Topic 16: Key Legal Concepts

Question 1

What is a Limited Liability Partnership?

Answer 1

A form of partnership which is a legal entity in its own right and registered at Companies House. Partners have no liability for the partnership’s debts over and above their initial investment in the business – hence ‘limited liability’. Contrasts with a standard partnership, where the business is not a legal entity in its own right, and partners are jointly and severally liable for all the partnership’s debts.

Question 2

What is Apparent authority?

Answer 2

Relates to agency agreements. The agent does something that is not permitted in the agency agreement, but something the principal said or did appears to have given, or gave the impression that, the action was acceptable.

Question 3

What is Ratification?

Answer 3

Relates to agency agreements. The agent did something not contained in the agency agreement, but after the event the principal agreed (ratified) the action.

Question 4

What is Realty?

Answer 4

Immovable property (land, etc) that can be restored to the rightful owner in the event of dispossession. Hence the term ‘real estate’.

Question 5

What is Personalty?

Answer 5

Personal property that is not immovable – money, shares, antiques etc.

Question 6

What is Joint Tenancy?

Answer 6

A type of joint property ownership. Two or more people are registered as legal owners. On the death of one legal owner, legal ownership automatically transfers to the survivor(s) equally, regardless of any will or intestacy.

Question 7

What is Tenants in common?

Answer 7

A type of joint property ownership. Legally, the property is jointly owned, as with joint tenancy, but each owner is also the beneficial owner of an agreed share of the property and can leave that share to anyone they choose. On the death of an owner, the surviving owner must hold the deceased’s share of the property on trust for their beneficiaries until it is sold.

Question 8

What is a ‘legal person’?

Answer 8

A ‘legal person’ is a body that has a legal existence and can, therefore, enter
into contracts, sue or be sued in a court of law. It is important to remember
that this includes not just an individual acting in a personal/private capacity
but also an individual acting in a formal capacity such as that of executor, as
well as groups of individuals such as trustees. It also includes bodies such as limited companies.

Question 9

What is a Sole Trader?

Answer 9

As a sole trader, the owner is not considered a separate legal person from the business, meaning that they are personally liable for their business’s debts.
This also means that they are entitled to keep all of the profits generated by
the business, after income tax and National Insurance contributions have been
paid.

Question 10

What are the requirements for a binding contract?

Answer 10

• Offer and acceptance
• consideration
• capacity to contract
• Terms certain, complete and free from doubt
• Intention to create a legal relationship
• Legality of object
• Entered into freely

Question 11

What does caveat emptor mean?

Answer 11

Let the buyer beware

Question 12

What does Unberrima fides mean?

Answer 12

Utmost good faith

Question 13

Describe the three court remedies for brach of contract?

Answer 13

• Damages – the injured party seeks to obtain financial compensation for
  their loss. The intention is to put them in the position they would have been in had the contract not been breached by the other party, insofar as it is possible to do so with money.
• Order for specific performance – such an order compels the other party to complete the contract.
• Injunction – this is a court order preventing someone from doing something.

Question 14

What is an Agent?

Answer 14

An agent is a person who acts on behalf of another, who is called the principal.
The agent can conclude contracts on behalf of the principal. In law, the acts of
the agent are treated as being those of the principal. In the context of financial services, an IFA is an agent of their client and given specific powers under the terms of engagement. Another example is an estate agent, who is the agent of
a person looking to sell their property.

Question 15

In relation to joint ownership of property, there are two types:

Answer 15

• Joint tenants – each joint owner owns 100 per cent of the property – there is
  no division of the property. On the death of any joint owner, the surviving
  joint owner(s) will take over legal ownership of the property. The transfer
  is automatic and cannot be overridden by any provisions made by a joint
  tenant in a will or through the laws of intestacy.
• Tenants in common – the joint legal owners are regarded as one single
  owner but are trustees of the land. However, each legal owner is also the
  beneficial (or equitable) owner of a defined interest (share) of the equity in
  the property, as agreed between them. If one owner dies, their share of the property passes to whoever is entitled to inherit it under the terms of their will or the law of intestacy.

Question 16

What is power of attorney?

Answer 16

An attorney is a person who is given the legal responsibility to act on behalf of another person. Examples of situations in which the need for an attorney might arise include:
- a person who, while currently in good health, is concerned about how their
affairs will be run should they become unable to manage their own finances
(for instance if they develop an illness such as dementia); or
- someone with affairs in the UK who is moving abroad.
A person who does not have the legal capacity to enter into a contract (eg a
minor or a mentally incapacitated person) cannot appoint someone else as their attorney.

Question 17

What is an enduring power of attorney?

Answer 17

An ordinary power of attorney automatically ceases if a person becomes mentally incapacitated. This can create problems for those responsible for managing the individual’s affairs. An enduring power of attorney (EPA) can
continue if the donor becomes mentally incapacitated, although it has to be registered with the Office of the Public Guardian (OPG) if the attorney believes
that the donor is losing mental capacity. An EPA can be revoked only with the consent of the Court of Protection.

Question 18

What is a lasting power of attorney?

