Chapter 5: Formalities and Constitution Flashcards
1
Q
- Introduction
A
This chapter explores the formalities for declaration and constitution of trusts. When we talk about ‘formalities’, we mean the formal requirements (if any) for giving an
arrangement legal effect. For example, is it necessary to put the arrangement into writing or use
some other specific formal document such as a deed?
Because trusts involve both legal and equitable title, we need to consider the formalities (if any) in
respect of both interests.
2
Q
1.1 Rights of legal owner
A
Before we start to look at formalities, let’s remind ourselves of the main ways in which legal owners
can deal with their proprietary interests. Please note that we are focusing on gratuitous methods
of dealing with assets. We are not concerned with transactions made for consideration. We are also focusing on the formalities for inter vivos transactions. This chapter is not concerned with gifts or trusts created by will although we will briefly touch on wills at the end of the chapter. There are three broad things a full legal owner can do gratuitously with their property. They can:
(a) Make a gift;
(b) Declare themselves to be a trustee; or
(c) Transfer the property on trust.
3
Q
1.1.1 Gift
A
A gift is the most simple thing a full legal owner can do with their interest. It simply involves the
transfer of full legal ownership from one person (the donor) to another (the donee). When it comes to formalities, therefore, it is only necessary to consider the formalities for transferring legal title from the donor to the donee.
4
Q
1.1.2 Self-declaration of trust
A
In contrast, a trust involves the creation of distinct legal and equitable interests in property. If we
take a simple self-declaration of trust, it involves the full legal owner creating a new equitable interest in the same property. So we start with legal title only and end with separate legal and equitable interests. There is no change in legal ownership, but the settlor now holds the legal title in a new capacity ie as trustee. There is therefore no need to consider any formalities for dealing with the legal interest but it will be necessary to consider whether there are any formalities for creating the new
5
Q
1.1.3 Transfer on trust
A
The other way of creating a trust is a transfer on trust. This involves the settlor transferring legal title to a trustee, who then holds for a beneficiary. This is more complicated than a self-declaration because it involves changes in both legal and
equitable title. Therefore it is necessary to consider formalities both for creation of the equitable
interest and the transfer of the legal interest.
6
Q
1.2 Formalities for declaration and constitution
A
It is important to understand when you need to consider the formalities rules for declaration of trusts, when you need to consider the rules for constitution of trusts and when you need to consider both.
7
Q
1.2.1 Formalities for declaration of trusts
A
When we talk about formalities for declaration of trusts, we mean the formal requirements (if any) for creating a completely new trust. You must therefore consider the issue of formalities whenever a trust is being created (whether it is a self-declaration of trust or a transfer on trust). For completeness, this means that formalities should be considered if a sub-trust is being created although we do not focus on sub-trusts on this course.
8
Q
1.2.2 Other property
A
If the property is not land, there are no separate formalities for creation of the equitable interest. This is clear from the case of Paul v Constance. No specific formalities are required for the declaration of a trust of property other than land, meaning there is no requirement to use a
particular method (such as writing) to create the equitable interest.
9
Q
1.3 Formalities for constitution of trusts
A
When we talk about formalities for constitution, we mean the formal requirements for transferring
legal title to another person. This means that you need to consider the constitution rules when a legal owner intends to make either a gift or a transfer on trust. The constitution rules will always
be relevant here, but will differ depending on the type of property. For example, the method you must use to transfer legal title to land is very different to the method needed to transfer legal title to a chattel.
10
Q
1.3 Formalities for constitution of trusts
A
The reason we don’t need to consider constitution when dealing with a self-declaration of trust is
because legal title is not moving. Self-declarations of trust are therefore automatically constituted.
You may question why we are focusing on gifts here at all, given that this module is concerned
with trusts. The reason is because there are circumstances in which equity will intervene and perfect an imperfect gift even though it has not been properly constituted. Sometimes this takes effect by way of a constructive trust. We consider these circumstances in detail later in this chapter.
11
Q
1.4 A note on testamentary trusts
A
Although this chapter does not focus on testamentary trusts, it is worth briefly mentioning them because you will come across a lot of trusts created via will. The creation of a testamentary trust requires compliance with s 9 Wills Act 1837. This is not so much a specific formality requirement for the creation of a trust but rather a general requirement for any testamentary disposition. If the will does not comply with s 9, the will itself will be void, meaning that no gifts or trusts created in the will can take effect.
12
Q
1.4 A note on testamentary trusts
A
As long as the formalities in s 9 Wills Act 1837 have been complied with, the will is valid and the legal title to all property in the deceased’s estate will vest in their personal representatives (known as either executors or administrators). They then have an obligation to give effect to any valid gifts or trusts in the will.
If the personal representatives are named as trustees, they will then hold the relevant property in
their capacity as trustee (once they have administered the estate and are ready to distribute property). If the will contains any gifts or trusts with a third-party trustee, the personal representatives have an obligation to transfer legal title to those people.
13
Q
1.4 A note on testamentary trusts
A
You therefore do not need to worry about the formalities and constitution rules when analysing
the provisions of a validly executed will.
14
Q
2 Formalities
2.1 Trusts of land
A
This section explores the formalities for declaration of a trust of land set out in s 53(1)(b) LPA 1925. Although it is generally possible for a settlor to declare a trust without complying with any specific formalities requirements (see eg Paul v Constance) there are specific rules applicable to the declaration of trusts of land.
15
Q
Key case: Section 53(1)(b) LPA 1925
A
Section 53(1)(b) LPA 1925 provides that ‘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’.
16
Q
s 53(1)(b) LPA 1925
A
We will now look in detail at the requirements of s 53(1)(b) LPA 1925 and considers the effect of failing to comply with those requirements
17
Q
Manifested and proved
A
Section 53(1)(b) is an evidential requirement only. This means:
- The declaration and the writing need not be contemporaneous.
- The trust will be unenforceable unless and until s 53(1)(b) is satisfied.
18
Q
Some writing
A
There is no prescribed form for the written evidence. All that is needed is something in writing which provides evidence of:
- The settlor’s intention to create the trust; and
- The terms of the trust.
