LEVEL 6 - UNIT 5 – EQUITY & TRUSTS SUGGESTED ANSWERS – JANUARY 2011

Note to Candidates and Tutors:

The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the January 2011 examinations. The suggested answers set out a response that a good (merit/distinction) candidate would have provided. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers.

Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners’ reports which provide feedback on student performance in the examination.

SECTION A

1(a) A decree of specific performance is a court order instructing a party to a contract to perform their obligations under that contract. Failure to comply is contempt of court. It is a precondition of a decree of specific performance that the remedy at law is inadequate. That remedy is generally damages. This is consistent with the role of equity within our legal system, as it developed to provide remedies for those who could not receive the assistance they required through the common law courts.

Whether damages are an adequate remedy will depend on the subject matter of the contract. If a contract is for the sale and purchase of an item that is unique, no amount of damages will be able to make up for the fact that the purchaser will no longer receive the item they contracted for. Examples of unique property include land or leases of land and also antiques or items that are in short supply, even temporarily (Phillips v Lamdin (1949), Sky Petroleum Ltd v VIP Petroleum Ltd (1974)).

If, on the other hand the contract is for something that is easy to obtain elsewhere, the claimant is expected to be satisfied with the value of the thing they contracted for, rather than the thing itself. A claim was refused in Cohen v Roche (1927) because the contract was for chairs that were then “ordinary articles of commerce and of no special value”. A contract for the same chairs today would be specifically enforceable, because the chairs in question would now be valuable and irreplaceable antiques. Shares in public companies are readily replaceable and therefore specific performance would not be available; if the shares are in a private company, so they cannot be purchased on the open market, it would be (Duncroft v Albreht (1841)).

1(b) A search order is a special type of injunction that may be obtained as part of the preparation for a trial. The search order was formerly known as an Anton Piller Order and the jurisdiction to grant it is now based on s37 Supreme Court Act 1981. Its purpose is to prevent a defendant from disposing of items which may be prejudicial to them at the trial. The Page 1 of 14 claimant is given the opportunity to go (with their solicitor) to go to the defendant’s premises, inspect and make copies of relevant documents and other materials. Not surprisingly, given its purpose, this type of mandatory injunction will be obtained without notice. Examples of situations where a search order might be obtained include an order allowing inspection of documents relating to earnings (Emanuel v Emanuel [1982] and an order allowing the claimants to inspect, photograph and remove articles that were infringing copyright (EMI Ltd v Pamdit [1975]).

The conditions for the grant of a search order are that the claimant must have a very strong prima facie case, they must be able to show actual or potential damage of a serious kind, there must be clear evidence that the defendant has incriminating documents or things, and there must also be a real possibility they will be destroyed (Anton Piller). According to Columbia Picture Industries Inc v Robinson, the court must find a balance between the infringement of the defendant’s rights and the future enforcement of remedies granted to the claimant. It is only available against materials that are likely to be destroyed or concealed, it is not a means of getting hold of other less vulnerable evidence. The documents are not to be retained, they are photocopied and where there is a dispute about their ownership, they should be held by the defendant’s solicitor. If a search order is carried out in an excessive or oppressive manner, the claimant may have to pay aggravated damages (Universal Thermosensors Ltd v Hibben [1992]). The guidelines in Universal Thermosensors include matters such as having a woman present as part of the search team if the search is being carried out somewhere where a woman may be alone, and a requirement that the search is during office hours. The guidelines were set out formally in Practice Direction (ex parte Mareva Injunctions and Anton Piller Orders [1994].

A freezing order is an injunction preventing a defendant from removing money or chattels from the jurisdiction. Freezing injunctions are made under s37 Supreme Court Act 1981 and were formerly known as Mareva injunctions. They are brought where the claimant has an action that is being brought to trial, but there is a danger that assets will be removed, so that any judgment made will be useless (The “Rena K” [1975]). A freezing injunction cannot be issued unless proceedings have already been issued or will be issued immediately or almost immediately. It may also be granted after judgment has been given.

The subject matter is usually a named sum of money or some specific assets. The defendant will be permitted to use money for normal expenses – the injunction should not destroy their business (United Mizrahi Bank Ltd v Doherty [1998]). The effect of the injunction is not to give the claimant a right to the property, just to prevent certain dealings with it by the defendant.

