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by • June 11, 2015 • TrustsComments (0)214

Duties and liabilities of trustees: Lessons from recent cases

NOTE: This article was published in June 2015 and reflects the law as it stands on the date of publication and not at any later date.

Introduction

There have been a number of recent cases which provide useful guidance in considering the scope of trustees’ duties when faced with decisions as to whether or not to sell or retain land, or to incur expenditure on repairs, or to take legal action.

Duties of trustees: the law

In Brudenell-Bruce v Moore [2014] EWHC 3679 (Ch), paras. 88-95 Newey J set out a number of basic principles, relating to the duties of trustees, with particular reference to land:

  • It is incumbent on trustees to exercise their administrative powers in the interests of the trust’s beneficiaries. The paramount duty of the trustees is generally to provide the greatest financial benefits for the present and future beneficiaries.
  • A power of investment must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investment in question.
  • Trustees may also be obliged to seek to generate income from land comprised in the trust.
  • When exercising the powers of an absolute owner of land, a trustee must exercise the statutory duty of care under section 1 of the Trustee Act 2000, i.e. to exercise such care and skill as is reasonable in the circumstances, having regard in particular—
    1. to any special knowledge or experience that he has or holds himself out as having, and
    2. if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.
  • The statutory duty of care applies to the manner in which a power is exercised, not to the decision whether to exercise the power.
  • The common law duty of care applies to decisions whether or not to exercise a power, e.g. of repair. The common law duty requires a trustee to exercise the same standard of diligence and care as an ordinary prudent man of business would exercise in the management of his own affairs.
  • There is no difference of significance between the statutory and common law duties of care.

Liability of trustees: the law

The duty of a trustee is not absolute. There is no strict liability. Newey J’s formulation of the law in Brudenell-Bruce v Moore reflects this limitation:

  • The fact that a trustee could have prevented a loss does not necessarily mean that he is liable for it.
  • Nor will an error of judgment automatically result in liability in the case of an honest and reasonably competent trustee who acts with reasonable care, prudence and circumspection.
  • If trustees make a decision upon wholly wrong grounds, but it subsequently appears, from matters which they did not express or refer to, that there are in fact good and sufficient reasons for supporting their decision, they would not incur any liability for having decided the matter upon erroneous grounds: the decision was right.

Brudenell-Bruce v Moore

The above principles are illuminated by the facts and decision in Brudenell-Bruce v Moore. The case involved the historic Savernake estate in Wiltshire, which was owned by a trust in which Lord Cardigan had a 49% share. The principal asset of the estate was Tottenham House, which comprised two huge properties: a Grade 1 listed house (which had been unoccupied since 2005 and was decaying fast) and a Grade 2 listed stable block (which was extremely dilapidated). There was also about 4,000 acres of land on which there were a number of buildings.

The trustees had little or no money. The estate’s losses were in excess of £200,000 in 2012-13, and there were borrowings of £1.8M. There were two trustees: a lay trustee (a barrister’s clerk) and a chartered accountant. The relationship between Lord Cardigan and the trustees was strained.

Claims

Lord Cardigan made a number of claims alleging breach of trust against the trustees:

    • They had allowed the stable block to fall into disrepair.
    • They had failed to repair and re-let a property on the estate (Sturmy House).

They had allowed Lord Charles Brudenell-Bruce (the half-brother of Lord Cardigan who was not a beneficiary of the trust) to live rent-free in a cottage on the estate.

  • The lay trustee had charged for his services at £150 per hour in breach of his duty to act gratuitously.

Lord Cardigan also sought an order for the removal of the trustees.

Stable block

The claim in respect of the stable block failed. The block was suffering from decay caused by damp penetration. It was let by the trustees on a long lease. In 2009 there was a partial collapse of the first floor structure. Wiltshire County Council warned the trustees of the damage caused by water ingress, and recommended that the roof should be sheeted over to protect the building and make it watertight.

However, the trustees, on advice, pursued a policy of seeking a purchaser who would completely gut and replace the interior. In August 2013 the trustees entered into a conditional contract for the sale of Tottenham House, including the stable block. However, subsequently, part of the roof collapsed, and there was further damage to the first floor.

Lord Cardigan’s claim was that the trustees should, as a minimum, have arranged for tarpaulins and plastic sheets to be used to cover the vulnerable sections of the roof. It was alleged that, as a result of the trustees’ failure, the stable block had deteriorated much more than would otherwise have been the case. The additional costs of repair were estimated at between about £2 million and £2.6 million.