19
Q
Signed by some person who is able to declare such trust
A
Although the signature will usually be that of the settlor, it is arguable that the trustee (being the legal owner) can also provide the written evidence. This point is not settled and it is preferable to seek directions from the court in situations where the trustee considers doing so.
20
Q
By will
A
Section 53(1)(b) expressly provides for the possibility that a trust of land is created by will. As long as the will is validly executed, ie complies with s 9 Wills Act 1837, this will be sufficient to satisfy s 53(1)(b).
21
Q
2.1.1 Unenforceable trusts
A
As we have already seen, s 53(1)(b) is an evidential requirement. Non-compliance renders the trust
unenforceable rather than void. This is a crucial distinction: A trust exists from the moment it is declared but the beneficiary cannot enforce their rights unless and until s 53(1)(b) is satisfied. Once the trust becomes enforceable the beneficiaries can enforce their rights in respect of the
period between declaration and satisfaction of s 53(1)(b)
22
Q
Example: Oral declaration subsequently evidenced by signed writing
A
Consider a life interest trust of land which is orally declared in January but evidenced six months
later, in June. The life tenant is entitled to the income produced by the land between January and June. Once the trust becomes enforceable, the life tenant can sue to enforce this interest. The trustee can also be sued for any other breaches of trust between January and June.
23
Q
2.2 Exceptions to s 53(1)(b) LPA 1925
A
The formalities rules in s 53(1)(b) LPA only apply to the creation of express trusts. There is an exception in s 53(2) for resulting, constructive and statutory trusts. This means that there are cases where trusts of land can arise in the absence of written evidence.
24
Q
2.2 Exceptions to s 53(1)(b) LPA 1925
A
Statutory trusts are not considered in this module. Resulting and constructive trusts are covered in
further detail in the chapter on ‘Resulting trusts’ but in order to understand the following discussion on failure of formalities, it is helpful to briefly consider what we mean by resulting and constructive trusts
25
2.2 Exceptions to s 53(1)(b) LPA 1925
* An automatic resulting trust arises when legal title has been transferred to an intended trustee, but the trust fails for some reason (such as certainty of objects).
* A presumed resulting trust arises when legal title is gratuitously transferred but there is no
evidence that it was intended to be a gift.
* A constructive trust arises in circumstances where it would be unconscionable for the legal
owner of property to assert beneficial ownership of that property
26
2.3 Failure of formalities
We have considered the effect of time passing between declaration of the trust and satisfaction of s 53(1)(b) LPA 1925, but what if those formalities are never satisfied? As a basic rule, the answer is that the trust will simply not become enforceable. This gives the settlor an opportunity to change their mind about parting with beneficial ownership of the property.
27
2.3 Failure of formalities
In cases involving a gratuitous self-declaration of trust over land the settlor can simply choose not
to create the signed, written evidence of the existence of the trust. In the absence of any facts
rendering it unconscionable for the settlor to deny the existence of the trust (such as a proprietary estoppel claim) the beneficiary will not be able to assert any interest in the land.
28
2.3 Failure of formalities
If the settlor changes their mind about a gratuitous transfer on trust, and makes no attempt to constitute it, the trust will not only be unenforceable for non-compliance with s 53(1)(b) but also void for lack of constitution. Again, this is subject to any additional circumstances which may make it unconscionable for the settlor to deny the existence of the trust.
29
2.3 Failure of formalities
The position is more complicated in cases where there has been a legal transfer of the land but no
evidence satisfying s 53(1)(b) LPA 1925. In such circumstances, can the intended trustee rely on non-compliance with s 53(1)(b) to deny the existence of the trust?
30
2.3 Failure of formalities
There is a series of cases dealing with this point, each of which involves the conclusion that equity
will not allow a statute to be used as an instrument of fraud. Each of the following three cases adopts a different approach
31
Rochefoucauld v Boustead [1897] 1 Ch 196
The court enforced the intended express trust despite the lack of formalities
32
Bannister v Bannister [1948] 2 All ER 133
The court imposed a constructive trust over the land (which is exempt from s 53(1)(b) by virtue of s 53(2) LPA 1925)
33
Hodgson v Marks [1971] Ch 892
The court recognised a resulting trust over the land (which is also covered by s 53(2) LPA 1925)
34
Key case: Rochefoucauld v Boustead [1897] 1 Ch 196
This case predates the LPA 1925 but remains relevant as it dealt with the question of whether a trust could be enforced despite non-compliance with the precursor to the LPA 1925 (the Statute of Frauds 1677). To understand the case it is also important to be aware that the mortgage in this case operated differently to modern day mortgages of land (which only involve a charge over the land). The mortgage in Rochefoucauld involved the mortgagee acquiring legal title to the land, with an obligation to reconvey the land once the mortgage was repaid.
35
Key case: Rochefoucauld v Boustead [1897] 1 Ch 196
Facts: The claimant mortgaged land, which the mortgagee then sold to the defendant on the basis of an oral agreement that the defendant would hold it on trust for the claimant (subject to the claimant repaying the loan to the defendant). The defendant sold the land for a profit but then became bankrupt. The claimant sought to recover the profit.
36
Key case: Rochefoucauld v Boustead [1897] 1 Ch 196
Held: The defendant could not rely on the lack of writing to deny the existence of the trust as this would be using the Statute of Frauds 1677 as an instrument of fraud. The court therefore enforced the trust on the basis of the evidence of the oral declaration, allowing the claimant to recover the defendant’s profit.
37
Key case: Bannister v Bannister [1948] 2 All ER 133
Facts: The defendant sold a cottage to the claimant on the faith of an oral agreement that the claimant would hold it on trust for her, and allow her to continue living there rent free, for the rest of her life. The parties subsequently quarrelled and the claimant tried to evict the defendant. The claimant argued that the defendant could not rely on the oral agreement because it did not
comply with s 53(1)(b) 1925.