For a freezing injunction, the claimant must have a good arguable case and the balance of convenience should favour the grant. If the order would persuade the defendant to provide security, that is a good reason to grant one, the claimant must make full and frank disclosure of all material matters, and his grounds for believing the defendant has assets that are at risk of dissipation or removal, leading to the risk of default on judgment. It is not enough to show that the defendant is resident abroad or has a foreign passport (Midas Merchant Bank plc v Bello [2002]). The claimant must give an undertaking to pay damages in case the action is not successful (HM Revenue & Customs v Egleton [2006]). Page 2 of 14 2. The trust is a creation of equity, and it is easier to describe than to define. When a trust exists, the trustee is the legal owner of certain property, but is not entitled to use that property however they wish. The trustee holds the property for the benefit of one or more beneficiaries.

Fixed trusts and discretionary trusts are two types of trust. In a fixed trust, the size of the beneficiary’s interest is known from the time the trust comes into being. In a discretionary trust, the settlor describes a class of potential beneficiaries and gives the trustees to discretion to select which beneficiaries to benefit and by how much.

When a donor (the owner of property) creates a power, she gives someone else – the donee – the power to deal with or dispose of property that is not their own. A power of appointment is a power to appoint (give) property to some other person or persons. If it is a general power, the property can be appointed to anyone, even the donee. If it is a special power, there is a limited class of objects to whom appointments may be made.

There are some similarities between trusts and powers. Both involve giving someone something less than full ownership of property, with limited or restricted ability to alienate or destroy the property. A full owner of £50,000 worth of bank notes would be entitled to burn them, if she wished. A trustee could not, and nor could a donee (since the power is only to dispose of the property to particular objects). The similarities between discretionary trusts and powers of appointment are even stronger. The trustee of a discretionary trust, like the donee of a power, gets to choose who will receive the benefit of the property. However, although they may look similar – and it may even be difficult to tell the difference – there are also some important differences.

The first important distinction between a trust and a power is that the trustee must exercise their duties as a trustee, but a person who has been given a power does not have to use it. If the trust is fixed, the trustee is required to transfer property to the beneficiaries as set out in the trust document (or oral instructions if there is no written document). If the trust is discretionary, the trustee is required to consider how to exercise their discretion. If the trust requires property to be distributed, then property must be distributed. A donor of a power is not required to exercise that power, or even to consider exercising the power.

As a result, at one time the test of certainty of objects was different for trusts and for powers (Re Gestetner’s Settlement [1953]). Because there was no duty even to consider exercising the power, there was no requirement that the objects be certain; but for a trust, even a discretionary trust, it was necessary to be able to list every possible beneficiary. This required a high level of conceptual certainty in the definition of the objects and also evidential certainty The court might have to carry out a trust if the trustees did not, but it would not have to exercise a power. Later case-law decided that this level of certainty was not necessary for a discretionary trust, and introduced what is known as the “is or is not” test (McPhail v Doulton [1971], Re Baden’s Deed Trusts [1973]). This requires sufficient certainty for the trustees to carry out their duty of surveying the class, but not the level of certainty needed for a list. The list certainty requirement is retained for fixed trusts. It is probable also, following on from this, that the rule that a trust will fail if the class of beneficiaries is so large as to be administratively unworkable (McPhail v Doulton) does not apply to powers.

Page 3 of 14 The next important distinction is between the duties of a trustee and a donee. A trustee is subject to strict fiduciary duties –the no profit rule and the no conflict rule. In addition, they have various duties towards the trust property and the beneficiaries. For example, they must not favour life tenants over remaindermen, and investments are subject to a stringent standard of care. A donee of a power is not necessarily a fiduciary, and if he is, that is an additional role, not something central to the power itself. Therefore, the no profit and no conflict rules don’t automatically apply, and in choosing who to appoint capital or income to, there are very few restrictions.

However, the freedom of the donee should not be over-stated. As mentioned earlier, donees may well be fiduciaries and therefore subject to fiduciary duties. They are restricted to the powers that were given to them by the donor. An appointment to someone who was not an object of the power would not be valid. The power must be exercised honestly: it would not be permitted, for example, to make an appointment to an object subject to a private agreement that they pass the property on to someone else, who is not an object of the power (Re Dick [1953]).

The final point that should be noted about the distinction between trusts and powers relates to the interest of the beneficiaries and objects. What a beneficiary has is a proprietary right. It is something less than a legal right, which is a right to the thing itself, enforceable against the whole world. But it is also something more than the right to bring an action against the trustee for a breach of trust. It is thought nowadays that a beneficiary can exercise their rights against anyone except a bona fide purchaser for value without notice. They can sell, mortgage or otherwise dispose of their interest. It may be regarded as part of the beneficiary’s property for tax purposes ([Baker v Archer-Shee 1927]).