Newey J found that:

  • The trustees could not fairly be criticised for not forfeiting the lease. They had received legal advice that legal proceedings against the tenant could cost in excess of £100,000, and might result in a re-letting on less favourable terms.
  • It was reasonable for the trustees not to put tarpaulins and plastic sheets over the stable block in advance of forfeiting the lease (by exercising their right to re-enter and do the work themselves). It was preferable that the tenant should bear the cost of the repairs, and the tenant was insisting that it would carry out repairs.
  • It was material that the trustees had no money to pay for repairs, or to fund forfeiture proceedings, and the trustees were justified in focusing on the search for a purchaser who would completely rebuild and redevelop.
  • It was not, in any event, established that the use of tarpaulins and plastic sheets would have prevented the damage which did occur. The trustees could not be criticised for taking action which would not have been effective to prevent loss.

Sturmy House

The trustees were, however, liable in respect of their failure to let Sturmy House, once they had repaired damage caused by a burst pipe. However, they were not liable for failure to repair the pipe before May 2012 when they obtained a loan of £1.8M. This, again, indicates that lack of funds may provide a reasonable excuse for inaction.

The trustees could have re-let by April 2013. They were liable for 18 months of lost rent (£50,000). This illustrates the general principle that trustees are under a duty to seek to generate income from land comprised in the trust.

Permitting rent-free occupation

The trustees were liable for their failure to ask Lord Charles Brudenell-Bruce to pay a market rent for his occupation of the cottage (£14,225 for 11 months’ rent); and, if he did not do so, to take steps to evict him and re-let. Lord Charles was not a beneficiary of the trust. Lord Cardigan had made clear that he no longer consented to Lord Charles’ rent-free occupation.

Newey J noted that trustees may have to act dishonourably (though not illegally) if the interests of their beneficiaries require it. In this sense, trustees are under a strict liability. They must act in the interests of beneficiaries, in seeking to generate maximum returns, however distasteful this may be.

Remuneration

Lord Cardigan made a claim that the lay trustee (Mr Moore) should repay the remuneration that he had charged for his services (£64,225 at £150 per hour). This claim succeeded. The office of a lay trustee is usually gratuitous. Although the court has power to authorise payment of remuneration retrospectively, that jurisdiction should only be exercised sparingly and in exceptional cases. It was material that:

  • Mr Moore had initially agreed to act gratuitously, and was aware by the time that he was appointed that his role would involve more work than he had previously been led to believe when he agreed to act as trustee.
  • Mr Moore did not tell Lord Cardigan that he had changed his mind before rendering invoices.
  • Mr Moore was seeking to be paid for time spent on the affairs of the estate generally, rather than merely a specific project.
  • Mr Moore did not have particular qualifications or expertise of importance to the estate, even if he had devoted a considerable amount of time to his role as trustee, and put up with a considerable amount of unpleasantness from Lord Cardigan.
  • The estate was short of money.

Removal of trustees

Both trustees were in breach of trust (to repair and relet Sturmy House and in permitting rent-free occupation of the cottage). Mr Moore had also been in receipt of unauthorised remuneration. However, these breaches were not in themselves grounds for removal.

Mr Moore was nonetheless to be removed as trustee, following the sale of the estate, on the basis that the breakdown of his relationship with a major beneficiary (Lord Cardigan) was obstructing the administration of the trust. This was so even though the lion’s share of responsibility for the breakdown lay with Lord Cardigan.

The professional trustee (Mr Cotton) was not removed. He had considerable skill and expertise in trust matters, and relations with Lord Cardigan were nothing like as bad as they were between Mr Moore and Lord Cardigan.

Comments

The following lessons can be derived from Brudenell-Bruce v Moore:

  • Trustees may escape liability for losses caused by their actions or inactions, with regard to land, if they have acted reasonably, or not unreasonably.
  • Lack of funds may be a reasonable excuse for inaction. Trustees are not, for instance, bound to take legal proceedings at their own expense (Bradstock Trustees v Nabarro Nathanson [1995] 4 All ER 888).
  • The courts are prepared to cut trustees some slack if (as was the case with the stable block) there are risks in taking action, such as legal proceedings, or if the proposed action might not be effective: all the more so if the trustees have taken advice as to their options.
  • However, if funds are available, and there is a reasonably clear course of action, the trustees should act to maximize income and financial returns for the trust, however distasteful this may be.
  • Lay trustees must expect to put in the time and effort required, for no pay. A lay person, invited to take on the role of trustee, should be wary of doing so, if the trust is short of funds, and there is potential for difficulties or dispute.
  • Breaches of trust are not themselves sufficient grounds for removal of a trustee. However, a breakdown of relations between a beneficiary and a trustee will be a ground for removal if it obstructs, or has the potential to obstruct, the administration of the trust.

