The High Court enlarges the liability of Trustees
The Property Law Act 2007 contains a number of surprises and today’s article refers to one of them.
Ms Dyas and Mr Elliot decided to buy a house as their “matrimonial home”. They bought it by two Trusts, one that she formed, and one that he formed. The Trusts co-owned the property as tenants-in-common.
When their relationship ended, he stayed on in the property and Ms Dyers went to live elsewhere.
Section 343(f) of the new Property Law Act empowers the Court to make an order:
“requir[ing] the payment by one person of a fair occupation rent for all or any part of the property.”
The factors to be taken into account when assessing a fair occupational rent are set out in s 342 of the Act.
Section 140 of the old Property Law Act didn’t contain any specific provision for the payment of a “fair occupation rent” for co-owned property.
Justice Asher says:
“Where one co-owner chooses to stay in possession and this makes it not reasonably practicable for the other co-owner to continue to co-habit, occupation rent will usually be ordered. The position will be different where a co-owner leaves voluntarily, would be welcome back, and it is reasonably practicable for that co-owner to live there.”
- Dyas & Anor v Elliott & Anor CIV-2008-404-001021, 16 April 2010.
He assessed a fair rental for the jointly-owned Trust property at $1,200 pw. Mr Elliot had been in sole occupation of the property for 124 weeks, giving a value to his occupation of $148,800. From this Asher J deducted the amounts that he had spent on rates and insurance, and $8,000 that he had spent on maintaining the property.
The resulting sum was divided in two, to reflect the co-ownership, and the Trustees of Mr Elliot’s Trust were ordered to pay the sum of $68,300 to the Trustees of Ms Dyas’ Trust.
This dispute reflects the trend for couples to co-own property by Trusts or for at least “one party’s interest” to be owned by a Trust. No proceeding had been filed under the PRA.
Although Justice Asher’s decision was based on the new Property Law Act, he held that the PRA “could be applied to issues in relation to” the Trust-owned house in two ways.
The first was via the so-called “Bundle of Rights” doctrine. In this context, he was careful in the language that he used, saying that the Court of Appeal has “appeared to assume that a party’s interest in a Trust, whether as settlor, trustee, appointor, or beneficiary may be relationship property …”. (My emphasis.) He added, “The fact that there might be interests in the Trust which could be regarded as relationship property is, at the very least, speculative.” This caution suggests that there is some way to go before the Bundle of Rights “doctrine” becomes embedded in the law.
His second reference to the PRA was to the ability of a Court to make an order under s 11B(2) of the PRA to compensate a spouse/partner for the lack of a family home.
The decision raises a number of important questions. For example:
Would an occupation rental be payable if the spouse who remained in the house did so primarily to provide a place for the children to live?
Should the Court determine property rights under the Property Law Act when those rights might be altered under the PRA or s 182 of the Family Proceedings Act?
If a spouse wants to modify a Trust under s 182 of the FPA, should the Court defer hearing an application under the Property Law Act until the application under s 182 is able to be heard and determined?
Should a Trustee be liable to pay an occupation rent when he/she doesn’t occupy the property and doesn’t approve of a co-trustee or anyone else, doing so?
Now comes the really important part of the decision. The Order to pay the occupation rent was made against “the CEEJAY Investment Trust”. That Trust has two Trustees, Mr Elliot and a nominee Company. The latter has a 1000 shares and presumably minimal capital.
If, as is more common, the second Trustee was a lawyer or accountant, that person would be personally responsible for paying the occupation rent of $68,300.
Professionals who accept the role of Trustee for a spouse are well aware of the high failure rate of marriages. Lawyers who choose to be a Trustee with a spouse in a co-owned property are now on notice that the burdens of trusteeship have expanded considerably. They may be personally liable to pay an occupation rent if the spouses separate.
The case for having a corporate Trustee to reduce this risk has got a lot stronger as a result of Dyas v Elliott. But if a lawyer chooses to be a director of a corporate Trustee with only nominal assets, the position would not be much better. A determined plaintiff would get judgment against the corporate Trustee and have the Company struck off for non-payment of the debt. What lawyer wants it on his or her record that he/she was a director of a Company that was struck off with unpaid debts?
This decision is bound to cause many lawyers and accountants to want to resign from their role as Trustees.