Formalities and Constitution Flashcards
Rights of legal owner
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.
A note on testamentary trusts
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.
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.
You therefore do not need to worry about the formalities and constitution rules when analysing
the provisions of a validly executed will.
Trusts of land
- ‘Manifested and proved’
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.
- ‘Some writing’
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.
- ‘Signed by some person who is able to declare such trust’
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. - ‘By will’
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).
Unenforceable trusts
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).
Exceptions to s 53(1)(b) LPA 1925
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.
- 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.
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.
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.
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.
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?
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:
* Rochefoucauld v Boustead [1897] 1 Ch 196: The court enforced the intended express trust
despite the lack of formalities
* 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)
* 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)
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?
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?
Constitution
Constitution refers to the transfer of legal title from one party to another. As we have already
seen:
* A transfer on trust requires the legal title in the property to be vested in the trustees. This is
known as ‘constituting’ the trust.
* Transfer of legal title is also required for a gift to be made from a donor to a donee.
* 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.
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.
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:
* 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.
* 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.
* 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.
* 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).
* 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.
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.
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.
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.
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.
Milroy v Lord
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.
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.
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.
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.
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.
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.
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
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
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’.
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.
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?
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)
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.
