A cautionary tale about the purchase of trust property by trustees

July 1st, 2017
x
Bookmark

By Edrick Roux and Lucinda Horn

We have all heard the age old adage that opportunity only knocks once, which at face value seems like encouragement to pursue an opportunity that presents itself without regret, usually on a ‘high risk, high reward’ basis. However, as with all things in life, it should be read with a pinch of caution thrown into the mix, especially when the opportunity in question relates to trust property that a trustee can purchase from the trust.

Due to the sui generis nature of a trust, buying property from a trust at the very best of times can be a harrowing process for the uninitiated. It is riddled with various requirements and regulations which are to be complied with, ranging from the required consensus required by the trustees to attend to the necessary purchase right down to whether the trust deed even affords the power to the trustees to attend to the purchase, or for that matter the sale, in the first place.

Accordingly it is not simply a process of entering into an agreement for the purchase and sale of a specific property, but rather a tactical decision of the trustees, which requires the necessary logistical support as envisioned in the trust deed.

What often complicates these purchases even further is the fact that the purchase from the trust will usually be to the advantage of the trustees, which can be seen as a potential conflict of interest. It may be prudent for trustees, or for that matter any individuals in a fiduciary position, to keep the following quote in mind:

‘Nothing is more difficult than the art of maneuvering for seizing favorable positions beforehand. What is difficult about it is to make the devious route the most direct and to turn disadvantage to advantage’ (Gerald Michaelson and Steven Michaelson Sun Tsu for Success (Adams Media 2003)).

There is a proverbial minefield of potential complications, which may arise where a trustee seeks to purchase property from a trust for his personal use. From claims that the benefit derived by the trustee is detrimental to the beneficiary (see Wiid and Others v Wiid and Others [2016] JOL 37360 (NCK)) to allegations of potential mismanagement of the trust funds being levied at the relevant trustee (see Gowar and Another v Gowar and Others 2016 (5) SA 225 (SCA)).

In the case of Kidbrooke Place Management Association and Another v Walton and Others NNO 2015 (4) SA 112 (WCC) an application was brought for the removal of a trustee from office due to, inter alia, allegations that they had breached their fiduciary duties. The primary issue in the case was around the locus standi of the applicant’s to bring the application, revolving around whether the parties had a ‘sufficient interest’, however, the grounds for the removal related directly to the breach of their fiduciary duties.

Although it may seem quite clear that a conflict of interest between trustees and the trust beneficiaries should be avoided, there are some times when the lines are blurred and certain conduct could be allowed even though it may technically be a conflict of interest (ie, where trustees are authorised to contract with the trust in terms of the trust deed and treat the transaction in such a manner that there can be no detriment to the beneficiaries).

Purchase of trust property by the trustees of the trust

In the Kidbrooke case it was alleged that the trustees breached their fiduciary duties in that they:

  • Sold trust property to companies that they held either direct or indirect proprietary interests with which trust property was subsequently sold again at a profit. Effectively the relevant trustees were thus contracting with themselves;
  • Commission was earned on the sale of life rights in the development by a CC (Codé Design), the members of which were one of the respondents and his spouse. Accordingly the allegation was that there was a conflict of interest between the trustee and his profitable involvement in the CC.

In the Kidbrooke case there was no doubt that there was a breach of the fiduciary duties of the trustees, specifically since they contravened two express provisions of the trust deed itself, namely:

‘No trustee who has a direct or personal interest in the method or result of the exercising of any of the powers of discretions vested in him by law or in terms of this trust deed may exercise or concur in the exercise of such powers or discretions, and must allow his co-trustees or co-trusee to act alone in the exercise of the powers and discretion aforesaid in relation to such matter.

… Each trustee who has an interest in any transaction affecting the trust fund, shall be obliged to disclose beforehand the nature and extent of his interest when exercising any power or discretion in such manner.’

Accordingly, their conduct would not be easily defensible in the current case. However, there are various cases where trustees would be able, and where it would be desirable for them to do so, to purchase property from a trust in their personal capacities. However, in order to avoid any potential conflict of interest or allegations of mismanagement additional measures may be required to ensure that the trustees rather err on the side of caution.

