Beneficiary Secures Victory in Concealed Denial of Trust Claim

A beneficiary recently succeeded in a claim for breach of trust against his grandfather who, having declared that he held the beneficiary’s share as sub-trustee, continued to act as if he had retained the beneficial interest.

The significance of the decision in Sheffield v Sheffield and others [2013] EWHC 3927 (Ch) is likely to be confined to its own quite unusual facts, however the case is confirmation of some technical points concerning bare sub-trusts and is useful for practitioners advising on claims where these are involved.

BACKGROUND

This case concerned a trust known as ‘the 1968 Settlement’ which held land including two farms and some residential properties, with the benefit of shooting rights (known as ‘the estate’). John Sheffield, the Claimant’s grandfather had a 25% absolute interest in the estate and a life interest in the remaining 75% under his late wife’s will.

As part of an IHT planning exercise, Sheffield made a declaration of trust known as ‘the 1983 Declaration’ stating that he held his 25% share on trust absolutely for his adult grandson (also called John), the Claimant. Following the declaration, Sheffield continued to act as if he still owned the 25% share and received the whole of the income arising from the estate.

Sheffield was the sole trustee of the 1968 Settlement for a period following his wife’s death, his eldest child, the Claimant’s father (Julian), became a co-trustee in 1974. Various other family members were later added as trustees. A solicitor (Mr Ratcliffe) was a trustee for a short period. It appears the trustees did not keep accounts.

Relationships broke down between the Claimant and his parents from 1996/1997 and between the Claimant and his grandfather from 1999/2000. Sheffield died in 2008.

The Claimant commenced proceedings in the High Court in 2010 against the executor’s of his grandfather’s estate, his father and the past and present trustees of the 1968 Settlement. He alleged various breaches of trust and claimed accounts of 25% of the income that had been earned, or should have been earned, from the estate from the date of the 1983 Declaration to the date of Sheffield’s death and compensation for benefits received by the trustees and others without his consent.

The trustee’s mounted a defence alleging the Claimant had informally entered into an arrangement in which he agreed with Sheffield that the Claimant would receive no benefit from his 25% share in the estate until after Sheffield’s death.

THE DECISION

The Claimant beneficiary largely succeeded in principle. The judge (Judge Pelling QC) found that:

  • The alleged arrangement that formed the basis of the Trustees’ defence did not in fact exist, so the 1983 Declaration took effect according to its terms. Had the Arrangement been found to existed, the 1983 Declaration would have been a sham.
  •  The 1983 Declaration did not constitute an assignment of Sheffield’s absolute equitable interest under the 1968 Settlement. The trustees of the 1968 Settlement therefore held the 25% share on trust for him, who held it as a sub-trustee for the Claimant.
  •  The Claimant beneficiary was entitled to 25% of the income from the estate that had been paid to his grandfather. However, the judge adjourned the hearing to hear further argument as to quantum. There was an issue about whether he should order an account of rent for a period when it was likely to have been entirely consumed by trust expenses and the Claimant’s share could not amount to more than £750.
  • The Claimant beneficiary was entitled to compensation for breaches of trust. This included:
    • compensation for allowing a partnership to farm land on the estate without paying rent (despite the fact that the Claimant had been a partner in it);
    • compensation for the trustee’s failure to consider commercial exploitation of the shooting rights on the estate;
    • 25% of the occupation rent value of a property on the estate occupied by his grandfather, subject to giving credit for 75% of the occupation rent value of a property that the Claimant occupied on the estate; and
    • 25% of the occupation rent value of properties occupied by his parents and 25% of the market value of the properties on being transferred to his parents without payment, subject to credit for expenditure by his father that increased the value of the properties.

None of the defences raised by the Trustees applied in respect of the issues above. However, the judge held that there was no breach of trust where the trustees of the 1968 Settlement had entered into transactions (including the sale of a property to Sheffield’s stepson and his wife) based on professional valuation advice.

 NO CLAIM AGAINST HEAD TRUSTEES FOR SUMS PAID TO SUB-TRUSTEE

The judgment confirms the following points concerning claims where a sub-trust is involved:

  • If a beneficiary disposes of an equitable interest by way of a declaration of trust, the court cannot treat the declaration of trust as if it were an assignment (Milroy v Lord (1862) 4 DF & J 264, page 274). The sub-trustee does not simply “disappear from the picture”.
  • As a matter of practicality, the trustees of the main trust can choose whether to account to the sub-trustee or to the beneficiary of the sub-trust (Nelson v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358).

On the facts in this case, therefore:

  • The trustees of the 1968 Settlement could have paid the income that had arisen from the estate to the Claimant rather than to his grandfather, but weren’t obliged to do so.
  • As the trustees had paid the income to John Sheffield, it was he who had committed a breach of trust by failing to account for any sums due to the Claimant and not the trustees of the 1968 Settlement.
  • The Claimant could claim these sums only from his grandfather’s executors, not from the trustees of the 1968 Settlement.