The rights of the beneficiary of a discretionary trust are not quite the same. The interest of the beneficiary of the discretionary trust does not fix on specific property until the trustee exercises discretion in their favour. However, the beneficiaries as a group have a collective interest in the trust property. Beneficiaries of a fixed trust can use the rule in Saunders v Vautier to bring the trust to an end; the beneficiaries of a discretionary trust could as well, provided they were all of full age and capacity and all consented.

The objects of a power do not even have the ability to force the donee to consider exercising the power. There is nothing that can be described as a proprietary right or potential proprietary right. The only people who can bring an action against a donee are those who would be entitled to the property if the power was not exercised – the next in line to the property.

For these reasons, the distinction is still an important one, and one that neatly underlines the basic nature of a trust obligation.

3. The Charities Act 2006 provided with the first statutory definition of a charitable purpose. The Charities Act 1993 simply stated that charitable purposes were “purposes which are exclusively charitable according to the law of England and Wales.” The detail of what these purposes were came principally from case-law. The requirements for a charitable purpose were that the purpose itself was “charitable”, and that it was for the public benefit.

Page 4 of 14 The foundation of the case-law on what purposes were charitable was the preamble to the Statute of Charitable Uses (1601) (repealed in 1960). This was not formally part of the statute, which has now been repealed, but it was very influential. The approach that developed was for courts to look at whether a suggested purpose was within the “spirit and intendment” of the list in the preamble (Morice v Bishop of Durham (1805)).

Certain purposes were clearly charitable. A simplified list of purposes which was supposedly based on the preamble was adopted in IRC v Pemsel (1891). The three main purposes were relief of poverty, advancement of education and advancement of religion. The precise meaning of these terms was developed by case-law.

A fourth, catch-all category was “other purposes beneficial to the community not falling under any of the other three heads”. To be included in this category, the purpose had to be either listed in the preamble, be analogous to those purposes listed in the preamble or analogous to another purpose previously accepted as being charitable. Thus the reference to repair of bridges, ports and havens in the preamble was used to justify treating the provision of public amenities as charitable, and by further analogy, this was extended to cover protection of the environment (Re Verrall (1916)).

Once it was decided that a purpose was prima facie charitable, it must also be established that the purpose was for the benefit of the public or a section of the public. This related both to whether anything positive would come from carrying out the purpose and to whether those who would be benefited were a public rather than private group of persons. The benefit part of the test meant that judges sometimes had to consider the merit of a particular purpose, as in Re Pinion (1965) where a trust to set up a museum displaying the testator’s ‘collection’ was held to be non-charitable because the collection was nothing but a “heap of junk”. The requirement of benefit was also used to explain why trusts to campaign for a change in the law would not be charitable; a judge was not in a position to state whether this would be for the benefit of the public (National Anti-Vivisection Society v IRC (1948).

The need to positively establishing public benefit varied, however, according to the particular head of charitable purpose. There was a presumption that advancement of education, relief of poverty and advancement of religion would provide a benefit, and the issue arose only if the benefit was queried, as happened in Pinion. The requirement of a public rather than a private benefit applied to all charitable purposes, with one slightly odd exception, trusts for the relief of poverty. A trust to fund the education of members of one particular family or employees of a company would not be charitable because the connection between beneficiaries was “personal” (Oppenheim v Tobacco Securities Trust (1951)). However, trusts for poor relations or poor employees were permitted (Re Scarisbrick (1951), Dingle v Turner (1972)).

The Charities Act 2006 makes two significant changes to the way in which charitable purposes are defined. The Pemsel list is replaced by a much longer list of heads of charity in s2(2). This makes the process of deciding whether a purpose is charitable easier. The three main categories from Pemsel are included, but so are many other purposes that have come to be generally accepted as charitable such as “advancement of health”, “advancement of environmental protection of improvement” and “advancement of the arts”. To this extent, the new Act modernises and Page 5 of 14 simplifies the law on charitable purposes. One specific problem, that of the status of non-Christian religions, has been dealt with, and there is now a statutory definition of religion.

The other important change is to the public benefit requirement. There is no longer any special privilege for the three main Pemsel categories, and the need to benefit the public applies to all charitable purposes. The old exception for relief of poverty has been removed. This may result in some charities having to alter the way in which they operate, to ensure that they now satisfy the public benefit test.

However, the degree to which the Act changes the definition of charitable purpose should not be over-stated. The Act does not define terms such as “advancement of education”, for this it is still necessary to rely on the older case-law. Secondly, there is still a catch-all category, requiring reasoning by analogy. Under ss2(4)(b) and (c) a purposes that is analogous to or within the spirit of any other charitable purpose in s2, existing charitable purposes or purposes previously found charitable under ss2(4)(b) and (c) are also charitable. The ghost of Pemsel and the spirit of intendment still lurks. There are some good reasons for retaining this kind of flexibility, as social needs do change, but it does mean that some stretched analogies may still be needed. Finally, while the reach of the public benefit test is widened, there is no change to its content. It would be a fair conclusion that the approach to charitable purposes in the 2006 Act makes a few changes but most are cosmetic.

