As a professional practicing in the field of financial planning it is almost guaranteed that you will regularly receive calls from clients who are interested in purchasing a property and wish to know whether they should do so by means of a trust, or whether they should do so in their personal capacity.
Occasionally, one may even be approached for advice by a client who wishes to sell a property to a trust or enter into some other agreement with a trust. However, while it is no doubt important to do so, in this article I do not wish to discuss the merits, or not, of either of these options. Rather, I will assume that the client favoured the use of a trust for the transaction.
Working on that assumption, I will instead endeavour in this article to provide advice on how the client availing herself of a trust or the client who wishes to transact with a trust should proceed in order to ensure that a legally enforceable agreement is entered into. What follows is equally applicable to all parties to transactions where trusts are involved.
“Who the trustees are, their number, how they are appointed, and under what circumstances they have power to bind the trust estate are matters defined in the trust deed, which is the trust’s constitutive charter. Outside its provisions the trust estate can not be bound.”
With the above in mind, the place to start for any person acting in a transaction where a trust is a party would be to obtain a copy of the trust deed and the letters of authority and determine the following:
- Who are the persons authorised in the letters of authority to act as trustees on behalf of the trust?
- Does the trust deed require a minimum number of trustees to be in office? And, if so, is the number of the authorised trustees as determined equal to or more than that minimum number?
The above checks are obviously necessary in order to ensure that the correct persons are acting on behalf of the trust and also to ensure that there is no shortcoming in respect of the number of trustees. A failure in respect of either of these issues will render the transaction void.
Once the trustees and their numbers have been ascertained it is time to read the trust deed and check the following:
Does the trust deed allow the specific type of transaction that the trustees are trying to enter into?
As can be seen from the quote above transactions that fall outside of the provisions of the trust deed are void.
This is an opportune time to mention that trustees who enter into transactions on behalf of a trust that later turn out to be void by reason of their not falling within the ambit of the trust deed are likely to be held personally liable for any damages resulting from such unauthorised actions.
The Trust Property Control Act in section 9(1) thereof requires of trustees to exercise their powers with “the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.” I would suggest that trustees who have failed to familiarise themselves with the provisions of their trust deed and, as a result of such failure, have entered into an unauthorised transaction, have failed to meet the level of care, diligence and skill required of them.
When pointing out the aforementioned to clients and informing them of the risk of personal liability, they are usually eager to inform me that their trust deed contains a provision which exempts them from liability – often such a clause will claim to exempt them from all liability for damages other than that caused by their own fraudulent actions. Indeed, such a provision has been included in, near enough, every trust deed that I have seen.
Despite its pervasiveness, it is nevertheless an invalid provision and serves no purpose. Section 9(2) of the Trust Property Control Act specifically provides that provisions contained in a trust deed that seemingly exempt the trustees from or indemnify them against liability resulting from breach of trust, where they failed to show the degree of care, diligence and skill required by subsection 9(1), are invalid.
How are the trustees required to reach their decision? Does the trust deed require a simple majority decision or a unanimous decision? How must this decision be reflected?
Most trust deeds require that the trustees’ decisions be reduced to writing and signed by all the trustees present at the meeting – also those who may have voted against the specific action. Some trust documents also provide for the validity of a resolution that, while not taken at an official trustee meeting, was consented to and signed by all the trustees in office.
It is, however, important to note that trustees are required, unless the trust deed contains a provision to the contrary, to act jointly.
“The terms of the trust instrument which provide for the trustees to make decisions by a majority vote at a quorate meeting do not provide an exception to the rule that all the trustees must act jointly; they merely provide that … a majority decision will bind the dissenting or absent trustees. The minority is obliged to act jointly with the other trustees in executing the resolution adopted by the majority.”
This means that decisions taken by a majority of the trustees without including the remainder of the trustees in the decision making process are invalid.
This failure to properly authorise trustees to act has come to the fore in a number of cases in the recent past. From these cases it is abundantly clear that actions taken by trustees who have not been properly authorised thereto in accordance with the terms of the trust deed are invalid. Typically these issues arise in property transactions where the lack of proper authorisation to act has been used, successfully, as an excuse to renege on sales by purchasers and sellers alike.
The case of Thorpe v Trittenwein highlights the relevant issues and risks regarding transactions involving trusts and the need for trustees to act jointly. The facts are as follows:
a) Mr Thorpe entered into a contract of sale to purchase a property in the name of the Brian Edward Thorpe Trust. The trust deed required three trustees at all times.
b) Thorpe signed the agreement both as trustee and as the authorised agent of the other two trustees. This authority was apparently given verbally. His actions were later, but only after entering into the agreement on behalf of the trust, ratified, in writing, by the other trustees.
c) When the seller reneged on the deal the trust approached the court to force performance by the seller.
d) The Supreme Court of Appeal found that Thorpe had exceeded his powers. Co-trustees are required by law to act jointly and in the absence of a joint decision (in writing) by the co-trustees the assent to the contract by any single trustee will not bind the trust.
e) As such the agreement of sale is void ab initio and of no force and effect.