38
Key case: Bannister v Bannister [1948] 2 All ER 133
Held: The court rejected this argument and concluded that the claimant held the cottage on constructive trust for the defendant. To hold otherwise would be to allow the defendant to use the statute as an instrument of fraud.
39
Key case: Bannister v Bannister [1948] 2 All ER 133
The fraud which brings the principle into play arises as soon as the absolute character of the conveyance is set up for the purpose of defeating the beneficial interest, and that is the fraud to cover which […] the Law of Property Act 1925 cannot be called in aid in cases in which no written evidence of the real bargain is available.
40
Key case: Hodgson v Marks [1971] Ch 892
Facts: An elderly widow transferred her house into the name of her lodger on the basis of an oral
understanding that the lodger would hold the house on trust for the widow, with the living arrangements remaining the same. The lodger then sold the house to a third-party purchaser, who sought to evict the widow. During the course of the sale negotiations, the purchaser visited
the house on one occasion. He saw the widow but did not query who she was or what interest she had in the house
41
Key case: Hodgson v Marks [1971] Ch 892
Held: The land was held on a resulting trust for the widow. It was analysed as an automatic
resulting trust on the basis that the express trust had failed. This is not very satisfactory given that
s 53(1)(b) renders trusts unenforceable rather than void.
It could (and arguably should) have been analysed as a presumed resulting trust as she had not intended a gift to the lodger but there was a technical reason why this argument was not made. Although the purchaser did not have
knowledge of the trust, the widow was in actual occupation. She had an overriding interest, and the purchaser therefore acquired the land subject to the trust.
42
2.3.1 Failure of formalities: Three party situation
The cases considered above involved a transfer on trust where the settlor was also the intended beneficiary. The position is more complicated in circumstances involving a transfer of land to a trustee for a third-party beneficiary. What happens in such cases if there is no written evidence
satisfying s 53(1)(b) LPA 1925?
43
2.3.1 Failure of formalities: Three party situation
Of course, this may only be a temporary issue, in which case the position is as described above (ie
the trust exists but is unenforceable unless and until s 53(1)(b) is satisfied). But what happens if
either:
(a) The trustee seeks to deny the existence of the trust and keep the property for themselves; or
(b) The settlor seeks to deny the existence of the trust and requests the return of the property?
44
Three party situation: Trustee denies trust
Example: Trustee relies on non-compliance with s 53(1)(b)
Anmol transfers land to Brianna, orally requesting that Brianna holds the land on trust for Claudette. The land is duly registered in Brianna’s name at the land registry. Anmol dies several days later, without having provided written evidence of the declaration of trust.
45
Brianna wishes to know whether she can keep the property for herself.
Brianna is clearly intended to be a trustee so cannot keep the property for herself. To do so would
be to use s 53(1)(b) LPA 1925 as an instrument of fraud. Claudette may seek to enforce the trust against Brianna (analysing it as either an express trust as in Rochefoucauld or a constructive trust as in Bannister) but Anmol’s estate may argue that this is not possible and claim that Brianna holds the land on a resulting trust (as in Hodgson v Marks). It
is therefore advisable for Brianna to seek directions from the court as to the beneficial ownership of the land.
46
Three party situation: Settlor denies trust
Example: Settlor relies on non-compliance with s 53(1)(b)
Anmol transfers land to Brianna, orally requesting that Brianna holds the land on trust for Claudette. The land is duly registered in Brianna’s name at the land registry. Anmol does not provide written evidence of the trust. Several weeks later, Anmol has an argument with Claudette
and asks Brianna to reconvey the land to him
47
What should Brianna do in this situation?
Anmol cannot revoke the trust, but Claudette cannot enforce it. If Brianna continues to hold the
property on trust for Claudette, she risks Anmol claiming that the property is held on a resulting
trust. If she transfers the property back to Anmol, she risks Claudette asserting that the property
is being held for her on a constructive trust.
48
What should Brianna do in this situation?
Brianna could attempt to provide the signed written evidence satisfying s 53(1)(b) but, given the potential for Anmol to dispute this, it would be preferable to seek directions from the court as to the enforceability of the trust. This would ensure that Brianna does not do something which results in liability to either party for breach of trust.
49
2.4 Summary
* A declaration of trust over land must satisfy the requirements of s 53(1)(b) LPA 1925.
* Section 53(1)(b) is an evidential requirement only. The trust will be valid but unenforceable unless and until it is ‘manifested and proved’ in signed writing.
* Resulting and constructive trusts do not need to comply with s 53(1)(b) (by virtue of s 53(2) LPA 1925)
50
2.4 Summary
* The court will not allow s 53(1)(b) LPA 1925 to be used as an instrument of fraud. This means
that, in cases of transfer on trust, a trust will be enforced regardless of lack of formalities if it would be fraudulent to deny the beneficiary’s interest.
* This may involve enforcement of the express trust despite lack of formalities (as in Rochefoucauld v Boustead) or by recognition of a resulting or constructive trust (as in Hodgson v Marks and Bannister v Bannister respectively).
51
2.4 Summary
* If a trustee receives land to hold on a trust which has not been evidenced in writing, and the settlor is unable or unwilling to provide this evidence, it would be prudent for the trustee to seek directions from the court as to their obligations. The trustee cannot keep the land for themselves as it is clear they are intended to hold it as a trustee.
52
3. Constitution of trusts and the rule in Milroy v Lord
3.1 Constitution
Constitution refers to the transfer of legal title from one party to another
53
A transfer on trust
Requires the legal title in the property to be vested in the trustees. This is known as ‘constituting’ the trust.
54
Gift
Transfer of legal title is also required for a gift to be made from a donor to a donee.
55
Self-declaration of trust
A self-declaration of trust does not require any movement of the legal title as legal title to the property is already vested in the settlor. This means that the trust is automatically constituted when the trust is declared.
56
Testamentary gifts and trusts
As discussed above, the personal representatives of estates receive legal title to the entire estate
and are then responsible for distributing the property in accordance with the will. This may
include transferring legal title to the donee of a gift or the trustee of a trust (in which case, they will need to follow the methods discussed below to ensure legal title is properly transferred). In this Workbook, we focus only on the constitution of inter vivos gifts and trusts.
