Trusts and Property Transfer Formalities

Introduction

Trusts are one of the important inventions of English common law, with significant implications in law of property. The law of trust is a special contractual relationship, which provides a channel through which individuals can ensure that their properties are managed according to their wishes after their death.

Although there are not many formality requirements for the creation of trust, there are some formalities in certain kinds of trusts. Nevertheless, the courts will focus on the result, which may not be justifiable on the basis of the legal principle (contained in formalities); but may be justifiable on the basis of the merits of the case. This essay critically analyses the use of exceptions to the formality requirements for a declaration of trust or transfer of an equitable interest. Clearly, trust laws are not spared by the rules of exceptions. The law of trust is composed of various legal requirements and exceptions to these requirements, which are explored and analysed in this essay.

Trust: Formalities for formation and exceptions

A trust is a legal relationship, in which a settlor (owner of the property) transfers his or her ownership rights to a trustee. The settlor can also transfer the equitable interest in a property. This is normally a beneficial interest, and it can give the holder a right to obtain a formal legal title. In turn, the trustee is required to manage the property and transfer all the benefits to a beneficiary, who is also appointed by the settlor. The trustee is normally reimbursed for any expense incurred in managing the property. However, all the profits or benefits accruing to the property must be transferred to the beneficiary. In other words, the trustee is given legal ownership rights and, thus, the power to use the property in any way, as long as the usage is consistent with the interests of the beneficiary.

From this definition, it is evident that the fundamental feature of a trust relationship is a separation of control and benefit of the property. Trust relationships were initially developed and popularly used in common law and Roman society. A good example of a trust relationship is a will, which is normally written by an individual to dictate the way his or her property will be used or divided among beneficiaries after his or her death. Trust can also be created through an oral declaration, a trust instrument signed by both the settlor and trustee, or through a court order.

At the outset, it is important to note that there are no formalities required for the creation of trusts. Formality concerns the language and forms used to transfer the property. Generally, the property can be transferred orally, especially in case of chattels. Formal documentation is not necessary, as long as the clarity of intention to form the trust has been established. However, there are exceptions to this, and there are certain trusts that can be formed only if certain formalities are incorporated.

It is these kinds of trusts that require formalities for constitution, with which this essay is concerned. Particularly, in case of transferring property in land, written documentation is mandatory. The same applies to wills and transfers of equitable interests such as shares. In such situations, the relevant statutes, particularly the Law of Property Act 1925 must be followed. Section 53(1)(b) of the Law of Property Act 1925 provides that there must be evidence of the trust’s existence, which may consist of a signature on a declaration. Another formality to be abided by in the case of trust of land, is the Law of Property (Miscellaneous Provisions) Act 1989, Section 2 which must be followed. As per this, transfer of property must be made in writing in one document, which must be signed by both parties. In case of equitable interests also, we see an exception to the formalities rule, as for a valid disposal of equitable interest, it must be in writing and signed by the person disposing of the equitable interest.

The question is whether it is correct to say that in the majority of cases forming exceptions to the formality requirements for a declaration of trust or transfer of an equitable interest, the results are central to the ascertainment of trust and whether such trusts are difficult to justify on the basis of legal principle. In order to understand that, it is first important to understand the legal principles that are involved in the constitution of trusts. These include formalities as well in certain kinds of trusts.

Four basic elements must be present in a valid trust relationship. These are constitution, certainty, capacity, and formality. These elements go to the formation of a valid trust and there are legal principles involved in these elements, which explain the formality that is involved in the creation of trusts.

The term ‘constitution’ implies that trust will only be considered to be valid when the property has been legally transferred to the trustee. Failure to transfer property from the settlor means that both the beneficiaries and trustees are regarded as volunteers. In this case, the principle of equitable maximum prevails. In other words, the principle can be simply interpreted as "equity will not assist a volunteer." Constitution of a trust is based on the following two conditions: first, there must be a declaration of trust; and second, there must be actual constitution of the trust.

For the purpose of declaration, ‘three certainties’ principle is involved, which relates to the certainties of intention, subject matter and object. Therefore, for a contract to be certain, there are three elements that must be present. The court determines whether certainty exists by examining the language used in the trust contract. The words used are interpreted based on the closest reasonable meaning. Determining certainties allows the court to understand the real reason for the creation of a trust relationship. It also enables the law to execute the trust obligations in case the trustee fails to do so.

Certainty of intention relates to the manner of expression of the trust, and if the trust is clearly deducible, then the element of certainty is satisfied, and this can be considered to be a valid expression of intention. Additionally, using the word "trust" in the contract is not interpreted to mean the creation of an express trust. This is because equity looks to the substance and not form.