In this case the failure to comply with the rules of the trust deed and the law of trusts worked to the detriment of the trust when the trustees tried to force the seller to comply with the terms of the agreement of sale. It is important therefore for persons, when contracting with or on behalf of a trust, to realise that it is not acceptable to take or condone short cuts in the decision making and administrative processes of trusts.
The following quote from the case of Thorpe v Trittenwein indicates an unwillingness on the part of the court to assist parties involved in a trust who take such shortcuts:
“Those who choose to conduct business through the medium of trusts of this nature do so no doubt to gain some advantage, whether it be in estate planning or otherwise. But they cannot enjoy the advantage of a trust when it suits them and cry foul when it does not. If the result is unfortunate, Thorpe has himself to blame.”
But consider the reverse situation as it presented itself in the case of Van der Merwe NO and Others v Hydraberg Hydraulics CC and Others. In this case the trustees sold a property without complying with the provisions of the trust deed in respect of joint action and authorisation. They even gave the purchasers possession of the property and accepted payment of the largest part of the purchase price. This did not, however, prevent the trustees when it suited their purposes at a later time (after realising that the property had substantially increased in value) to offer their own non-compliance with the provisions of the trust deed as a reason why the transaction was void.
Take cognisance of the provisions of other relevant legislation and ensure that they are complied with.
Admittedly though, in the Hydraberg-case there were a number of factors that, in slightly different circumstances, may well have caused the court to hold the trustees to their representation. In fact, the court stated that it wished to do so. The trustees however got away with their delinquent behaviour by reason of another deficiency in compliance with formalities. They in fact got their get-of-jail-free-card in the form of the provisions of the Alienation of Land Act, [9] that prescribe certain formalities to be complied with in contracts dealing in immovable property.
One of these is a requirement that the authority to act as an agent on behalf of another has to be reduced to writing. As there were three trustees in office at the time, the two trustees who purported to act on behalf of the trust could only bind the trust in respect of a sale of immovable property by acting together with their co-trustee as joint principals, alternatively, on the written authority of all of them acting jointly. This was not done and accordingly the transaction is void by reason of the non-compliance with the formalities prescribed by the Alienation of Land Act.
The court in the Hydraberg-case made the following illuminating statement:
“Whereas, as between the parties to the contract I might, on the basis described at some length above, have been able to disregard the veneer of the trust to overcome an unscrupulous resort by the trustees to internal formalities and conveniently assumed lack of capacity to escape contractual obligations, I am not able to ignore the trust’s existence as a formally constituted legal concept when it comes to compliance with the peremptory requirements of applicable legislation. When law and equity cannot concur, it is the law that must prevail.”
The point, of course, being that when you transact with a trust it is in your best interest to work through all the information above and to ensure that all prescribed formalities have been complied with so as not to find yourself in the position of the unsuspecting purchasers in the Hydraberg-case. This has to be done in respect of the formalities imposed internally in respect of the trust and those imposed externally such as by relevant legislation.
The aforementioned issues regarding authority and non-compliance with formalities often arise in another situation. This can most easily be explained by way of an example. Clients looking at purchasing a fixed property, who consider using a trust for that purpose do not always have a trust available for that purpose. And for some reason they seem to only become aware of this short-coming once they have found a property that they are interested in, when, all of a sudden they worry about losing their once in a lifetime opportunity and suddenly start looking for ways that would allow them to sign a contract to buy a property for a trust that does not yet exist. This is an insurmountable problem as section 6 of the Trust Property Control Act prohibits trustees from acting in their capacity as trustee until such time as they have been issued with a letter of authority to act as trustee.
Their only chance is to hope for a seller who is willing to hold onto the property until such time as a trust has been created and a letters of authority issued. And, it would have to be a very naïve seller indeed who is willing to pass up other opportunities to sell while a prospective purchaser registers a trust, as he will have no guarantee or protection if such a purchaser should, in the process, change her mind and decide that she is no longer interested in purchasing the property.
In times past the way of addressing this conundrum was for the interested purchaser to sign a deed of sale in her own name with the right to nominate, before a specified future date, another party to take transfer in her place. This is not a suitable solution and will lead to a double expense in respect of transfer duty.
In terms of section 16 of the Transfer Duty Act [10] the first-mentioned person will be presumed to have acquired the property. The ultimate transferee, the trust, and the person who contracted with the seller will be deemed (unless the contrary can be proved) not to be alternative, but successive purchasers where the nominee does not validly accept the nomination as purchaser on the date of the original transaction. This proof to the contrary will be determined by reference to the date of issue of the letters of authority and/or by reference to the date of issue of the valid, written authorisations to act on behalf of the trust.
I would suggest that extreme care should be taken by all parties any time that a trust is a party to a transaction especially if rights in immovable property are the subject of such an agreement. Whether you are acting on behalf of a trust or transacting with a trust it is advisable to obtain the assistance of a trust specialist prior to entering into any agreement.