Additional measures to safeguard trustees when they wish to purchase trust property for their own use

As the presiding officer in the Kidbrooke case, Binns-Ward J suggested the following as contributing to the impropriety on the part of the trustees in respect of the breach of their fiduciary duties: ‘Cameron et al op cit suggest … that the purchase of immovable property by the trustees from a trust is something that is required by custom in South Africa to be sanctioned by a court. The authors cite Peffers NO and Another v Attorneys, Notaries and Conveyancers Fidelity Guarantee Fund Board of Control 1965 (2) SA 53 (C) at 57 in support of the proposition.’

Read with: ‘The judgment in that matter described the custom as applying in respect of the purchase by an executor of a deceased estate of property in the estate, but I can think of no reason why the rationale for the custom should not apply equally in the context of the purchase by a trustee of immovable property from a trust. There is no material difference in the character of the fiduciary relationship involved … In the current matter, not only did the trustees not see fit to seek such sanction, they failed to take independent advice or make prior disclosure to the beneficiaries of their actions’ (our italics).

Accordingly in light of the suggestions that were made by Binns-Ward J, it would seem that it is possible to dilute specific elements, which would serve to at least mitigate, if not completely remove any impropriety on the part of the trustees when trustees purchase trust property from the trust for their personal use.

We suggest that these elements are, and should ideally be followed in the sequence set out below, as follows:

  • A thorough perusal of the trust deed should be embarked on to determine whether the powers and duties which are afforded to the trustees allow for such an action, potentially seeking professional advice in this regard should there be any concerns as to the ability of the trustees to be involved in purchases of this nature.
  • In addition to a technical perusal of the trust deed, a perusal of objects of the trust in order to determine whether the purchase of the relevant trust property will not be contrary to the purpose for which the trust was created.
  • In the event where the serving trustees wish to purchase trust property from the trust, it would be prudent to inform the beneficiaries of the intention to purchase the trust property.
  • Approach independent advisers to determine the viability of the purchase and to confirm that the purchase will not be to the detriment of the trust beneficiaries.
  • An application to the court, likely by way of seeking a declaratory order, asking the court’s leave and sanction in order to proceed with the purchase of the property.

Should all of the steps above have been followed, provided of course that no objections are raised in respect of any of the abovementioned, there should be no reason for any party to claim that there was impropriety on the part of any of the trustees when purchasing the trust property, as they were involved in the process, it was determined it would not be to their detriment and the court had sanctioned the purchase.

Additional consideration

Due to the nature of trusts and the role that they generally play in estate planning exercises, they often contain various types of assets and are often not simply limited to containing immovable property.

Among the most prominent assets held in trusts are shares and/or other investments, which may often be quite substantial from a financial perspective.

The judgment in the Kidbrooke case specifically refers to the custom where immovable property is to be purchased, however, it may be prudent for the trustees to err on the side of caution in all cases where there is a significant risk that it may be alleged that there is either impropriety or a breach of fiduciary duties on the part of the trustees.

From a practical point of view, the process should be exactly the same as the process that has been suggested in respect of immovable property and should give the trustees, and likely the beneficiaries, some peace of mind in these kinds of dealings.

Conclusion

Ultimately all of the information contained above will come down to a simple question – whether it is appropriate for the trustees of the trust to attempt to purchase trust property from the trust?

This question is undoubtedly a factual question, which can only be answered on a case by case basis. It must be noted that trustees serve a fiduciary function and although there may be situations where such purchases may be allowed, it should not become the norm in practice to allow for such purchases to occur frequently, lest an unhealthy precedent should arise.

Should a trustee have breached his or her fiduciary duties towards the beneficiaries, the consequences may be severe – these could range from removal from office as trustee together with potential costs orders being made against them to potential claims for damages being instituted against them by the beneficiaries of the trust.

As with most things in life, acquiring certainty before attempting to take action would be a prudent course of action, and in this case may well save the trustees the costs of legal action and the embarrassment of being removed from office.

Edrick Roux LLB (UP) is a legal adviser in the Trusts and Estates Division at Pricewaterhouse­Coopers Africa and Lucinda Horn LLB (UP) is an attorney at Dyason Attorneys Inc in Pretoria.

This article was first published in De Rebus in 2017 (July) DR 32.

Loading...