4. Trustees undertake to act in the best interests of the beneficiaries of a trust and, as such, are fiduciaries. There are two important fiduciary duties: the ‘no profit’ rule and the ‘no conflict’ rule. A trustee who acts in breach of these duties is in breach of trust and will be liable either to compensate the trust (if a loss occurred) or account for their profits. The rules are often described as being independent of fault, and their purpose is partly to dissuade trustees from breaching their duty. As a result, honesty or good motives is not a defence to a claim of breach of fiduciary duty.

The rule in practice is not quite as strict as this brief account suggests. It seems that the courts are keen to avoid unfairness to honest and well- meaning trustees. However, it would be a mistake to go further, and replace the current preventative rule with one that was concerned more with fault and punishment. The potential for abuse of a trustee’s position means that tight controls on how they use their legal ownership of trust property are essential.

Under the no conflict rule, a trustee must not place herself in a position where her duty as a trustee might conflict with her personal interests ( (1967)). This rule is particularly important where a trustee purchases trust property from the trust itself or from a beneficiary. The problem is that the trustee’s interest is in purchasing the property at the cheapest possible price; the trust or beneficiary’s interest is in it being sold at the highest possible price. The conflict for the trustee is obvious.

The strictest application of this rule is the “self-dealing” rule. Self-dealing is where the trustee’s contract is with herself or herself and the other trustees. A contract that breaches the self-dealing rule is voidable by the beneficiaries. A sale to nominees or a close relative will also be caught, if the trustee is the true purchaser. The rule is breached even though the price

Page 6 of 14 is fair; the only defence for the trustee is that they acted with the informed consent to the beneficiaries.

There are some exceptions. The trust deed may state that self-dealing is permitted, and the court may sometimes allow it or permit a trustee to bid at auction. A tenant for life of settled land, which he holds on trust, may purchase the property (Settled Lands Act 1925, s68).

However, the rule is not always applied as strictly as stated here. One factor that might be taken into account is whether the settlor themselves created the situation where the fiduciaries were in a position of conflict, as in Sargeant v National Westminster Bank plc (1991). A father appointed his sons as executors, knowing they were already tenants of property that would be part of the estate. This led to a conflict of interest when some of the property was to be sold. The court decided that the conflict of interest was an unavoidable side-effect of how the father had organised his affairs and there was no breach of fiduciary duty. Another case where the court failed to set a sale aside was Holder v Holder (1968). Here, a trustee believed he had effectively renounced the trusteeship, and later purchased some of the trust property at auction. In fact he was still trustee. The court stressed that he had had no involvement in the trust, was not involved with the auction, the beneficiaries did not think he was a trustee either and therefore were not relying on him, and the beneficiary who complained had not complained about the sale at the time.

The rules are also less strict where the purchase is not from the trustee(s) but from the beneficiary themselves (fair dealing). The trustee must be careful, because a beneficiary dealing with the trustee may be vulnerable, but the sale will be valid provided the trustee gave full value and the beneficiary gave informed consent (Thomson v Eastwood (1877)). The onus is on the trustee to show that the transaction involved no undue influence.

The no profit rule is demonstrated by (1726). A trustee tried to renew a lease held by the trust, but the lessor did not wish to lease the property to the trust for reasons connected with the beneficiary’s infancy. The trustee then renewed the lease on his own behalf. This was a breach of fiduciary duty and he therefore held the lease on trust for the child and must account for any profit made. Other applications of the no profit rule are the principle that a trustee acts without remuneration and the requirement for trustees to account for any incidental profits made. These could include payment for acting as a director where the directorship results from the trust’s shareholding (Re Macadam (1946)) and profits made by exploiting information obtained as a fiduciary (Boardman v Phipps, Williams v Barton (1927)).

Here, as with the no conflict rule, the official statement of the rule is more absolute than its practical operation. Trustees rarely have to work without remuneration. There will usually be provision for this in the trust instrument. If there is not, in exceptional circumstances the court has an inherent jurisdiction to award remuneration (Re Duke of Norfolk’s Settlement Trusts (1982), Foster v Spencer (1996)). Where an action has been brought against a trustee who has profited from information gained as a fiduciary, this discretion may be used to provide them with some compensation for the use of their own skill (Boardman v Phipps). This power means that the court can take into account that the trustee acted honestly and in the best interests of the trust. The beneficiaries themselves may authorise remuneration, provided they are of full age, competent and fully Page 7 of 14 entitled to the trust profit. There are special provisions for the Public Trustee or judicial trustees. Trustees are always entitled to reimbursement for their expenses.