57
3.1.1 Transferring legal title
In order to constitute a gift or trust, legal title must be transferred using the correct method. The formalities for transferring legal title will vary according to the nature of the property in question. Some common types of property are considered below
58
Registered Land
Transfers must be made by deed under s 52(1) LPA 1925 and registered with the Land Registry under s 27 LRA 2002. Legal title passes on registration of the new owner at the Land Registry.
59
Shares
In a private company are transferred by the transferor signing a stock transfer form and sending it to the company. (It is also common for the company to require the share
certificate or an indemnity in respect of the transferor’s ownership as part of this process.) Legal title passes when the transferee is registered in the company’s internal register of
members.
60
Choses in action
(eg debts and money in a bank account) are transferred by a written transfer and notice in writing to the debtor or to the bank (see s 136 LPA 1925). Legal title passes once
notice has been received.
61
Chattels
Including physical cash) may be transferred either:
- By deed of gift; or
- By delivery of the chattel with evidence of the transferor’s intention to transfer it (Re Cole [1964] CH 175).
62
Cheques
(And other bills of exchange) in favour of the transferor may be transferred to a third party (ie someone other than the named payee) by the transferor endorsing the cheque by signing their name on the back according to the Bills of Exchange Act 1882. See eg Jones v
Lock (1865) LR1 CH App 25.
63
3.1.2 Effect of constitution
The effect of constitution is that the disposition is irrevocable. Once a trust is constituted the settlor ceases to have any beneficial or legal interest in the trust property (providing all other requirements for creating the beneficiary’s interest have also been satisfied).
The trustee has legal title and holds it on trust for the beneficiary. The same is true of gifts. Once the donee acquires legal title, the donor has no rights in the property and cannot ask for it to be returned.
64
Example: Irrevocable nature of constituted trust
Jamal asks Paul to hold some shares on trust for Sian. Jamal transfers legal title to Paul. Once Paul is registered as the shareholder, the trust is completely constituted and Jamal cannot revoke it.
65
Example: Irrevocable nature of completed gift
Ariana receives a watch from Tarek as a gift. Later they argue and Tarek tells Ariana to give it back. The gift was perfected on delivery. Tarek can’t change his mind so Ariana can keep the watch.
66
3.2 The rule that equity will not assist a volunteer
If trust property is not vested in the trustees, the trust is incompletely constituted and is therefore
void. In the case of a gift, if legal title has not passed to the donee the gift is imperfect and the donor can change their mind.
67
3.2 The rule that equity will not assist a volunteer
Usually no consideration is given in the creation of a trust and so the beneficiary of a trust and the recipient of a gift are both volunteers. Equity will not assist a volunteer by compelling the settlor/donor to transfer legal title to the trustee/donee.
68
3.2 The rule that equity will not assist a volunteer
This is an example of the equitable maxim: ‘equity will not assist a volunteer’. The leading case on constitution is Milroy v Lord (1862) 31 LJ Ch 798. This case established the principle that ‘equity will not perfect an imperfect gift’ or treat a failed gift as a self-declaration of
trust.
69
Key case: Milroy v Lord (1862) 31 LJ Ch 798
Facts: The settlor intended to transfer shares to Lord to be held on trust for the claimants. The
settlor completed a voluntary deed but did not comply with the correct method for the transfer of legal title in the shares to Lord as trustee.
70
Key case: Milroy v Lord (1862) 31 LJ Ch 798
In order to transfer legal title to the shares and properly constitute the trust, it was necessary to complete the appropriate transfer form and send it to the company registrar who would then register the new owner. Instead, the settlor simply handed the share certificates to Lord (ie the
intended trustee). The settlor died several years later and there was a dispute as to the ownership of the shares
71
Key case: Milroy v Lord (1862) 31 LJ Ch 798
Held: The trust was not constituted, despite the settlor’s intention to create one, as legal title to the shares had not vested in Lord. The settlor had not completed the process of transferring legal
title and equity would not treat him as if he had.
72
Turner LJ in the Court of Appeal noted three methods of transferring property:
(a) An outright gift;
(b) A transfer on trust; and
(c) A self-declaration of trust.
73
Turner LJ in the Court of Appeal
He made clear that the transferor must do ‘everything necessary’ to effect the intended disposition by following the correct method for transferring legal title. If they fail to do so, equity will not perfect the disposition or treat the transferor as having used one of the other methods.
74
Turner LJ in the Court of Appeal
If a donor intends to make a gift but fails to transfer legal title, they will not be treated as having made a self-declaration of trust. The transferor did not intend to take on the obligations of trusteeship and should not be treated as having done so.
75
Turner LJ in the Court of Appeal
Similarly, if a settlor fails to constitute a transfer on trust, they will not be interpreted as holding
the trust property for the intended beneficiary. They did not intend to take on this obligation and will not be treated as having done so.
76
3.2.1 Milroy v Lord examples
Example: Imperfect trust
Jamal asks Paul to hold some shares on trust for Sian. Jamal forgets to complete the stock transfer form and so Paul is not registered as the shareholder. Jamal dies and leaves the shares to Dhan as a gift in his will. The trust is void because it was imperfectly constituted. Dhan will receive the shares under the will.
77
Example: Imperfect gift
Tarek says he is going to send Ariana a watch as a gift. Later they argue and Tarek tells Ariana he won’t be sending the watch. Whilst Tarek intended to make a gift of a chattel, he did not deliver it and so legal title has not transferred to Ariana. Tarek can change his mind. Ariana has no right over the watch.
78
Key case: Jones v Lock (1865) LR 1 Ch App 25
Facts: A father returned from a business trip without a gift for his baby. He produced a cheque
for £900 payable to himself and putting it into his son’s hands said: ‘I give this to baby; it is for himself’. He put the cheque in a safe saying it was put away for his son. He died shortly afterwards. As he had not endorsed the cheque, legal title to it had not transferred to the son.