The judge made no determination about the effect of these principles on the breach of trust claims that were not based on the non-payment of income that had been received by Sheffield. In this case, Sheffield’s estate was large enough to satisfy any claims against his executors. Neither did the judge make any findings about the position where the sub-trust was not a bare trust.

Because John Sheffield was not entitled to occupy a property on the estate to the exclusion of the Claimant without paying an occupation rent, the judge did not need to make findings as to the basis of Sheffield’s occupation. In particular, he noted that whether a a beneficiary who had declared himself a sub-trustee had a right of occupation under s12(1) of TOLATA 1996 was a controversial proposition.

TRUSTEES HAD NO DEFENCES BECAUSE OF CLAIMANT’S LACK OF KNOWLEDGE

When considering whether the arrangement that was alleged by the trustee’s had existed, the judge found that Sheffield and his son Julian had been advised (more than once) by solicitors that the Claimant had a right to 25% of the income from the estate under the 1983 Declaration, but had deliberately concealed this from the claimant.

The Claimant knew that his grandfather had given the 25% share to him and that he had signed the 1983 Declaration. However, the Claimant’s evidence was that he had not read it and had received no advice on it. He was a university student at the time. He had accepted, based on what he was told by his father and grandfather, that he would receive no benefit from the gift during his grandfather’s lifetime. The Defendant trustees were unable to show that the Claimant became aware of his right to income before his solicitors obtained a copy of the 1983 Declaration in December 2004.

These findings meant that the defences raised by the defendants could not succeed. Specifically:

  • Proprietary estoppel could not be made out because the claimant could not be taken to have waived any claim of which he was unaware, for example, by signing the 1983 Declaration, not objecting to his grandfather’s occupation of trust property or entering into the farming partnership that paid no rent. It was not unconscionable to allow the claimant to assert his legal rights in these circumstances.
  •  The six-year statutory limitation period for claims for breach of trust did not bar:
    • the claims for income actually received by John Sheffield (section 21(1)(b), Limitation Act 1980)
    • the remaining claims of breach of trust because John Sheffield and his son Julian had deliberately concealed relevant facts, so the limitation clock did not begin to run until the claimant became aware of his rights in December 2004 (section 32(1)(b), Limitation Act 1980); or
    • the claims for occupation rent because of the concealment by JVS and Julian and further because a trustee who occupied trust property rent-free was treated for limitation purposes as having received income (Re Howlett [1949] Ch 767, at page 778).
  • Laches and acquiescence could apply as a defence only in relation to the claimant’s conduct after he became aware of his rights in December 2004. From that time:
    • laches did not apply because there was no delay by the Claimant or other circumstances that made it inequitable for him to advance his claims (in particular, the claimant had first asked for an account in February 2005, but the trustees did not raise the alleged arrangement until October 2006, and did not appear to rely upon it until May 2011; and
    • acquiescence did not apply because the claimant asserted his claim promptly enough when he became aware of his rights.
  • The trustees of the 1968 Settlement and Sheffield as sub-trustee ought not fairly to be excused under section 61 of the Trustee Act 1925 on the basis that they had acted honestly and reasonably. (However, this defence would apply if the judge was wrong to conclude that there was no breach of trust in respect of a transaction where the trustees of the 1968 Settlement had acted on apparently competent professional advice.)

FINAL THOUGHTS

The judge’s confirmation of the technical points concerning sub-trusts will be useful for practitioners advising on claims that involve a sub-trust, at least if it is a bare trust.

This case is a salutary tale of family trustees managing property without regard to the trusts on which they held it. Many practitioners will be familiar with the scenario of a dominant individual who is keen to save tax but less keen to respect legal niceties. Even if not in a position to ensure that trustees fulfil their duties, practitioners should at least advise trustees:

  • Of the rights that arise under the trust, particularly if the beneficial interests change or property transactions affect these interests.
  • To document any agreement to waive those rights and ensure that the parties concerned have independent advice where necessary.
  • That informal agreements may not have legal effect or may be difficult to prove.
  • That even formal waivers may be challenged if relationships break down within the family or in the case of divorce or bankruptcy.
  • To keep accounts.
  • That the court may not order accounts where it would be disproportionate to do so, but is less likely to be sympathetic if this results from the trustee’s failure to keep proper accounts.
  • That obtaining appropriate professional advice on transactions will make claims for breach of trust less likely to succeed.
  • That if claims are made against a trustee, they should raise any relevant defences based on facts known to them (such as acquiescence) and obtain evidence from relevant parties at an early stage.

Practitioners should also record all the advice given, both as a matter of good practice and to protect the practitioner if a trustee facing a claim should decide that the blame really lies with his advisers, as dominant individuals sometimes do.

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