections) permits the trustees to delegate to any beneficiary of full age and beneficially entitled to an interest in possession in land any of the functions of trusteeship which relate to the land. Such a beneficiary will have many of the powers of a tenant for life under the old strict settlement. The settlor could make provision that the tenant for life is also to be a trustee, thereby making it practically impossible to obtain a revocation of any delegation of power under section 9 insofar as section 9(3) does not address this by providing that any one trustee can revoke the power.

There is one obvious problem with this section. Section 9(3) states that the delegation to beneficiaries ceases on the appointment of a new trustee. Additionally, section 9(7) provides that a beneficiary is in the same position as trustees with the same duties and liabilities. Section 9(8) makes trustees liable for any act or default of the beneficiary to whom they have delegated only of the trustees did not exercise reasonable care in deciding whether or not to delegate to that beneficiary.

Let us suppose that the beneficiary has the power to buy new property. He is in the middle of buying land when a new trustee is appointed. This automatically revokes his power to buy the land. What are the consequences if he is unaware of the revocation and goes ahead with the purchase (possibly contrary to the wishes of other beneficiaries living abroad)?

ii. Beneficiaries' rights

The rights of beneficiaries are extended by the TLATA. For the first time the trustees are required to consult with the beneficiaries in the exercise of any of their functions. And for the first time an Act of Parliament legislates for the right of a beneficiary to occupy trust property.

a. Consultation of beneficiaries - section 11

The trustees of land, when exercising any function relating to the land subject of the trust, are now under a duty (as far as practicable) to consult with beneficiaries of full age and beneficially entitled to an interest in possession in the land. They must give effect to the wishes of those beneficiaries, so far as they are consistent with the general interest of the trust. If there is a dispute among the beneficiaries, the wishes of the majority (according to the value of their combined interests) should be followed (section 11(1)). Section 11(2) permits the settlor to exclude the above provisions if the trust is created by a disposition. Even though this subsection is not retrospective, by virtue of section 11(3), it can be written into a trust which was in existence before the commencement of the TLATA. This is done by executing a deed which cannot subsequently be revoked (section 11(4)).

b. Rights of occupation - section 12

Section 12(1) allows a beneficiary beneficially entitled in possession to occupy trust property to occupy the land subject to the trust at any time, as long as the trust allows such occupation or where the land is available for such occupation. Section 12(2) states that where land is unavailable or unsuitable for occupation the beneficiary has no such right. The trustees are charged with determining whether the land is or is not suitable or available. The trustees also have the power to exclude or restrict the right of occupation of any beneficiary. This section would particularly come into play when there are several beneficiaries beneficially entitled and wanting to occupy the land and the trustees must make a choice.

c. Rights of occupation - section 13

Section 13 sets out three matters to which the trustees must have regard when considering whether to restrict or exclude occupation:

The trustees' power of exclusion and restriction is limited, however, by section 13(4) which forbids them to (a) unreasonably exclude any beneficiary's entitlement to occupy; or (b) restrict any such entitlement to an unreasonable extent. What exactly is meant by the terms "unreasonable exclusion" and "an unreasonable extent" is not defined or discussed in the TLATA.

The trustees may also impose reasonable conditions on the occupying beneficiary (section 13(3)), including directing him to pay any outgoings or expenses (section 13(5)). In addition, occupying beneficiaries or other beneficiaries could be asked by the trustees to provide compensation to excluded or restricted beneficiaries or to forgo any payment or other benefit they may be entitled to under the trust (section 13(6)). Finally, section 13(7) forbids the trustees from exercising any of the powers conferred by section 13 if it would prevent any occupying person from continuing to occupy the property, or could result in them ceasing to occupy the property, unless they consent or the court so approves. There is, therefore, plenty of scope in section 13 for lawyers to do battle over the wishes of beneficiaries and the meaning of the words and phrases.

d. Appointment and removal of trustees - sections 19 and 20

According to Re Brockbank [1948] Ch 206, the beneficiaries have no power to appoint or remove trustees even when all the beneficiaries have agreed. Sections 19 and 20 of the TLATA reverse this position, allowing beneficiaries to appoint and remove trustees, if (1) there is no person nominated to appoint new trustees in the trust instrument and (2) the beneficiaries are of full age and capacity and are absolutely entitled to the trust property (section 19(1)). They can then direct one or more of the trustees to retire and require remaining trustees to appoint a new one (section 19(2)). This reversal will allow the beneficiaries to retain control of the trust without being forced to terminate it.

e. Comment

It is important to note four things: sections 19 and 20 apply to trusts in general, not just to trusts of land; according to section 21 the beneficiaries must act unanimously; section 21(5) allows the above provisions to be excluded; and the overreaching mechanism still applies, leaving the occupying beneficiary in the same vulnerable position as before.

iii. Sections 14 and 15 - powers of the court

Under the TLATA the powers of the court in relation to trusts are extended. The powers of the court are no longer restricted to orders in relation to the sale of the property, but extend to any other orders the court thinks fit to make.

a. Orders of the court - section 14

Section 14 replaces the old section 30 of the LPA 1925. It provides that any trustee of land or any person having an interest in the trust property may make an application to the court for an order under the section. This includes the remainderman for the first time and includes an order preventing sale of the property.

