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Trusts of land

Previous: Registered title conveyancing

Throughout previous pages, reference has been made to some of the different types of estate. Estates can be both legal or equitable, express or implied, or successive or concurrent. It has also been noted that the concept of the ‘trust’ arose from the crusades, where it was found that a property could be held on trust for a knight/soldier. To have his estate held on trust, a knight (the grantor) would surrender legal title to his trusted friend (the trustee). At common law, it would then be said that the trustee owned the property and had the right to dispose of it contrary to the knight’s intentions. However, the court of equity decided that in such an arrangement, the trustee would then hold the estate on trust for the grantor (also the beneficiary), such that although legally the house belonged to the trustee, the benefit of the estate was vested in the knight.

Historically, land could be held on trust in the form of a trust for sale under the Law of Property Act (LPA) 1925, or as part of a strict settlement under the Settled Land Act 1925. Trusts for sale will be considered later, however, the Trusts of Land and Appointment of Trustees Act (TOLATA) 1996 almost entirely replaced these trusts with the concept of a trust of land. Today, wherever a legal estate can be found, an accompanying equitable estate can be said to exist.

Structure of trusts of land

Ownership can be either concurrent or successive. Only concurrent ownership will be considered in this section, meaning that this discussion of trusts of land is only relevant where there are two people involved in the ownership of the estate.

There are two main types of estate today, the joint tenancy and the tenancy in common. A joint tenancy means that two or more owners share the same whole ownership interest in an estate. If one of the joint tenants dies, ‘survivorship’ operates, meaning that joint tenant’s interest may remain vested in the other joint tenant(s), and will be not passed to others along with the rest of the deceased’s estate. To be joint tenants, the four unities must be present between each of the tenants: a sharing of the same possession, with the same interest, the same title and at the same time. Just as a joint tenancy cannot be inherited, it also cannot be assigned, as it is the same right shared by all other joint tenants. This was made explicit in Burton v Camden LBC [2000]. A tenancy in common can be described as where two or more people own (equitable) ‘shares’ in the estate. There will be no physical division in the land and each person’s share may be assigned and altered. Survivorship will not operate and tenants in common need not share the four unities.

As of section 1(6) of the Law of Property Act (LPA) 1925, it has been impossible to have a legal tenancy in common. Therefore, at common law (‘legally’), it is only ever possible to be joint tenants of an estate. Only in equity is it possible to have a tenancy in common. This also means that wherever there is co-ownership of an estate, there is always a trust. Only the equitable estate need be considered for the purposes of trusts of land. Section 34(2) of the Trustee Act 1925 provides that there may be no more than 4 trustees of an estate in land, therefore, following s 34(2) of the Law of Property Act, if a property is transferred to more than 4 people (as joint owners of a legal estate), the legal estate will only vest in the first 4, who will hold the equitable estate on trust for both themselves and the other ‘owners’.

Although the tenancy in common is preferred by equity, it is usually presumed that where there is co-ownership, both owners are presumed to be joint tenants, in accordance with Stack v Dowden [2007]. This presumption also extends to where each owner contributed in different proportions to the estate’s purchase price. This presumption may be rebutted, however, as it was successfully in Bathurst v Scarborow [2004]. Malayan Credit v Jack Chia-MPH [1986] illustrates that the presumption may even be rebutted contrary to the express wording of a lease.

The distinction between a legal and equitable estate can be illustrated by Williams and Glyn’s Bank v Boland [1981]. Mr Boland, the husband, was the sole registered proprietor of Mr and Mrs Boland’s estate. This means that Mr Boland was the sole owner of the legal estate. However, as both Mr and Mrs Boland contributed to the purchase price of the property (and the presumption of a joint tenancy could be rebutted), they were both owners of shares in an equitable estate, in the same proportions as their purchase price contributions. Mr Boland held the property on trust for both himself and Mrs Boland as equitable tenants in common. Similarly, if (hypothetically), Mr and Mrs Boland were both registered proprietors of their ‘estate’, they would both own their legal estate as joint tenants, but they would hold the equitable estate on trust for themselves in the same proportions as their respective purchase price contributions.

Severance

It is possible to convert a joint tenancy (in equity) to a tenancy in common. This is usually done to prevent survivorship, but also allows a then tenant in common to sell their share in the estate in question. This process is known as severance, and the burden of showing whether severance took place or not is always on the person claiming an advantage.

According to section 36(2) LPA 1925, severance can occur either by “notice in writing” or “such other acts” which would constitute notice to sever.