The qualifications to the strict rule mean that there is less unfairness than might be expected. Although a less strict rule might be more in keeping with equity’s principle-based approach to problem solving, flexibility is achieved by the other means mentioned here. Given that the vulnerability of a beneficiary, in light of the trustee’s legal ownership of trust property and access to information, there is much to be said for continuing the current approach.

SECTION B Question 1

I have been asked to advise Hamish on whether three provisions in Kate’s will create valid trusts. I shall consider the provisions one at a time, as they give rise to different issues.

The first provision attempts to create a trust of Kate’s shares. The problem with this provision relates to certainty of subject matter. To be valid, a trust must satisfy the three certainties: certainty of intention, certainty of subject matter and certainty of objects (Knight v Knight (1840)). There is no question that Kate intended to create a trust, and the objects are clearly stated. However, although the term “my shares” is clear, there is ambiguity about the extent of each object’s interest. It does not matter that the trustees have a discretion as to the shares held for the grandchildren; this part of the provision creates a discretionary trust. However, the trustees are also told to hold the “bulk” of the shares for Margaret. The term “bulk” was found to be uncertain in Palmer v Simmonds [1854]. It is not possible for the trustees to determine how many shares are for Margaret and how many they are to hold on the discretionary trust for the grandchildren. The provision will therefore fail for uncertainty.

Certainty is also an issue with the second provision. Here, Kate has left a statue to her daughter Fiona, “expecting she will keep it safely for her grandchildren.” If this was a trust, the subject matter and the objects would be clear, but this may not be a trust at all. The words Kate has used are words of hope, that is, precatory words. At one time, testators who used precatory words were taken to have intended to create a trust but the modern approach is to look at the meaning of the provision as a whole (Lambe v Eames [1871]). The issue is whether Fiona is under an enforceable obligation to keep the statute safely for her own grandchildren or whether this is an absolute gift to Fiona, who has a moral duty to keep the statue safe and pass it on. Looking at the other provisions from Kate’s will, she has been very clear in provision 1 that a trust is intended. This suggests that she would have been equally clear in this provision. For this reason, my conclusion is that provision 2 does not create a trust. Fiona will receive the statue free of any obligations.

Provision 3 does not mention whether a trust has been created, but the words “I have already told him what I would like him to do with them” suggests that Kate may have intended to create a secret trust. There are two types of secret trust. With a fully secret trust, the trust is not mentioned at all in the will. With a half secret trust, there is some reference in the will to the fact that the recipient is under an obligation to use the property in some specified way, but the details of the trust are not set out. Secret trusts do not satisfy the formal requirements for testamentary gifts in section 9 Wills Act 1837. There are various theories about why they are enforced, including the rule that equity will not allow a statute to Page 8 of 14 be a vehicle of fraud (McCormick v Grogan [1869]) and the theory that the trust arises outside the will and therefore the Wills Act does not apply (Re Snowden [1979]).

The gift to Peter may be a half secret trust. For a half secret trust to be valid, there must be intention, communication and acceptance ( [1929]). The words used by Kate are not entirely clear, and it is possible that Peter is only under a moral obligation, as in provision 2. The standard of proof is the balance of probabilities (Re Snowden [1979]). If no trust was intended, then the gift is valid but Peter cannot be made to carry out any promise that he has made.

It is more likely that Kate intended Peter to be bound. His comments to Hamish suggest that he did accept the obligation to assist Janine, but there may be a problem with the timing of communication. For a half-secret trust, communication must occur at or before the time when the will is executed (Re Keen [1937]). We know that the will was executed on 14 September, but do not know whether the communication occurred before that date. If it did not, then the half secret trust will not be valid, unless a court is persuaded that the established rule about date of communication should be rejected. The half-secret trust will be valid if the communication occurred on or before 14 September.

To conclude, the first provision will fail because of uncertainty of subject matter. The shares will go to the residuary legatee. There is no trust of the statue, and Fiona will take it absolutely. More information is needed to resolve the problem with the vintage motorbikes. If no trust was intended or communication occurred early enough, the motorbikes will go to Peter. He will be bound only if a trust was intended. If a trust was intended but communication occurred too late, the trust will fail. Peter cannot take the cars beneficially and they would form part of the residue.

