4- Formalities of creating a trust

Question 1

Reminder: How can a trust be created?

Answer 1

1) Self-declaration of trust- declaring yourself trustee of the property for the benefit of someone else.
2) Transfer on trust- transferring the property on trust for the benefit of another.

Question 2

Fuller (1941) Functions of formalities in trust creation

Answer 2

1. The Evidentiary Function – The most obvious function of a legal formality. Providing ‘evidence of the existence and purport of the contract, in case of controversy’- ie certainty.
2. The Cautionary Function – deterrent function by acting as a check against inconsiderate action.
3. The Channelling Function - a simple and external test of enforceability. Formality offers a legal framework into which the party may fit or channel his actions, so that they create a legally effective expression of intention.

Question 3

Davies & Virgo- reasons for formalities

Answer 3

“There are good reasons for formality rules being in place.

BUT a strict insistence upon formalities will inevitably mean that the intention of the settlor is frustrated in some instances.

There is a tension between giving effect to the clear and unambiguous intention of the settlor and ensuring compliance with the relevant formalities. This tension has produced some difficult cases.”

Question 4

What types of trust require formalities to be met for constitution?

Answer 4

Declarations of trusts of land or interests in land must be proved by writing that is signed by the person declaring the trust- s.53(1)(b) LPA 1925.
- No signed writing is required for RTs, implied trusts or CTs of land.

Testamentary trust: s.9 Wills Act 1837

Question 5

Role of equity in formalities?

Answer 5

Equity sometimes finds ways of avoiding the formality requirements. This is where many of the cases arise.

Question 6

Declarations of trusts of land- requirements?

Answer 6

found in s.51(3)(b) LPA 1925

Question 7

s.53(1)(b)

Answer 7

a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will.

Question 8

s.53(2)

Answer 8

This section does not affect the creation or operation of resulting, implied or constructive trusts.

Question 9

Effect of failure to comply with s.53(1)(b)?

Answer 9

Trust is unenforceable. Policy means the requirement of formality outweighs the intention of the settlor, even if he otherwise clearly intended the trust.

Question 10

Gardner v Rowe (1828)

Answer 10

Decision: If express trusts of land are not proved by signed writing, the trust is unenforceable rather than void. This means the trust is valid, but it cannot be enforced by the beneficiary.

So, if the trustees wish to be bound by the trust they can be, but they cannot be compelled to fulfil their obligations if they do not wish to.

(though in some circumstances it may be possible to treat the land as being held on CT which does not require writing to be enforceable).

Question 11

Why is formality required for trusts of land (but not for other inter vivos trusts)?

Answer 11

Certainty is seen as particularly important for trusts of land because it is considered a particularly important and valuable asset.

Question 12

Avoiding s.53(1) equitable maxim?

Answer 12

‘Equity will not allow a statute to be used as an engine of fraud’

Question 13

Why is it possible to avoid s.53(1)(b)?

Answer 13

stringent insistence on formalities could lead to injustice.

What if S transfers land to T as trustee for B, but S fails to comply with the necessary formality for declaring the trust?
• If trust unenforceable, T could take benefit of land, even though T knows he was intended to hold it on trust
• This would clearly be unconscionable.

Question 14

Two-party scenarios

Answer 14

Where A orally transfers B land to be held on trust for A, it would be fraudulent for B to deny the trust if he knew that intended him to hold the land for A on trust.

B could argue the trust has not been validly declared because it was not evidenced in writing contrary to the requirements of s.53 BUT this would be to use the statute as an instrument of fraud.

Equity will recognise that B holds the land on trust for A.

• The ‘fraud’ arises from denying B’s rights, T need not have obtained the land through any ‘fraud’.
• Doesn’t require the individual to have acquired the land through any actual fraud, the fraud is in seeking to use the statute to deny the beneficiary’s rights.

Question 15

Meaning of fraud in maxim?

Answer 15

Fraud in the sense of the maxim means both or either:

1. Procuring the transfer of the land (or in the will) without formalities; and
2. Relying on the transfer as vesting absolute title to the land in himself.

Question 16

Bannister v Bannister [1897]

Answer 16

Illustrates the meaning of fraud in this context in an extreme way.

Case: A was widowed. Owned a cottage and entered an oral agreement with B, her brother-in-law, whereby she would convey the cottage to him on the understanding that she would be able to live in it rent-free as long as she wished.
- B allowed her to occupy only 1 room and then sought possession on the basis that A had no right to occupation.

Decision:
1. B was acting fraudulently by setting up the absolute character of the conveyance to defeat A’s life interest.

2. The property was held on CT trust by B for A to occupy for as long as she wished.
3. As a CT it would fall within s.53(2): no formalities required.
   - This has benefit that Equity not seen to be blatantly ignoring the statutory requirements, but the effect is the same

Question 17

Rochefoucauld v Boustead [1897] CoA

Answer 17

Leading case on operation of fraud maxim in two-party scenarios.

Case: A owned coffee plantations. She mortgaged the land and the mortgagee sold the land to the B. B orally agreed to hold the land on trust for A, so long as A repayed B the purchase price.
Instead, B sold the land at profit, but was then declared bankrupt.

Issue: Could A claim the proceeds were held on trust for himself? The trust had not been formalised by writing, so B claimed he held the land absolutely.

Decision:
1. It is a fraud on the part of a person to whom land is conveyed as a trustee, and who knows it was so conveyed, to deny the trust and claim the land himself’

2. This is because it would be unconscionable for trustee to take property absolutely in this knowledge.
3. Court found an express trust. Because trust was recognised as express it was not time bared.
4. NB: Later cases have held the trust as either:
   - A CT, because it operates to prevent the transferee of the property from the benefiting from fraud, or
   - A RT, because it arises from the failure of an express trust.
   BUT characterising the trust as express is consistent with the language of the LPA, since there is a valid trust where there has been no writing, it is simply unenforceable.

Question 18

How does the court resolve the fraud? 3 possibilities?

Answer 18

1) It should just prevent B from benefiting
- Where A transfers property on trust to B for benefit of C, it would be sufficient for B to hold on RT for A- i.e. land reverts back to A to he can recover it. Most convenient, as A could then choose a different trustee.
OR
2) Modern tenancy of the courts- it should uphold the trust as intended, i.e. T holds for B. Respects A’s original intention.
BUT, as with RT, this does basically avoid the formality requirements: s.53(1)(b) is effectively limited to oral self-declaration of trust of land, as if transfer to trustee, the Rochefoucauld principle enforces the trust regardless of lack of written evidence. Is this correct?
OR
3) B should hold the land on express trust for C for the same reasons an express trust was recognised in Rochefoucauld.
Arguable that this is preferable because it is more in line with the legislation and does not effectively render the formalities redundant.

Question 19

Three-party scenarios

Answer 19

Where A conveys land to B and A has orally communicated to B that the property should be held on trust for C.

Although the express trust for C is unenforceable by C himself, it is fraudulent for B to deny the trust and to rely on his own legal rights to the property.

Same cases and solutions as 2 party.