Duty to consider sale

Trustees do not have a duty to sell land. However, they do have a duty to review trust investments (including land) and to consider, having regard to the standard investment criteria, whether such investments should be varied (Trustee Act 2000, s. 4(2)). In short, they have a duty to consider whether or not to sell land.

In Jeffrey v Gretton [2011] WTLR 809 trustees of a valuable, but dilapidated property, retained it un-let for 6 years, on the basis that one of the beneficiaries would, over time, pay for its refurbishment. The trustees were held to be in breach of their duty to review investments. They had, in effect, made a positive decision not to review, but to retain. Also their decision to retain had fallen below the standard to be expected of a reasonable prudent man of business. They ought to have taken professional advice on the merits of their plan to retain the property. That advice would probably have been to sell. However, the claimant beneficiaries could not establish that any loss had been caused by the failure to sell at an earlier date.

In summary, trustees must consider whether or not to sell trust assets, and take professional advice, if necessary.

Manner of sale

Trustees are not necessarily obliged to sell on the open market after the fullest possible marketing exercise. They may pursue a targeted marketing strategy, confined to verified and previously interested parties, if they have received cogent professional advice that this is the better strategy.

In Cotton v Earl of Cardigan [2014] EWCA Civ 1312 the trustees of the Savernake Estate proposed to sell Tottenham House to an unnamed buyer (X) for £11.25M conditional upon obtaining the approval of the court. The court made an order approving the sale, in large part because there was no certainty of a better offer, and there was a need for a speedy and cost effective sale to discharge liabilities.

Lord Cardigan appealed on the grounds that the price was inadequate, and was the result of an ineffective and inadequate marketing exercise. There should, he claimed, have been a full open, international marketing campaign. There were unanswered questions as to how the selected bidders had been procured and selected. It was submitted that the court should be cautious of approving a momentous decision without a proper evidential basis. However, it was not disputed that there should be a sale.

The trustees had taken expert advice from a land agent (Knight Frank) on valuation, and from a surveyor on marketing strategy. The surveyor advised against an open market campaign on the basis that the selected bidders were known to be interested and good for the money. They were special purchasers who would be attracted by competing in a narrow market field and, therefore, might be prepared to pay a premium price. Indeed, X’s offer was 32% higher than Knight Frank’s valuation.

Judgment

The Court of Appeal held:

  • The trustees were entitled to accept the clear and cogent views of an accomplished and well-reputed surveyor as to marketing
    strategy. Trustees are not bound to second guess the professional advice of experts.
  • The trustees’ concern was to get the best possible price as speedily and unconditionally as possible, and the surveyor’s advice achieved this for them.
  • Although the court would not approve a trustee’s decision without a proper evidential basis with full and frank disclosure, it should not deprive a trustee of approval without good reason. The court should not place insurmountable hurdles in the way of trustees.
  • The trustees had presented sufficient evidence to satisfy the court they had fulfilled their duties to the beneficiaries and had formed a view which, in all the circumstances, reasonable trustees could have formed.
  • If the appeal were allowed, the trustees would probably be thrown on an open-market strategy which they could ill afford and which would, very possibly, lose the special purchasers. Moreover, the trust had no money and faced action from its bank. The effects of denying approval were potentially dire.

Bird in hand

Page v West [2012] EWHC 4390 (Ch) illustrates that trustees need not take steps to obtain the best possible price in any circumstances, but may accept an available offer, at least if they obtain the approval of the court.

The court authorised trustees to sell land at an offer price of £1.575M without planning permission. An application for permission would not have been justified, it being unreasonable to expect the trustees to engage in an expensive and speculative permission application where there was no clear prospect of increasing the property’s value. Expert advice had been obtained from a surveyor that it was reasonable to sell at the offer price. There was no cash to fund the planning permission application, and there was a pressing need to sell to pay arrears of income due to beneficiaries.

Comment

These cases emphasise the importance of trustees obtaining proper advice from reputable experts in the relevant field. If they do so, and the advice is cogent, it is unlikely that they will have committed a breach of trust, even if the advice turns out to be wrong (see Pitt v Holt [2013] 2 AC 108).

Trustees are also not bound to go to any lengths to expose the trust property to the maximum number of potential buyers, or to take all conceivable steps to maximize value, e.g. by applying for planning permission, if there are good reasons for not doing so. Such good reasons may include a lack of funds, the need for a quick sale, and the risk of losing a good offer.

The trustees may, in an appropriate case, be advised to accept an offer, conditional upon approval by the court. They would then need to apply to the court to approve their decision to sell. The court will give its approval if satisfied that the trustees have formed a view, in the light of the expert advice that they have received, which reasonable trustees could have formed. The court’s job is not to pick holes in the process adopted by the trustees, but to supervise their actions to ensure that they have taken reasonable steps to act in the best interests of the beneficiaries.

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