79
Key case: Jones v Lock (1865) LR 1 Ch App 25
Held: The court rejected the argument that he had declared himself a trustee of the cheque. It
was clear that he had intended an absolute gift which entails giving away all benefit to, control of
and obligation for the property. He had not intended to retain control of the property and therefore assume the onerous obligations of a trustee.
80
Key case: Richards v Delbridge (1874) LR 18 Eq 11
Facts: A grandfather wanted to assign a lease to his grandson who was a child at the time. He
endorsed the lease with a memorandum stating: ‘This deed and all thereto belonging I give to
Edward from this time forth.’ He later died. Endorsement on the lease was ineffective to assign the lease. It was necessary to use a separate
deed. The gift had therefore not been validly constituted.
81
Key case: Richards v Delbridge (1874) LR 18 Eq 11
Held: As in Jones v Lock, the grandfather had intended to make an outright gift and so, applying
the rule in Milroy v Lord this could not be treated as a self-declaration of trust. The gift to the grandson therefore failed.
82
3.3 Relationship with certainty of intention
Constitution is intrinsically linked with certainty of intention. If legal title to property has not been
transferred to a trustee (for a transfer on trust) or to a donee (for a gift), the court needs strong
evidence that the owner intended to declare themselves a trustee. The court must be satisfied that the owner intended to take on the onerous obligation of trusteeship and divest themselves of beneficial ownership.
83
3.3 Relationship with certainty of intention
For contrast, you may wish to compare the outcome of Jones v Lock and Richard v Delbridge with
Paul v Constance [1977] 1 WLR 527. In this case, an effective declaration of trust was found despite the fact that Mr Constance was seemingly unaware of what a trust was.
84
3.4 Summary
* In order to create an express trust, it is necessary for the trust to be constituted.
* Constitution occurs when legal title is transferred from one party to another.
* To constitute an inter vivos transfer on trust, legal title must transfer from the settlor to the trustee.
* To constitute an inter vivos gift, legal title must transfer from the donor to the donee.
85
3.4 Summary
* A self-declaration of trust is automatically constituted when the trust is declared.
* Gifts and trusts contained in a will are constituted via the will.
* The method for transferring legal title will depend on the nature of the property in question.
* If legal title is not transferred correctly then the disposition will fail. Under Milroy v Lord equity
will not assist a volunteer, perfect an imperfect gift or treat a failed gift as a self-declaration of trust.
86
4 Exceptions to the rule in Milroy v Lord
We have seen that the effect of the rule in Milroy v Lord is that if legal title has not been vested in
the intended recipient the disposition will fail. There are three possible lines of exception to this
rule:
* Principle in Re Rose;
* Fortuitous vesting; and
* Donationes mortis causa.
87
4.1 Re Rose line of exceptions
Following Milroy v Lord the general rule is that equity will not perfect an imperfect gift. This means that a disposition will fail unless legal title has been vested in the intended recipient. According to Turner LJ the owner must do ‘everything necessary to be done’.
88
4.1 Re Rose line of exceptions
This has subsequently been interpreted to mean that the transferor must do everything within
their own power to transfer legal title. As such, even if the transfer of legal title has not occurred equity may regard the transfer of the equitable interest in the property as complete.
89
4.1 Re Rose line of exceptions
In Re Rose [1952] Ch 499, the Court of Appeal held that a transfer of shares was effective in equity
once the transferor had done ‘everything in his power’ to vest the shares in the transferees. But at
what point has an owner done everything within their power?
90
Key case: Re Rose [1952] Ch 499
Facts: Two transfers of shares were executed by Mr Rose on 30 March 1943, one by gift to his wife
and the other to trustees to be held on trust for his wife and son.
The transfers needed to have been effected before 10 April 1943 if estate duty was to be avoided
on Mr Rose’s death in 1947. The transfers and share certificates were delivered to the company
registrar but were not registered until 30 June 1943. Legal title to the shares did not therefore pass
until 30 June 1943 and so after the key date of 10 April 1943.
91
Key case: Re Rose [1952] Ch 499
ISSUE: Could equity intervene and hold that the equitable title had passed to the transferees
prior to 10 April 1943 to avoid the payment of estate duty?
Held: The Court of Appeal held that no estate duty was payable. The transfers were effective in
equity when Mr Rose had delivered the correct transfer documentation to the company registrar
on 30 March 1943, before the crucial date of 10 April 1943.
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Constructive trust
This case established that Mr Rose held the legal title on constructive trust for the recipients (pending registration of legal title). At this point, the intended transferees had the equitable interest. They were found to hold the equitable interest because:
* The correct method of transfer had been used
* The transferor had done everything within his own power to effect the transfer (when he sent the documentation to the company registrar)
* The documentation ended up in the hands of the person capable of effecting the legal transfer (in this case, the company registrar)
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4.1.1 Extension of Re Rose
Key case: Mascall v Mascall [1985] 50 P & CR 119
In Mascall v Mascall [1985] 50 P & CR 119 the Re Rose principle was applied by the Court of Appeal to the gift of registered land from a father to his son. The father handed the son the signed transfer deed and land certificate, which was sent by the son’s solicitors to the Stamp Office. The father and son quarrelled and the father wanted to revoke the gift. The transfer had not yet been
registered and so legal title had not yet passed to the son.
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Applying Re Rose:
(a) The correct method of transfer had been used (a signed transfer deed).
(b) The father had not done everything within his power to effect the transfer because he had
not sent the transfer deed and land certificate to the Land Registry. Was giving them to the son enough?
(c) The documentation had therefore not ended up in the hands of the person capable of
effecting the transfer.
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Key case: Mascall v Mascall [1985] 50 P & CR 119 Judgement
Held: The Court of Appeal held that the gift was complete in equity and so could not be revoked
by the father. The fact that the documents had not yet been sent to the Land Registry did not
prevent the gift being complete in equity. By sending the documents to his son, the father had
given the intended transferee everything he needed to complete the transfer for himself. The son
could go on and have the property registered in his name.