"Any order" under section 14(2) includes declaring the extent of a person's interest in the property and helping the trustees in the exercise of their functions - such as permitting them to proceed with a sale even if the trust instrument declares that a particular beneficiary's consent is required and they have not obtained that consent.

b. Factors to be considered - section 15

The case law decided under section 30 of the LPA 1925 is to some extent put onto a statutory basis in section 15(1) and is consequently quite detailed. It lists some of the factors the court is to have regard to when considering making an order under section 14:

When the court is asked to make an order in relation to the right of occupation of a beneficiary (sections 12 and 13), the court is also required to take into account the wishes of each of the beneficiaries who is entitled to occupy the land.

The court is obviously not bound by any of the above criteria, simply obliged to have regard to them. To what extent the court feels bound by them is yet to be determined, even though under section 14(4) the court can exercise the above powers on trusts which were created before the commencement of the TLATA. The other compelling question is whether and to what extend the court will consider and /or follow the case law under the old section 30 LPA. If the court is asked to make an order in relation to a trust for sale then the old case law will be more compelling than when considering a trust of land where the primary purpose is not to sell the land but to retain it as a home.

c. Comment

There are three points to note about section 14: it does not permit an order to be made to remove or appoint new trustees; there are separate and specific provisions for an application made by a trustee in bankruptcy; and, by virtue of section 17(2), the section also applies to trusts of proceeds of sale of land. This is surprising. If the proceeds of a trust of land (i.e. money) are also a trust of land, when do they stop being land for the purposes of the TLATA? It is even more surprising when one considers Re Wakeham [1945] Ch 177. This case held that once all the land subject to a trust for sale was sold the trust ended and the trustees could not re-invest the money. This situation, it seems, is now reversed. Section 17(1) categorically states that section 6(3) (trustees' powers to purchase a legal estate) also applies to trustees of the proceeds of sale of land. So when does the trust end? The TLATA itself makes no mention of any time scale or other limitation. Again, this is one potential area for litigation.

iv. Purchaser Protection - section 16

One of the great strengths of the 1925 land law reforms was that a purchaser of land subject to a trust need only deal with the trustees. As long as they dealt with all the trustees (being at least two or a trust corporation), the purchaser need not be bothered with the beneficial interests under the trust.

Although the TLATA significantly alters the powers and duties of both the trustees and beneficiaries, the position remains much the same for the purchaser.

a. Section 16(1)

The purchaser can ignore the trustees' general duty under section 6(5) to have regard to the rights of the beneficiaries when exercising their powers of an absolute owner. The similar duty under section 11(1) to consult the beneficiaries and, as far as is practicable, to give effect to their wishes, can also be ignored. Nor need the purchaser be concerned with the necessity of the beneficiaries' consent to partition of the property under section 7(3).

b. Section 16(2)

Where the trustees exercise their powers illegally, or in spite of a restriction or limitation imposed on them by the court or any law, the purchaser is only affected where he has actual notice of it. Otherwise the conveyance is valid.

c. Section 16(3)

If the trust document excludes or restricts the trustees' powers, again the purchaser is only affected if he has actual notice. (This section also imposes the duty on the trustees to take all reasonable steps to bring any such exclusion or restriction to the buyer's attention).

d. Section 16(4)

Finally, the TLATA allows the trustees to execute a deed declaring that they are discharged from the trust where they convey the land to persons they believe to be beneficiaries of full age who are absolutely entitled to it. Purchasers can rely on such a deed unless they have actual notice that the trustees were mistaken.

e. Registered land

These particular provisions only apply to unregistered land as they are unnecessary to registered land. Any restrictions made by the trust document should appear on the register. Also, land conveyed to the beneficiaries will be conveyed in their names. Lastly, matters dealt with section 16(1) will not appear on the register and so will be ignored. The only controversial issue is whether section 16(2) should also apply to registered land. Unless fraud can be proven, it seems that even a purchaser with actual notice of the trustees' illegality is unaffected by this knowledge because it will not appear on the register.

4. Conclusion

The TLATA is welcome, clearing up several issues of land law and reflecting the present day use of land rather than that which was usual during the first quarter of the century. The doctrine of conversion was inappropriate to the trust for sale in the context of matrimonial or family homes and had been sidelined by the courts in these circumstances; abolition was just a matter of time. The strict settlement and entail had also seen their day. In these respects the TLATA merely clears away what has become obsolete or awkward.

More significantly, the emphasis has changed from protection for the purchaser of land to one of recognition and protection of the beneficiary's rights. Following the courts' lead, Parliament has given the beneficiary a right of occupation and allowed for their greater co-operation with the management of the trust, by means of consultation and delegated powers.

The courts, too, have greater powers in that they can make any order that they feel appropriate, regard being had to the factors enumerated in section 15, relating to any of the trustees' functions. No longer are they limited to making or refusing orders of sale, and no longer is the remainderman excluded from coming to court on such an issue.

There is little that is radical in the TLATA, but time will tell whether it has rid the law of much of its clutter. Trustees and beneficiaries alike should welcome the new law for its greater freedom and simplicity.

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