Question 2

Trustees investing trust property are expected to use the care that would be used by an “ordinary prudent man of business” investing on behalf of someone to whom he has a moral obligation to provide (Learoyd v Whitely [1887]). The Trustee Act 2000 states that the trustee is under a duty to exercise such care and skill as is reasonable in the circumstances, having regard to any special experience of knowledge the trustee has (or claims to have). This standard clearly applies to investment (schedule 1 TA 2000) and sits alongside the ordinary prudent man of business test. The scenario does not indicate that Noah had any special skill so the enhanced standard does not apply.

There are two problems with the investment Noah made. The first is that it was a risky investment. The trust fund had previously been spread across a number of publically listed companies. The trust did not depend on the success of just one business. Although trustees are permitted to make any investment, and there is no restriction on types of investments (s3 TA 2000), a prudent man of business is unlikely to put “all his eggs in one basket” in the way Noah has done. This would be risky even if the business was well-established, but this was also a very new business. The initial decision to invest in this company was, therefore, probably a breach of his duty towards the beneficiaries.

Ordinarily, this might not have mattered because it seems that Noah’s risk paid off, and the investment is doing well. Although the trust may want to consider whether the investment is retained, at first sight there does not appear to be any loss to the trust. However, on closer examination a further problem appears. Page 9 of 14 Rather than receiving an income on this investment, the trust is to receive a portion of the value of the company at some later date. Another aspect of the duty of investment is the duty to treat beneficiaries equally (Lloyds Bank v Duker [1987]). This trust has a life tenant – Miriam – and her children are entitled to the remainder. Miriam therefore benefits from investment income, but her children will benefit from capital growth. This investment favours capital growth over investment income. For this reason, combined with the riskiness of the investment, there has been a breach of trust by Noah. Whether anything can be done about this is unlikely, unfortunately, given that Noah appears to have gone to Brazil and his whereabouts are unknown.

The next issue is whether the trust property that Noah put into his bank account can be traced. Tracing is a useful process where a trustee has transferred property in breach of trust but no personal action against the trustee is possible. When Noah first took trust funds for himself, his bank account was overdrawn. However, it is now in credit and he has also paid off the loan he had for a car.

A distinction is drawn between legal and equitable tracing, although the merit of the distinction has been questioned (Trustee of the Property of FC Jones & Sons (A Firm) v Jones [1996]). Equitable tracing is more flexible, allowing tracing into mixed funds. It is not necessary to consider whether equitable tracing should be available without a fiduciary relationship, because Noah is a trustee and therefore a fiduciary. If the trust property can be traced, the beneficiaries will have a proprietary interest in the property traced.

The specific tracing rules that must be applied here are those that apply where trust property is paid into a bank account. The first problem the beneficiaries will have is that a beneficiary cannot trace through an overdrawn account (Bishopsgate Investment Management Ltd (in liq) v Homan [1995]). Noah’s account was overdrawn by £15,000 when he paid in £30,000 of trust funds. As a result, the maximum the beneficiaries can trace is £15,000.

The £15,000 that was left once the overdraft was paid off was used to repay a loan Noah had taken out to purchase a car. It will not be possible to trace the trust funds into the car itself (this is known as backward tracing) because Noah had already purchased the car before he paid trust moneys into his bank account. If, instead, he had spent £15,000 of trust funds on a car, then the trust could have claimed the car itself. Unless the loan company had notice that the loan was being repaid using trust money, the money cannot be traced into its hands, as tracing ends once the trust property is in the hands of a bona fide purchaser for value without notice (Pilcher v Rawlins [1872]). If the loan company did have notice, the money might still be traceable and, alternatively, the beneficiaries could argue that the money was held by the company on because the loan company had knowingly received money paid to it in breach of trust (Re Montagu’s Settlement Trusts [1987]).

At this point, therefore, it would appear that the trust property has been lost, despite there being a positive balance in Noah’s account. Sometimes a later deposit is intended to repay the money taken from the trust, in which case the beneficiaries could claim this money. This is an application of the principle from Re Hallett’s Estate [1880] that the trustee should be presumed to have acted in the best interests of the trust. This argument is unlikely to succeed, however, as the deposit seems to have been made by Noah’s grandmother’s executors, and he was probably unaware of it.

Page 10 of 14 Question 3

In order to answer the question about the ownership of the farm, the rental properties and the house in Kempston, we need to look at the law relating to complete constitution of trusts and also resulting trusts.

The first issue is Farooq’s rights to the farm. Mohammed had told him that he was going to transfer the farm to him later, but in the meantime he was holding the farm “for” Farooq. One way in which a trust can be constituted is by the owner of property declaring themselves trustee. This does not normally require any formalities, but there are formal requirements where the subject matter of the trust is land. This trust would be of land and therefore s53(1)(b) Law of Property Act 1925 applies. The trust will only be valid if it is evidenced in writing, and this was not. Therefore Farooq has no beneficial interest in the farm.