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Extended the Re Rose principle
This case is important because it extended the Re Rose principle to registered land. It also established that is not necessary for the transferor to send the documents to the person capable of completing the transfer. If the correct method of transfer has been used, the transfer will be irrevocable if the transferor
puts the matter beyond their own control. By giving the documentation to the son, the father had put the matter beyond his own control and the gift was therefore irrevocable.
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4.1.2 Putting matters beyond control of transferor
It can be seen that by using Re Rose and Mascall v Mascall together, a transfer is irrevocable if the matter is put beyond the control of a transferor. In contrast, if the transferor had sent the documents to their own agent, such as their solicitor or their accountant, that would not be sufficient as agency is revocable.
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Key case: Re Fry [1948] Ch 312
Re Fry offers an example of a situation where the matter was within the control of the transferor.
The transfer of shares required consent from the Treasury because the transferor was domiciled
abroad. This was not obtained before the transferor’s death and so the transferor was ineffective.
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Key case: Zeital v Kaye [2010] ECWA Civ 159
A further example can be found in Zeital v Kaye [2010] ECWA Civ 159. Here the owner of an absolute equitable interest in a shareholding had not done everything in his power to transfer his interest when he handed over the stock transfer form signed by the registered shareholder but not the share certificate.
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4.1.3 Pennington v Waine
Under the principles in Re Rose and Mascall v Mascall the transfer documents must either have
been sent off for registration or delivered to the donee in order for the disposition to be irrevocable. Pennington v Waine appears to take this principle even further. As Pennington is a significant case, which turns heavily on its own facts, those facts are considered in detail below
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Key case: Pennington v Waine [2002] EWCA Civ 227
In Pennington v Waine the transfer documents for the transfer of 400 shares from Ada Crampton
to her nephew, Harold remained with her own agent (the company auditor) Mr Pennington. Ada, who was a director and shareholder at the company, took the following steps to make the gift to her nephew
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Key case: Pennington v Waine [2002] EWCA Civ 227
* She signed a stock transfer form and gave it to Mr Pennington (her agent) who put it on file.
* She told Harold she wanted him to be a director at the company (he could only do this if he
held at least one share).
* She and Harold signed a form of consent for him to act as director and he took on the benefits
and burdens of directorship.
* Her agent, Mr Pennington, told Harold he need take no further action.
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Key case: Pennington v Waine [2002] EWCA Civ 227
Despite the documents remaining in Ada’s control, the Court of Appeal indicated that equity would perfect an imperfect gift in any situation where it would be unconscionable for the donor to resile from it, concluding that was the case here.
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Principle in Re Rose or Mascall v Mascall
For the principle in Re Rose or Mascall v Mascall to apply, Ada should have done all in her power
to transfer ownership to Harold. However:
* She had not given the documents to the company registrar; and
* She had not given the documents to Harold or his agent.
The documents were with her own agent, an extension of herself, and so she could revoke her decision at any time.
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So why was it unconscionable?
Arden LJ said that there could be no comprehensive list of factors that make it ‘unconscionable’
for the donor to change his mind. It was relevant that:
* Ada made the gift of her own free will;
* She told Harold about the gift and signed the transfer form which she gave to Mr Pennington to secure registration;
* Mr Pennington told Harold he need take no further action;
* Harold agreed to be director, which he could not do without holding a share; and
* Ada had countersigned the form of consent for Harold’s directorship.
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Pennington v Waine
Pennington v Waine is difficult to reconcile with the other case law in this area. Obiter comments in Zeital v Kaye and Curtis v Pulbrook suggest it will only be followed where the facts are similar to Pennington itself. The decision may be better explained by the doctrine of proprietary estoppel.
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Proprietary estoppel arises if there is:
* An assurance (Harold was assured that Ada would give the shares to Harold);
* Reliance (Harold relied on this assurance by becoming a director);
* Detriment (he took on the burdens of directorship).
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If proprietary estoppel is established:
The claimant can bring an action against the defendant. In
such cases, the court has a discretion to award the remedy which it considers most appropriate.
Thus, unlike the rule in Re Rose, a proprietary estoppel does not necessarily give rise to a
constructive trust. This doctrine is covered in greater detail in the chapter on ‘Family homes’.
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4.2 Fortuitous vesting (the rule in Strong v Bird)
In some cases a failure to perfect the intended recipient’s title may be cured if they obtain legal title through another route. This exception is called fortuitous vesting because legal title vests in the recipient in another capacity.
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4.2 Fortuitous vesting (the rule in Strong v Bird)
This will usually occur because the intended recipient of a gift is also the personal representative of the transferor’s estate. On the transferor’s death, legal title to all their property will transfer to
their personal representative to administer their estate. If their personal representative was also
the intended recipient of an imperfect gift, this gift may be perfected on the death of transferor.
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Example: Perfection of imperfect gift by fortuitous vesting
Diane intends to give Ciara an antique sword, but Diane dies before this is delivered to Ciara and
so legal title has not transferred to her. Ciara is named as executor in Diane’s will. Ciara will obtain legal title to the antique sword as executor. The gift to Ciara will be perfected via fortuitous vesting because Ciara has obtained legal title in her capacity as executor.
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Key case: Strong v Bird (1874) LR 18 Eq 315
Fortuitous vesting is commonly known as the rule in Strong v Bird (1874) LR 18 Eq 315. Whilst this
case established the rule which is commonly applied to gifts, the case was actually about forgiving a debt.
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Key case: Strong v Bird (1874) LR 18 Eq 315
Facts: Bird had borrowed money from his step-mother. He had agreed to repay her by instalments. He paid two instalments but she then orally agreed to forgive the debt. An oral
release of debt is ineffective at law and so on her death Bird still owed her estate the money. On her death, Bird was appointed executor of her estate.
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Key case: Strong v Bird (1874) LR 18 Eq 315 Judgement
Held: The debt was released at common law by Bird’s appointment as executor because, as the
legal owner of the estate, he was both creditor and debtor. But this did not prevent equity from
enforcing the debt. However, Jessel MR held that equity would not enforce the debt if the creditor appointed the debtor as their executor and had manifested an unchanged intention during their lifetime to forgive the debt.