Notice in writing

Generally, to be effective to sever, a notice to other joint tenants must be of immediate effect. As such, Goodman v Gallant [1969] confirmed that a will cannot sever a joint tenancy as it may be changed prior to the operation of survivorship, and survivorship operates upon death, before the effectiveness of a will. Similarly, a prayer of divorce petition, according to Harris v Goddard [1983], is not capable of immediate effect, so will not sever. Although a summons for divorce for proceedings, according to Re Draper’s Conveyance [1969], is capable of severing a joint tenancy. A receipt is not required for a notice to effect severance, according to Re 88 Berkeley Road [1971], which extended the wording of section 196 LPA 1925 to apply to severance:

Any notice…shall also be sufficiently served, if it is sent by post in a registered letter addressed to the [other joint tenant(s)], at the aforesaid place of abode or business, office, or counting-house, and if that letter is not returned by the postal operator (within the meaning of the Postal Services Act 2000) concerned undelivered; and that service shall be deemed to be made at the time at which the registered letter would in the ordinary course be delivered.

As a result of this extension, in Kinch v Bullard [1999], where a wife sent a valid notice to her husband and then destroyed it before it came to the attention of her husband, severance was effected and could not be revoked.

Such other acts

The catalogue of other acts which may affect severance were listed in Williams v Hensman (1861) as: an act on a joint tenant’s share; a mutual agreement and a course of dealing.

An act on a share, such as purporting to sell a ‘share’ of a joint tenancy (an impossibility) will firstly effect severance before the transaction is effective.

A mutual agreement can be defined as an agreement between joint tenants. There is no authority in the UK suggesting whether this should mean an agreement between any number of joint tenants, or all of the joint tenants – Australia prefers the latter view. There must be a final agreement, according to Neilson-Jones v Fedden [1975], and according to Burgess v Rawnsley [1975], the agreement must be irrevocable – where there was no mutual intent, there could be no severance. However, even if there is an agreement and severance is effective, the share proportions are not agreed prior to the operation of severance, shares in the estate will be allocated equally, according to Hunter v Babbage [1994].

A course of dealings is a much more uncertain method of severance. In Burgess v Rawnsley [1975], Lord Denning and Sir John Pennycuick disagreed over whether a course of dealings needed to be enforceable or not. The likely scenario is that severance will be inferred where joint tenants discuss their shares in an estate. In Jones v Kernott [2011], the Supreme Court, following a husband’s effective desertion, severance was effected and an equitable judgement was made as to the share proportions resulting from the severance. It is assumed that a course of dealings must involve all of the joint tenants.

If there are 2 joint tenants when severance occurs, each will become a tenant in common. However, if there are more than 2, severance will sever only the joint tenancy in relation to the party severing. For example, if there are 3 joint tenants and 1 severs the joint tenancy, there will become 2 tenants in common: the severed party and the joint tenancy between the other 2 original joint tenants.

Rights of co-owners

TOLATA 1996 replaced the concept of the ‘trust for sale’ with that of the ‘trust of land’. Under the old trusts for sale system, beneficial (equitable) owners were given merely an interest in the proceeds of sale of land, under the doctrine of conversion. This meant that in theory, a beneficiary, such as a wife who had contributed to the purchase price of her husband’s estate did not have a right to occupy that estate. Thankfully, this doctrine was abolished by s 3 TOLATA, making cases such as Bull v Bull [1955] and Barclay v Barclay [1970] no longer relevant.

Section 12 TOLATA gives beneficiaries a right to occupy an estate if: the purpose of the trust of land includes making that land available for occupation or the land is held to be available for occupation. However, this right will be subject to section 13, and will be unavailable if the land if either unsuitable or unavailable for occupation. Section 13 gives trustees the right to control occupation where there are multiple beneficiaries, giving them the right to deny all but 1 beneficiary of the right to occupy and to impose reasonable conditions on that occupation. But in controlling occupation, they must regard the grantor’s wishes, the purposes of the trust and the beneficiaries’ wishes.

Disputes between trustees

Under the old trusts for sale system, where trustees couldn’t agree on how to deal with land, a court could force trustees to sell land under s 30 LPA 1925. This would be so unless the court found that doing so would undermine the purpose of the trust. In Re Buchanan-Wollaston’s Conveyance [1939], a sale would have undermined the purpose of providing an unobstructed sea view; and in Harris v Harris [1995] and Williams v Williams [1976], sales would have undermined the purpose of providing a family home. Conversely, in Jones v Challenger [1961], the sale of a matrimonial home was ordered after a couple’s divorce.

