2 September 2011 by

A few pitfalls when dealing with trusts in property related transactions

When dealing with a trust, it is firstly important to understand the nature of a trust, which was explained by Cameron JA in Land and Agricultural Bank of South Africa v Parker and Others 2005 (2) SA 77 (SCA) (the Parker case) as follows:

"Except where statute provides otherwise, a trust is not a legal person. It is an accumulation of assets and liabilities. These constitute the trust estate, which is a separate entity. But though separate, the accumulation of rights and obligations comprising the trust estate does not have legal personality. It vests in the trustees and must be administered by them - and it is only through the trustees, specified as in the trust instrument, that the trust can act. 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 cannot be bound."

Cameron JA furthermore reiterated that "It is a fundamental rule of law, which this Court recently restated in Nieuwoudt and Another NNO v Vrystaat Mielies (Edms) Bpk, that in the absence of contrary provision in the trust deed the trustees must act jointly if the trust estate is to be bound by their acts."

Some recurring pitfalls when dealing with trusts in relation to property transactions include the following:

  • It is often the case that a resolution authorising the transaction and one or more trustee(s) to act on behalf of the trust was not properly passed in accordance with the provisions of the relevant trust deed prior to the conclusion of the relevant agreement. This could affect the validity of the agreement as a trust is not, in law, able to ratify the conclusion of an agreement after the fact.
  • In most instances, the trust deed requires a minimum amount of trustees to be appointed in order for the trust to transact business. There are many instances where one of the existing trustees has passed away or resigned but a new trustee has not yet been appointed. In such a scenario, unless the trust deed provides otherwise, the remaining trustees do not have the power to conclude any agreements on behalf of the trust until such time as a new trustee has been properly appointed in accordance with the provisions of the trust deed and amended letters of authority have been issued by the Master of the High Court (Master) authorising the new trustee to commence acting on behalf of the trust.
  • There are also many instances where parties intend purchasing a property in the name of trust which has not yet been registered with the Master and the sale agreement purports to have been concluded by a trustee on behalf of a trust to be formed. A trustee of a trust only derives his/her power to act as a trustee on behalf of the trust once the trust has been registered with the Master and the requisite letters of authority have been issued by the Master. The concern is therefore that SARS could in certain instances effectively construe the transaction as a double sale and could claim double transfer duty.
  • There also appears to be a practice by certain accountants where they purport to register so-called "shelf trusts" with the Master, which are then at a later stage "sold" to clients. These shelf trusts could potentially create a whole host of problems for clients. Firstly, the founder/donor, initial trustees and initial beneficiaries of the trust are often simply employees of the accountancy firms who have no real intention of creating a trust in its true sense. In some instances, these employees have resigned from the employ of the accountants by the time the trust is "sold" to a client. The parties then purport to amend the trust deed to provide for the "purchasers" of the trust to become the new trustees/beneficiaries of the trust. The donor of a trust can, however, never be amended.
  • In many instances, the purported amendments to the trust deed are not properly and legally attended to by the parties in accordance with the provisions of the trust deed, which in turn could lead to the possible argument that the new trustees and beneficiaries were never properly appointed and that the trustees therefore do not have the required power to transact on behalf of the trust. In addition, the initial generic trust deed in many instances does not properly cater for such amendments to be effected or for the client's specific needs.
  • The issuing of amended letters of authority by the Master reflecting the resignation/appointment of trustees cannot, in our view, serve to ratify a situation where such resignation/appointment of the trustees was not properly done in terms of the provisions of the trust deed.

The practical effect of some of these issues and the possible abuse of the trust form, was highlighted in the case of Van der Merwe NO and others v Hydraberg Hydraulics CC and Others 2010 (5) SA 555 (WCC) (the Hydraberg case), In this case, the Court reiterated certain legal principles when dealing with a trust and was forced to uphold the argument that a deed of sale had not been validly concluded as only two of the three trustees had represented the seller trust in concluding the deed of sale (even though the trustees had warranted that they were duly authorised by the trust to do so).

The basis for the above decision arose from among others, the following:

  • Although the third trustee was under the impression that he had resigned as a trustee at least a year before the sale transaction, he had not in fact resigned in the manner permitted in terms of Section 21 of the Trust Property Control Act (requiring written notice to the Master and the ascertained beneficiaries), or in the manner permitted in terms of the trust instrument (that is, by notice in writing to his co-trustees).
  • Consequently, the third trustee had been unaware of the conclusion of the deed of sale and there had been no written authority from all of the trustees in terms of Section 2(1) of the Alienation of Land Act, empowering the two trustees in question to execute the deed. Section 2(1) of the Alienation of Land Act provides, among others, that no alienation of land shall be of any force or effect unless it is contained in a deed of alienation signed by the parties thereto or by their agents acting on their written authority.
  • The Court referred to the Parker case and stated that the Hydraberg Property Trust bore the unwholesome hallmarks of the 'newer type' of business trust in which functional separation between control and enjoyment is entirely lacking. As observed in the Parker case, "while outsiders have an interest in self-protection, the primary responsibility for compliance with formalities and for ensuring that contracts lie within the authority conferred by the trust deed lies with the trustees. Where they are also the beneficiaries, the debasement of trust function means all too often that this duty will be violated."
  • The Court proceeded to state that the abuse of the trust form is something that should not lightly be countenanced by the courts in cases where the veneer of a trust is used to protect the trustees against fraud and dishonesty and to raise unscrupulous defences against bona fide third parties seeking to enforce the performance of contractual obligations purportedly entered into by the trustees ostensibly in that capacity. A decision to disregard the veneer would be a decision to afford an equitable remedy.
  • The Court found that the facts of this matter were a classic example of an abuse of the trust, as the trustees treated the property as their own and only invoked the existence of the trust when it suited them.
  • The Honourable Judge Binns-Ward JA stated that it would be unconscionable to allow the trustees to get away with such behaviour and that if it had been legally possible, this matter would have been an appropriate case to have disregarded the veneer of the trust form. However, unfortunately, the formalities applying to contracts in respect of the alienation of land, posed an insuperable obstacle and it was not competent for the trustees to act other than jointly.

It would be prudent for any party contracting with a trust to bear these potential pitfalls in mind so as to ensure the validity of any agreements entered into with the trust.

Simone Immelman

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