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4.2.1 Extension of the rule in Strong v Bird
Re Stewart [1908] 2 Ch 251 extended the principle in Strong v Bird to perfect imperfect gifts. This case also confirmed that Strong v Bird will apply even if the intended recipient is one of several executors.
The following conditions must be met in order for the Rule in Strong v Bird to apply:
(a) There must be an intention to make an immediate gift (Re Freeland)
(b) The intention must continue until the donor’s death (Re Gonin)
(c) The intended donee becomes an executor (or one of the executors) of the donor’s estate (Re Stewart)
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4.2.2 An immediate gift
In Re Freeland, the Court of Appeal made it plain that the donor must have the intention to make an immediate gift.
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Key case: Re Freeland [1952] Ch 110
Facts: The claimant, Mrs Jackson, claimed that Mrs Freeland had given her a Hillman motor car.
As the car was not in running order, Mrs Freeland agreed to give it to Mrs Jackson when it was back on the road. Several months later, Mrs Freeland wrote to her saying that she had lent the car to another friend (Mrs Rodgers) for a few months but that she was not going back on her word to let Mrs Jackson have it. Mrs Freeland died having appointed Mrs Rodgers and Mrs Jackson as her
executors.
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Key case: Re Freeland [1952] Ch 110
Held: Lord Evershed MR said there must be ‘an intention of giving, as distinct from an intention to
give […]’. The fact that the car had been lent indicated a future intention to give, after it had been put in
running order and recovered from Mrs Rodgers. There was no intention to make an immediate gift to Mrs Jackson. It follows that the gift must also relate to existing, not future (or after acquired) property.
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4.2.3 Continuing intention
Key case: Re Gonin [1979] Ch 16
Facts: A mother intended to pass her house to her daughter but incorrectly developed the belief
that she could not transfer the house to her. She therefore wrote a cheque for £33,000 in favour of her daughter in lieu of transferring the house. The mother died without a will (intestate). The daughter was appointed as administrator of the mother’s estate and attempted to claim the house under the rule in Strong v Bird.
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Key case: Re Gonin [1979] Ch 16
Held: Strong v Bird requires a continuing intention to give which remains unchanged until the
death of the donor. By writing the cheque, the mother had changed her intention and so there was no continuing intention to give the house.
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4.2.4 Extension to administrators
If a person dies without making a will, they are said to die intestate. On their death, an administrator is appointed by the court in order to administer their estate. In contrast, a person who makes a will can appoint executors to administer their estate.
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Re James [1935] Ch 449
The rule in Strong v Bird was held to apply where the donee was
appointed administrator. This therefore extends the principle of fortuitous vesting to include personal representatives appointed independently of the donor, which some commentators consider unjustifiable.
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Walton J doubted that Strong v Bird
Applied to an administrator in obiter comments made in Re Gonin. He argued that in these circumstances the donor has no responsibility for making the donee administrator so Strong v Bird should not apply. These comments were obiter because the
court had found no continuing intention to give the property to the claimant in any event. However, at present, Re James remains good law
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4.3 Donationes mortis causa
A gift made in contemplation of death (traditionally known as a ‘donatio mortis causa’ or ‘deathbed gift’) is the final ‘exception’ to Milroy v Lord. (As a hybrid between a lifetime gift and a testamentary gift it does not fully comply with the rules for either. It is often referred to as an exception to the rule in Milroy v Lord although it could be argued that it is not a true exception to the rule but rather an anomalous category of disposition.) A donatio mortis causa is an anomalous type of gift which only applies in very specific circumstances. There are strict conditions for its application.
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4.3.1 Conditions for valid DMC
Cain v Moon [1896] 2 QB 283 sets out the following requirements:
(a) The gift is made in contemplation (though not necessarily expectation) of death from an identifiable cause which the donor believes to be imminent (King v Dubrey [2015] EWCA).
(b) The gift is conditional on death (ie it is not intended to be fully effective until then and can be revoked before death).
(c) There is delivery of the property; the donor must part with ‘dominion’ (control) of the property by handing it or something which represents title to the donee (Sen v Headley [1991] Ch 425).
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Key case: King v Dubrey [2015] EWCA
It was argued that an elderly women had made a deathbed gift of her home to her nephew 4-6 months before she died. She also attempted to gift the home to him in a number of invalidly executed wills.
The Court of Appeal held that she had no reason to anticipate dying immediately. The gift had not been made in contemplation of death. Moreover, the fact that she had made subsequent wills was inconsistent with the idea that she had already disposed of her property.
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Example: General testamentary intention insufficient to support DMC
Nico promises Elena his vintage Porsche when he dies. The next day Nico dies in a car accident. There is no DMC. Nico has no reason to anticipate dying and the gift isn’t conditional on his death, nor has the car been delivered.
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Example: DMC of car
Nico is racing one of his cars in a rally the next day. He gives his vintage Porsche to Elena saying: ‘If I die tomorrow, the Porsche is all yours.’ This is a DMC. Nico is anticipating his death and delivers the car to Elena. His words (‘if I die’) make the gift conditional. Elena can only keep the car if Nico dies.
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4.3.2 Delivery and passing of dominion
In the case of a chattel, delivery (with intention) is sufficient to pass title to the donee and they will be entitled to keep the property after the donor’s death. However, for other types of property (such as land, shares or bank accounts) more must be done to transfer title.
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4.3.2 Delivery and passing of dominion
A valid DMC does not require full transfer of legal title provided the donor parts with control (‘dominion’) of the property. If all requirements of a valid DMC are present, the donee may request that the donor’s personal representatives then complete the transfer legal title to them. Passing of dominion can also be constructive as Sen v Headley [1991] Ch 425 illustrates.
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Key case: Sen v Headley [1991] Ch 425
Facts: A man dying from terminal cancer told his friend that his house was hers, giving her the keys to a steel box which contained the title deeds to the house.
Held: The Court of Appeal held that there was a valid DMC of the house by constructive delivery of the title deeds via the keys to the steel box. The fact that she had keys to the house would not alone be enough as this represents a right of access rather than ownership.