Secondly, the subject matter (property transferred) must be identified. For instance, the statement "bulk of my estate" is not regarded as a clear identification of the property. The rule was reinforced in Palmer v Simmond. A third certainty is an object. This refers to a clear identification of the beneficiary in a trust relationship. Even in the case where the trustee has the authority to determine beneficiaries, the settlor must give an adequate clue that points out the identity of the individual. The rule was established in McPhail v Doulton.

Therefore, an important legal principle in the constitution of trusts is that there should be a beneficiary of the trust, which is also called as the ‘beneficiary principle’. The beneficiary must be ascertained, which means that the identity of the beneficiary must be clearly provided; or else, the beneficiary must be ascertainable, which means that the identity of the beneficiary must be open to ascertainment. In other words, the object of the trust should be identifiable and the settlor must settle the property on trust for the benefit of an ascertained or ascertainaible individual or individuals. The trust property may also be left for the benefit of a legal person. The court had clearly provided in an earlier authority in Bowman v Secular Society Ltd, that for a trust to be valid, it must be for the benefit of individuals, or for the benefit of the public in a charitable sense.

Therefore, the fundamental principle of law is that there should be some as the court considered was that there must be some human or legal beneficiary of the trust, who has the capacity to take the executors to the court if the conditions of the trust were not implemented. Capacity is determined by examining whether the settlor can create a trust relationship. Any individual with valid ownership rights on the property is allowed to create a trust relationship. Generally, minors and individuals of unsound mind are considered to have no capacity to form a trust relationship.

Apart from the above discussed legal principles, which are applicable to all trusts, there are certain formality requirements which are applicable to certain kinds of trusts. As mentioned earlier, certain trusts can be formed only if certain formalities are incorporated. Therefore, in case of transferring property in land, wills and transfers of equitable interests such as shares, it is necessary for the formality requirements to be followed. Section 53(1)(b) of the Law of Property Act 1925 provides that there must be evidence of the trust’s existence, which may consist of a signature on a declaration.

Similarly, the Law of Property (Miscellaneous Provisions) Act 1989, Section 2 provides that transfer of property must be made in writing in one document, which must be signed by both parties. However, despite these formality requirements, courts have allowed constitution of trusts when the written documentation requirements were not followed by the parties.

In other words, in some cases, driven by merit, courts have disregarded the legal principle. One of the first and most important examples of this can be found in the case of Rochefoucauld v Boustead, in which case the court allowed oral testimony to be sufficient for constitutiong the trust, when otherwise such trust should have been incorporated in a signed document. In this case, the Comtesse de la Rochefoucauld, owner of estates in Ceylon, was subject to a mortgage for £25,000, which she was unable to pay. Her friend, Boustead, orally agreed to buy the estates from the mortgagee and to hold them on trust for her, subject to her paying the purchase price and expenses.

However, Boustead later claimed that the trust was unenforceable, but the Court of Appeal held otherwise on the principle that the trustee be not allowed to use lack of writing as an instrument of fraud. The court therefore, enforced the oral express trust despite the lack of writing. While this undoubtedly answers the merits of the case, the legal principle was deliberately ignored by the court.

The principle that is used to enforce trusts even in absence of formality requirements, as noted in the Rochefoucauld case, is that equity will not permit a statute to prevent fraud to be used as an instrument of fraud. One may even argue that the court is actually following the spirit of the statute when it enforces a trust that does not comply with its formality requirements by not allowing fraud to be committed by using the lack of formality requirements in the trust to be used to defeat the oral express trust.

In Bannister v Bannister, another such example of giving effect to oral express trust in the absence of formality requirements is seen. In this case, Mrs Bannister inherited two cottages upon the death of her husband, one of which was in her occupation. She sold both cottages to her brother-in law for less than market value on an oral undertaking that she be allowed to remain rent free in the cottage she occupied for as long as she wished. At a later point, her brother in law sought to evict her from the cottage. His argument was that in the absence of a written document evidencing trust as per s53(1)(b) Law of Property Act 1925, there was no valid trust over land.

However, the court held otherwise and allowed constructive trust on the land in favour of Mrs Bannister on the ground that Mrs Bannister only agreed to sell the property at an undervalue because of the undertaking that she could remain there and therefore Mr Bannister held the cottage on constructive trust for Mrs Bannister and he could not rely on statutory formality requirements to defeat the oral trust as that would be fraudulent.

Both the cases discussed above indicate that courts are willing to be driven by results (in equity) and not by the formality requirements in statute when it comes to constitution of trusts that are statutorily required to be in writing. The motivation of the courts appears to be a desire to not let statute become an instrument of fraud when it was intended to be an instrument to prevent fraud. In other words, the courts in not applying statutory formality requirements are giving effect to the ulterior objective of the statute, which is to prevent fraud.