Answer 18

From 1 October 2007, under the provisions of the Mental Capacity Act 2005,
enduring powers of attorney were replaced by lasting powers of attorney (LPAs).
EPAs made before that date can remain in force, but all new arrangements
must be lasting powers of attorney.
There are two types of LPA:
- Health and welfare – this gives the attorney power to make decisions over
issues such as medical care or moving into residential care. It can only be used once the donor can no longer make decisions for themselves.
- Property and financial affairs – this gives the attorney power to manage
the donor’s bank accounts, collect benefits and sell property. It can be used
even if the donor has mental capacity, as long as the donor gives permission.
In both cases, the LPA must be registered with the OPG before it can come into
effect.

Question 19

What happens if no power of attorney is in place?

Answer 19

If a person loses mental capacity and does not have a valid LPA or EPA in place,
the Court of Protection can appoint a deputy. This process can take some time and a deputy’s powers are much more restricted when compared to those of an attorney. It is for these two reasons that all clients should be encouraged to
draw up an LPA if they have not done so already

Question 20

What is a WIll?

Answer 20

A will is a written declaration of an individual’s wishes regarding what they
want to happen after they have died. Although primarily concerned with how the person wishes to dispose of their assets, a will can also deal with other matters, such as giving instructions about burial.

Question 21

To make a valid will, two formalities must be followed:

Answer 21

• the will must be in writing;
• the will must be properly executed.

Question 22

What is a Testator?

Answer 22

Person who makes the will

Question 23

What is a Beneficiary?

Answer 23

A person or organisation that receives benefits under the terms of a will.

Question 24

What is a Codicil?

Answer 24

Document that formally amends a will

Question 25

What is the Executor?

Answer 25

Person named by the testator as being responsible for carrying out the
wishes expressed in a valid will.

Question 26

What is Grant of probate?

Answer 26

Legal authority for executors to distribute an estate according to the
terms of a valid will.

Question 27

What is Deed of Variation?

Answer 27

Legal agreement by the beneficiaries to alter the terms of a will, after the
death of the testator.

Question 28

What is Intestacy?

Answer 28

A person who has died without having made a valid will is said to have died intestate. This includes the situation where the deceased has left a will that turns out to be invalid. If a will makes valid provision for the distribution of some of the assets of the estate, but not of others, this is referred to as partial
intestacy.

Question 29

What are the rules of Intestacy?

Answer 29

• If the deceased leaves a spouse but no children – the spouse inherits the
  deceased’s entire estate.
• If there is both a spouse and children – the spouse inherits the deceased’s
  personal chattels, plus the first £270,000, plus half of the residue above £270,000 absolutely; the other half of the residue in excess of £270,000 is
  divided equally between the children.
• If there are children but no spouse – the estate is shared equally among
  the children.
• If there is neither spouse nor children – the estate goes to the parents of
  the deceased, or (if they are dead) to the deceased’s brothers and sisters.

This is just a summary of the main rules (Figure 16.2 provides further details)
and, ultimately, if no blood relative can be found, the estate will pass to the
Crown.

Question 30

What is the Administrator?

Answer 30

Person given the role of distributing the estate according to the rules of
intestacy.

Question 31

What is Letters of Administration?

Answer 31

Legal authority to distribute the estate of a person who has died without leaving a valid will.

Question 32

What is a Trust?

Answer 32

A trust (also known as a settlement) is a method by which the owner of an
asset (the settlor) can distribute or use that asset for the benefit of another
person or persons (the beneficiaries) without allowing them to exert control over the asset while it remains in trust. Depending on the nature of the trust, the beneficiaries may eventually become the absolute owners of the asset.

Question 33

Insolvency arises when?

Answer 33

• a person’s liabilities exceed their assets; or
• a person cannot meet their financial obligations within a reasonable time
  of them falling due.

Question 34

Explain Bankruptcy?

Answer 34

A person can apply to have themselves declared bankrupt, or a creditor may petition to have someone else declared bankrupt if they owe (or are owed jointly
with other creditors) £5,000 or more. Most bankruptcy orders remain in force for 12 months, during which time the person is said to be an undischarged bankrupt. If individuals do not comply with the terms of the bankruptcy order it may remain in place until the official receiver or insolvency practitioner is
satisfied that their requirements have been met.

Question 35

What is an Individual Voluntary Arrangement?

Answer 35

An individual voluntary arrangement (IVA) is an alternative to bankruptcy,
under which the debtor arranges with the creditors to reschedule the repayment of the debts over a specified period. An IVA can be set up only if creditors who represent at least 75 per cent of the debt agree to the arrangement. The
scheme must be supervised by an insolvency practitioner.

Question 36

What is an Official Receiver?

Answer 36

Official appointed by the court to identify and distribute the assets of
a bankrupt individual or business and investigate the reasons for the
bankruptcy.

Question 37

What is an Insolvency Practitioner?

Answer 37

Appointed by the court or by the official receiver (in consultation with
creditors) to identify and manage the distribution of an individual’s or
company’s assets. Insolvency practitioners must be licensed to practise.

Question 38

What is a Company Voluntary Arrangement?

Answer 38

Agreement by creditors who represent at least 75 per cent of the value
of the debt as to how to manage company liabilities, with the aim of
avoiding the business going into administration.