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4.4 Summary
* Exceptions have developed to mitigate the harshness of the rule in Milroy v Lord.
* Re Rose applies if:
- The correct method of transfer is used;
- The transferor has done everything in their power to effect the transfer; and
- The documentation ends up in the hands of the person/organisation capable of effecting
the transfer.
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Mascall v Mascall
Extends the Re Rose principle to registered land and says that the second limb of Re Rose is not necessary if the transferor has ‘put the matter beyond their control’ as
this would make a transfer irrevocable. If Re Rose or Mascall v Mascall apply the donor will hold the property on a constructive trust
for the intended donee.
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Pennington v Waine
Appears to create an exception permitting perfection in cases where it would be ‘unconscionable’ to resile from the transfer. This case is generally regarded as confined to its own facts. It is unlikely that it would be applied unless the facts of a future case were very similar (although the doctrine of proprietary estoppel may also apply in such cases).
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Fortuitous vesting
is also known as the rule in Strong v Bird and it operates where a gift is
made to a donee who subsequently obtains legal title to it by becoming the donor’s personal
representative
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Strong v Bird
In order for the rule in Strong v Bird to operate there must be a continuing intention to make an
immediate gift to the intended donee who becomes the
executor/one of the executors under
the donor’s will.
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Donationes mortis causa
Are recognised in exceptional circumstances where a donor
anticipates dying and wants to make a gift but does not have time to make a valid will.
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Donatio Mortis Causa
A valid donatio mortis causa will be recognised where the donor is contemplating their imminent death, expresses the intention that the gift is conditional on their death and parts with dominion of the property
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5 Consolidation
To consolidate the material in this chapter, we will consider the key issues to look out for when
analysing a fact pattern involving a legal owner of property who has attempted to do something with that property.
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5.1 Issue spotting
It is always useful to start by trying to ascertain the person’s intention: Do they intend a gift, a self-declaration of trust or a transfer on trust? Once you have ascertained the intention, move on to consider whether there are any formalities required to effect that intention. As we have already seen, if it’s a gift, it is simply necessary to transfer legal title to the donee. If it is a self-declaration of trust, it is only necessary to consider the formalities for declaring that trust. If it is a transfer on trust, you will need to consider both the formalities for declaring the trust and the formalities for constituting the trust.
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5.2 Formalities for declaration of an inter vivos trust
The key question is whether the subject matter of the trust is land. If so, you must consider whether the requirements of s 53(1)(b) LPA 1925 have been satisfied. Where the subject matter of the trust is any other type of property it is possible to create a trust in writing, orally or by conduct
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5.2.1 Failure of formalities
If s 53(1)(b) has been satisfied, the trust will be enforceable. If it has not been satisfied, the trust will be unenforceable. If it is a self-declaration of trust, it will simply have no effect. If it is a transfer on trust which has not been validly constituted, it will also have no effect. If legal title has been transferred to the intended trustee but there is no written evidence satisfying s 53(1)(b) you will need to consider whether a resulting or constructive trust has arisen instead.
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5.3 Formalities for constitution of an inter vivos trust
Now let’s remind ourselves of the circumstances in which we also need to consider the constitution rules.
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Intention is a gift
If the intention is a gift, the gift will not take effect until legal title has been transferred from the donor to the donee. Similarly, if the intention is a transfer on trust, it is necessary to transfer legal title to the intended trustee or trustees. This is known as constituting the trust.
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A self-declaration of trust
Is automatically constituted because legal title stays with the settlor but
in their new capacity as trustee. Similarly, if a settlor demonstrates an intention to become one of a number of trustees, there is no need to transfer legal title into the names of all of the trustees in order to constitute the trust. It is sufficient that legal title is in the name of one of the trustees, which it will be because the settlor already has legal title. Once a trustee has legal title to
property, they hold it on the terms of the trust and will be under an obligation to ensure it is
transferred into the joint names of themselves and their co-trustees.
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Land
Gift: Legal title must be
transferred to donee.
Self-declaration of trust: Requires compliance with s 53(1)(b) LPA
1925.
Transfer on trust: Requires compliance with s 53(1)(b) LPA
1925 and must be constituted by
transferring legal title to trustee.
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Personal property
Gift: Legal title must be
transferred to donee.
Self-declaration of trust: No formalities.
Transfer on trust: No formalities for
declaration of trust. Must be constituted by transferring legal
title to trustee
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5.3 Formalities for constitution of an inter vivos trust
The legal formalities for constituting a gift or trust will depend on the particular type of property.
Some property, such as land, requires registration for legal title to be properly transferred whereas personal property such as chattels can be transferred more informally.
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5.4 Lack of constitution
If the gift or trust is not property constituted, as a basic rule it will be void unless you can identify a relevant exception to the rule in Milroy v Lord.
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5.4 Lack of constitution
(a) If the transferor has tried to transfer legal title in their lifetime, the most obvious exception to
start with is Re Rose. Consider whether the transferor has used the correct transfer method. Have they done everything in their control to effect the transfer or, alternatively, have they put matter beyond their own control? If so, equity will impose a constructive trust for the transferee.
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5.4 Lack of constitution
(b) If this exception does not work, and the transferor has died, check whether the transferee has
been appointed as executor or administrator of the transferor’s estate. If so, does the exception from Strong v Bird apply? This requires an intention to create an immediate gift
which continues up to the death. When the transferee obtains legal title in their capacity as executor or administrator, this will perfect the transaction.
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5.4 Lack of constitution
(c) Alternatively, could the donor’s intention be a donatio mortis causa rather than a lifetime gift? This principle is often confused with Strong v Bird but unlike with Strong, you are not looking for an intention to make an immediate gift. The intention must be for the gift to be conditional upon the donor’s death.
They must contemplate dying of a specific cause and, as a result, indicate an intention to make a gift if they die. It is also necessary to transfer the property or something representing ownership of the property for a valid donatio mortis
causa. If the conditions are satisfied, and the donor dies, legal title transfers on their death. If they survive, the gift does not take effect because the condition has not been satisfied.
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