A recent case reinforces this principle. In De Bruyne v De Bruyne, Patten LJ specifically mentioned that there are a number of situations in which equity will impose a constructive trust in which even a third party may be benefitted by the trust because of the conditions in which the property was transferred, irrespective of whether the beneficiary relied on the trust to his detriment or not. Moreover, focus will remain on what was expressed so that express trust will be enforced whether or not compliant with the statutory or legal principles on formality.

Similar reasoning is seen in disposition of subsisting equitable interests, to which the formality requirements in s53(1)(c) of the Law of Property Act 1925 are applicable. This provision states that in case of disposition of an equitable trust or interest subsisting at the time of disposition, such disposition should be evidenced in writing or by will. Despite this formality requirement, cases indicate that courts are willing to forgo such formality requirements if the results are equitable by such approach.

The case of Vandervell v IRC, is an example of the application of such result-driven approach, which seeks to enforce equity and avoid fraud. In this case, the court observed that the object of the s53(1)(c) of the Law of Property Act 1925, was similar to the object of the old Statute of Frauds, which is to prevent hidden oral transactions in equitable interests in fraud of those truly entitled. In this case, Vandervell instructed his trustee to transfer 100,000 shares to the Royal College of Surgeons, which being a non-profit organisation was not required by law to pay tax, allowing Vandervell to evade the tax. The transfer of shares was conditional (made orally) on Vandervell having the right to exercise an option of repurchasing a significant amount of the shares at a price of 5,000 sterling pounds. The IRC became aware of the transaction and sought to recover taxes from Vandervell.

The IRC argued that Vandervell had not completely transferred the shares to the Royal College of Surgeons because there still was the option of repurchasing the shares at a future date. The second argument was based on the manner in which the shares were transferred, which did not comply with writing the writing requirement. The court held that Vandervell was to pay the due taxes to IRC; but that the oral declaration amounted to the ultimate disposition of the shares as the instruction was given to the settlor’s trustee. The court maintained that under such circumstances, the Law of Property Act 1925, and particularly, section 53(1)(c) was not applicable.

In Pennington v Waine, a similar absence of legal formalities in execution of a transfer of shares, did not prevent the court from deciding the matter in favour of the beneficiary. In this case, the transferor intended to transfer 400 shares to her nephew and requested the representative of the company’s auditors to design a share transfer form, which she filled and returned. However, the representative failed to submit the form for registration. Nevertheless, the court ruled in favour of beneficiary, as the transferor had done everything in her power to transfer the shares.

In Saunder’s v Vautier, the court has held that the wishes of the testator cannot not override the rights of the beneficiary to terminate the trust. This is an important principle here because it also relates to the orally expressed wishes of the testator or settlor.

The court has even given an exception to the equity principle that equity does not benefit a volunteer in Strong v Bird, so as to give effect to the more equitable result. In this case, Bird was appointed executor of his stepmother’s property and he also owed debt to her. However, the court held that appointment of Bird, as an executor, meant that the loan had been passed to him as a gift as the ownership was legally transferred to him. Furthermore, it is apparent that Bird's stepmother had a clear intention throughout her lifetime to pass the loan to Bird as a gift.

Conclusion

Many of the cases that involved exceptions from the formality requirements were decided by considering the results and impacts. However, they disregarded fundamental aspects of the law of trusts. Authorities on the exceptions to the formality requirements reveal that laws on trusts cannot be universally applied in all circumstances. Depending on the facts of the case, the judgment is likely to deviate from the universal rules and even statutory principles are at times disregarded by the courts to provide a more equitable result to the issue at hand. However, considering merits this approach seems to be justified.

Table of Cases

Bannister v Bannister [1948] 2 All ER 133.

Bowman v Secular Society Ltd [1917] AC 406.

De Bruyne v De Bruyne [2010] EWCA Civ 519.

Grey v IRC [1960] AC 1.

McPhail v Doulton (1970) UKHL 1.

Midlands Bank v Wyatt [1995] 1 FLR 697

Palmer v Simmond (1854) 2 Drew 221

Pennington v Waine [2002] EWCA Civ 227.

Re Astor’s Settlement Trusts [1952] Ch 534.

Rochefoucauld v Boustead [1897] 1 Ch 196, CA.

Saunders v Vautier [1841] EWHC J82 (1841) 4 Beav 115

Strong v Bird [1874] LR 18 Eq 315.

Vandervell v IRC [1967] 2A (291).

Table of Statutes

Law of Property Act 1925

Law of Property (Miscellaneous Provisions) Act 1989

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