The next issue is Salma and the rental properties. Here, there was no question of Mohammed planning to hold them on trust. His intention was to transfer them to Salma. If he had done this, it would have been a gift. However, nothing had been done to complete the transfer.

The usual rule is that equity will not assist a volunteer. Salma is a volunteer, as she was not going to give any value for the properties. However, under the rule in Milroy v Lord [1862] equity will complete the transfer if the transferor has done everything that is necessary to transfer the property to the transferee. This rule applies to the constitution of trusts but also to ordinary gifts. The question then is whether Mohammed had done everything it was necessary for him to do. For the property to be transferred, Mohammed needed to sign transfer documents and the transfer had to be registered in the normal way. Mohammed had signed all the documents required but his accountant had done nothing with them. If the principle underlying the rule in Re Fry [1946] relates to whether the transferor is still able to change his mind, then Mohammed has not done all that is in his power to do. He could easily telephone his accountant and say not to progress the transfer to Salma. On this approach, Salma will be unable to claim any interest in the rental properties.

However, a more recent case, [2002] may provide some assistance for Salma. In that case, the transfer of some shares was completed despite the transferor not having done all that was within her power. One of the reasons for this was that the intended recipient had known of the planned transfer and had acted to his detriment in reliance upon it. Salma’s case is similar: as in Pennington, the completed documents were in the hands of a third party and she suffered a detriment. Pennington v Waine has been criticized, and may not be followed, but if it was, it is likely Salma could claim the rental properties.

The final issue is the house that Hassan is living in, in Kempston. The house was paid for by Mohammed and is in Hassan’s name. Equity has a general presumption against gifts and will therefore assume that Mohammed was not giving the house to Hassan, and intended to have retain legal and beneficial ownership of the house. Unless this presumption can be rebutted, Hassan will hold the house on a resulting trust for Mohammed’s estate.

The evidence suggests that the house was not intended as a gift, and that Mohammed intended to provide for Hassan at a later date. However, part of the evidence explaining why the house is in Hassan’s name is that Mohammed wanted to keep the asset hidden from his wife in a future divorce settlement. The problem of illegal purposes therefore arises. Page 11 of 14 The clean hands rule means that equity will not permit evidence of an illegal purpose in support of a claim to an equitable remedy (Tinker v Tinker [1970], [1993]). A distinction is drawn between cases where the evidence of the illegal purpose is needed in order to establish a claim to the property and ones where the evidence of the illegal purpose is not essential to the claim. Thus in Tinsley v Milligan, the claimant had contributed to the purchase price property that was registered in the defendant’s name, and the reason for registering it in this way was social security fraud. This did not matter because the claimant’s claim to an interest in the property rested on her contribution, all the illegal purpose did was explain the decision about registration. By way of contrast, in Tinker v Tinker, property had been registered in the name of the claimant’s wife. Because of the presumption of advancement, there was a presumption that this was a gift. The evidence that it was not depended on an illegal purpose. This was not permitted to rebut the presumption of a gift. A distinction is also drawn between illegal purposes that were carried out and those that were planned but never put into effect ( [1995]). These rules governing illegal purposes are complex and have some arbitrary consequences, and the Law Commission has proposed some changes.

However, assuming that the current law still applies, Mohammed’s estate’s claim to the house probably does not depend on his potentially illegal purpose. A transfer from one brother to another will not be presumed to be a gift. The presumption will be that it is a resulting trust. The result would be different if there was a presumption of advancement between Mohammed and Hassan. There is a faint possibility that Mohammed is in loco parentis to Hassan, in which case the presumption of advancement would apply. Here, reliance on the illegal purpose would only be possible if it had never been put into effect. There is no indication that it was, and therefore Mohammed’s claim should still be successful. This argument could only be put forward if the transaction occurred before s199 of the Equality Act 2008 came into effect, as the section abolishes the presumption of advancement.

In conclusion, there is no trust of the farm because of lack of writing. Equity will not complete the transfer of the rental properties to Salma, and it is likely Mohammed’s estate will claim the house in Bedford was held on a resulting trust for Mohammed.

Question 4

Because Cameron and Bella are not married, their dispute about the ownership of their home will be dealt with by the general law of property. There has been no formal declaration of trust, but if there was, this would be decisive (Goodman v Gallant [1986]). Unless equity intervenes, the legal title to the property will determine their rights. If Cameron is the sole legal owner, he will have full rights to the property. If they are joint owners, they will be joint tenants, with rights of survivorship. However, as this approach does not always produce a fair result, various equitable principles have developed to resolve this type of dispute. Courts prefer to use constructive trust principles in this kind of situation because this gives more flexibility to consider all contributions to the home, not just contributions to the original purchase price ( [2007]).