Section 13 TOLATA does not assist trustees when they have disputes amongst themselves. Therefore, under the trusts of land system, a trustee can apply to a court under s 14 TOLATA to have an order made. This is usually for the sale of land. Section 15 TOLATA provides the court with the criteria within which they may make a section 14 order. A court must consider the grantor’s intentions, the purpose of the trust, the interests of minors and the interests of secured creditors before making an order. Unlike under the trusts for sale system, there is now no presumption that a property will be sold, and the interests of secured creditors must now be considered. Finally, consideration must also be given to the wishes and circumstances of any beneficiaries under s 15(2).

The lack of a presumption of sale allows for a court to make a fair order; as occurred in Mortgage Corporation v Shaire [2001], where a wife’s late husband had forged her signature to mortgage 25% of their jointly-owned house. Although, Bank of Ireland Home Mortgages v Bell [2001] illustrates that undue hardship to a mortgagee bank will likely justify an order for sale. Both Putnam v Taylor [2009] and Edwards v Edwards [2010] illustrate that where an innocent (i.e. non-defaulting) beneficiary will not suffer significant hardship from a sale order, a trustee (mortgagee bank) will be able to obtain an order for sale. A court may also impose conditions on sale, such as in Edwards v Lloyds TSB [2004], where a sale was delayed for 5 years to allow the children of a family home to complete their education. The overriding principle seems to be that if a fair solution can be found which merely delays a mortgagee’s recovery of money, that solution will be ordered.

Disputes between trustees and non-trustees

Unlike in the trusts for sale system, s 6(5) TOLATA 1996 requires trustees to give regard to the rights of beneficiaries when exercising their functions, and s 11 requires that trustees, as far as possible, consult with beneficiaries entitled to occupy before dealing with the land on trust. Although these two sections to bind a trustee to go along with beneficiaries, it is an improvement upon the old system. According to Fred Perry v Genis [2014], the protection of beneficiaries under the Family Law Act will not override a court’s discretion under section 15’s criteria.

Bankruptcy

If a beneficial owner is declared bankrupt (usually a mortgagor), prior to 1996, the scope of generous decision in Re Holliday [1981] was significantly reduced by Re Citro [1991], such that creditors nearly always prevailed. Section 15(4) TOLATA prevents a trustee in bankruptcy (appointed on a person’s bankruptcy to manage that person’s assets) from having an estate sold under a section 14 order. Instead, trustees in bankruptcy are to apply under section 335A of the Insolvency Act 1986. Similarly to the combined effect of sections 14 and 15 TOLATA, section 335A removes the ‘purpose’ criterion from a court’s assessment; excludes consideration of the needs of the bankrupt individual and provides for automatic creditor priority after 1 year. This much harsher criteria reflects the expectation that creditors should be more likely to recover from a bankrupt person.

A sale order on the application of a trustee in bankruptcy will only be prevented in exceptional circumstances. According to Re Citro [1991], exceptional circumstances do not include the residence of a child with special needs, but may include living in a house specifically adapted for such a child. As there is room for exceptional circumstances, according to Barca v Mears [2004], s 335A does not violate Article 8 of the European Convention on Human Rights, as applied to UK law in the Human Rights Act 1998. The balancing act carried out by a court constitutes a proportionate limitation on this Article, with is permissible, according to Nicholls v Lan [2006].

Overreaching

As illustrated by City of London Building Society v Flegg [1988], where an estate with is subject to a trust with two or more trustees (usually a husband and wife as joint legal owners) is purchased, the trust under that legal ownership will be overreached – that is the trust itself will be destroyed and an interest in the purchase money given to the beneficiaries for their lifetimes. According to Birmingham Midshires Mortgage Services v Sabherwal (2000), TOLATA 1996 did not change this rule. A purchaser is not responsible for what happens to his purchase money, the trustees are.

For overreaching to take place, a receipt, signed by two trustees, must be obtained by a purchaser. If not overreached, the beneficiaries of a trust will be able to enforce their equitable interests in the purchased estate if the purchaser had notice of their interest (in unregistered land) or if their interest is a protected interest under s 29(2) LRA 2002 (in registered land). Non-overreached beneficiaries may apply for sale of the estate in which they have an interest under s 14 TOLATA. A non-overreached interest will not justify the setting aside of the original sale.

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