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27-07-2015

The Court of Appeal has had to consider the extent of the powers available to a court when considering an application under the Trusts of Land and Appointment of Trustees Act 1996 (“TOLATA”) - Bagum v Hai and another.

The scenario of the home ownership will be familiar to many trustees in bankruptcy. Mrs Bagum’s late husband had purchased the property under the right to buy two years before his death. He died intestate. The family members gave up their interest so that Mrs Bagum became the sole registered proprietor. The family remained in occupation and contributed to the purchase but that occupation became increasingly difficult. Mr Hai left the property but in order to protect his interest, a declaration of trust was entered into confirming that the property was held in equal shares by Mrs Bagum and her two sons.

So far, therefore, we have a property held by one person but subject to a declaration of trust in favour of the legal owner and two others in equal shares. A familiar scenario it is submitted.

Needless to say, something went wrong. Mr Hai wished to realise his share. It was originally agreed the property would be sold. However, when it came to it, Mr Hai would not sign the document and instead proposed that he buy the property himself. Mrs Bagum would not consent to this. She did not want to move.

An application was made to the courts seeking an order that Mr Hai be obliged to sell his interest to Mr Hafiz or, alternatively, an order for sale. The judge declined to make the order forcing Mr Hai to sell his interest to Mr Hafiz but granted an order for the sale of the property. There was more, however, and the judge ordered that Mr Hafiz should have the opportunity to purchase the property at a price to be set by the court and if that could not be done, the property be sold.

The Court of Appeal was asked to consider whether the judge was correct in saying that there was no jurisdiction to order that Mr Hai sell his interest in the property to Mr Hafiz and, if not, whether it had power to make the order that was made. The court had to consider sections 14 and 15 of TOLATA.

The important point is that TOLATA deals with the court making an order as to the exercise by the trustees of their powers. Briggs LJ summed up the position as follows:

It is, in my judgment, no part of the functions of trustees of land to deal with or dispose of beneficial interests under the trust, whether by sale or otherwise, at least not directly.

But the functions of the trustees in relation to sale and partition do not cease to be relevant functions for the purposes of section 14(2)(a) merely because the exercise of them may convert the interest of beneficiaries into money without their consent.

By contrast, the direct disposal of a beneficiary’s interest, whether upon sale to another beneficiary or otherwise is, quite simply, not a function of trustees of land.

The Court, therefore, distinguished a sale of the whole of the property converting the beneficiaries’ interest into money which could be forced upon them (this was a function of a trustee) and forcing a transfer of one beneficiary’s interest to another (this was not a function of a trustee). In effect the order being sought was the latter and, not being within the functions of a trustee, the court could not make such an order.

Was that the end of the matter? Of course not, there had to be more. We know we have been told that the property has to be sold but did that mean that the court could not direct that it should first be sold to one of the beneficiaries?

The court recognised that if there were three beneficiaries, A, B and C, ordering a sale of the property to A and B was in effect ordering that they purchase C’s interest for money. The very thing that the court said it had no power to order. But, the Briggs LJ said that the mere fact one transaction was not within the function of a trustee did not mean that all other transactions would also be outside of that function merely because the same result was produced. A sale of the property to one group of beneficiaries was within the functions of a trustee, namely, the power to sell.

The court had a wider discretion than the trustees and it fell within that discretion to grant the order that was made so that one of the beneficiaries had the opportunity to purchase the property failing which it would be sold outright.

This was to achieve fairness between the parties with Briggs LJ adding “None of this means, of course, that the court will act unfairly, unjustly or capriciously as between beneficiaries in giving directions to trustees under section 14(2). It simply demonstrates that, in exercising its powers in circumstances where, necessarily, the beneficiaries will be in dispute with each other about what should be done with the trust property, the court is not rigidly constrained by those rules of equity which may...... constrain the trustees themselves”.

Why does this matter?

When a trustee in bankruptcy is dealing with the realisation of a property in co-ownership, the powers exercised by the court are those under TOLATA with some additional factors added by the Insolvency Act, eg, section 335A. Many co-owners would prefer not to sell if that is possible. Indeed many trustees would prefer a purchase of their share to an order for possession and sale. Nothing in this judgment prevents beneficiaries from reaching agreement outside of the court process.

This judgment is relevant when agreement cannot be reached. It arguably gives more scope for a co-owner to ask the court for time to purchase the property and it is confirmed that the court has the power to direct a sale to the co-owner. A mechanism would need to be put into the court order for agreement on the price and a reasonable time limit should be put in place for that transaction to complete failing which the order for possession and sale become operative.

It is submitted that, if there is such a possibility, it makes sense to investigate all the options in the first year period so that this option may well have been exhausted before the application for possession and sale to prevent any further delays. It is also submitted that the possibility of the enforceability of any possession and sale order being delayed, it is not appropriate to wait until the approaching end of the three year period under section 283A before property realisation is investigated.

It is true that such submissions on the part of co-owners is not common but this decision will become well known by those who deal in property transactions and the request for time to purchase may well be used to delay an inevitable order for possession and sale becoming effective.

If you wish to discuss this issue, please contact Graham McPhie on gmcphie@moonbeever.com or Frances Coulson at fcoulson@moonbeever.com

This is intended for general information only and should not be considered as giving advice in relation to any individual case nor be taken as applying to any particular case. No liability is accepted for any such use of the information contained here.

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