The specific type of constructive trust that has been developed in the family home context is the “common intention constructive trust”. This type of constructive trust arises where there is a common intention to share the property and detrimental reliance on that intention. The exact structure of the argument that would be used to argue for Bella’s interest in the home depends on whether

Page 12 of 14 the home was in sole or joint ownership. I shall therefore consider the alternative scenarios separately.

(a) In this scenario, the house is in joint names. Bella and Cameron have never discussed their ownership rights. Cameron paid cash for the house. Bella made no financial contributions but she did work on the garden as well as caring for Karina and providing the family with fruit and vegetables from an allotment. Cameron claims full legal ownership of the house.

The starting point here is that Bella and Cameron should share the house equally. This is because it is in joint names and equity follows the law (Stack v Dowden). In order for Cameron to claim a larger share, he will have to establish (on the balance of probabilities) that there was a common intention that he was to have more than half of the property, and that he relied on that intention to his detriment.

In the absence of discussion, courts look to a variety of factors in determining what the intention was. These include the reason for acquiring the house in joint names, the nature of the relationship, and how they arranged finances and household expenses. In Stack v Dowden, the claimant had paid considerably more than half of the mortgage as well as more than half of the initial deposit, and had also paid all the bills. Furthermore, the parties kept separate bank accounts and had no joint financial responsibilities at all other than the mortgage: Ms Dowden even took sole responsibility for childcare costs for their four children. The House of Lords was clear that it would take exceptional circumstances to counter the presumption in favour of joint beneficial ownership but this was such a case.

Bella and Cameron did not maintain separate finances and appeared to treat Cameron’s income as “family” income. Bella had access to Cameron’s salary through a joint account. Their situation is more like that in Fowler v Barron [2008]. In that case, as here, the male partner had paid the deposit and also made the mortgage payments and paid bills and other domestic expenses. The female partner earned some money from part-time work but this was used for luxuries. They did not have a joint account but had made mutual wills. The court rejected a claim that the male partner should receive a 75% share of the property. There was no evidence of intention to have unequal shares and the financial arrangements were not decisive; this was a situation where they each contributed what they could to the family.

Cameron’s case is even weaker than that of Mr Barron, since he and Bella did have a joint account and she earned no money at all because of Karina. For this reason, the presumption in favour of equal ownership is not likely to be rebutted in Bella’s case.

(b) The difference in part 2 is that the house is in sole ownership and there were some discussions of ownership at the time of purchase.

Where the home is in sole ownership, the correct starting point is that the legal owner is also the sole beneficial owner. It is therefore for Bella to establish that there was a joint intention that she should have a share of the beneficial ownership. If she succeeds in doing that, the size of her share will be determined by the court.

There was no actual agreement between Bella and Cameron but, as equity looks to the form and not the words, that does not mean there cannot be Page 13 of 14 common intention for her to have a share. The court will have to rely on the conduct of the parties as evidence of intention (Lloyds Bank v Rosset [1990]). If that conduct leads to the inference of a common intention to share, a constructive trust will be imposed (no writing is needed for a constructive trust of land: s53(2) PLA 1925).

One type of conduct that may lead to an inference of common intention is indirect contributions to the purchase price. Those contributions must, however, be referable to the acquisition of the house and be substantial. Substantial renovations were sufficient in Drake v Whipp [1996]. However, if the work was something that would have been done anyway, for example decorating in Lloyds Bank v Rosset, this will not permit the inference of common intention.

Bella could possibly argue that the work she did in the garden is evidence of common intention and also detrimental reliance on having an interest in the property. A patio and flower beds are not something she could take with her when she left, and it would be unusual for someone to do that kind of work on a house they had no interest in. Further support for Bella’s case would come from the discussion she had with Cameron about the ownership of the house. In some cases, an excuse given for not putting property in joint ownership has been taken as evidence of common intention (Grant v Edwards [1986], [1975]). The reasons for this decision is not clear in all the cases the explanation was clearly false (as it may have been with Cameron). This may therefore be an aspect of the clean hands rule: if the legal owner encouraged the other not to worry about not being on the title, he cannot later turn round and say that he had been lying.

While the garden by itself and the excuse by itself may not have been enough, the combination means that it is likely Bella will be able to establish that there was a common intention that she should have a share in the house. Her failure to protect her own financial interests and her physical work developing the garden can be seen as detrimental reliance. My advice is therefore that Bella will succeed in a constructive trust argument although she is unlikely to receive a large share of the property because the courts tend to take actual financial contributions into account at this stage of the constructive trust claim.

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