Thursday, November 5, 2009

LAND LAW -

Alteration and indemnity

The LRA 2002, Schedule 4 contains the current relevant principles on alteration and indemnity. A key feature of Schedule 4 is that ‘rectification’ of the register is now confined to a change ‘which prejudicially affects the title of a registered proprietor. i.e situations where a registered proprietor ‘loses’ something registered in his name. Rectification only now occurs when due to a mistake, someone has been wrongly registered as owner. All other changes to the register are now called ‘alterations’. Rectification will only be given against a registered proprietor who is in possession of the land if:

(a) he has by fraud or lack of proper care caused or substantially contributed to the mistake;
or
(b) it would for any other reason be unjust for the alteration [rectification] not to be made. (Schedule 4, paragraph 6(2)).

Schedule 8 of the 2002 Act covers indemnity. Generally a registered proprietor against whom rectification is ordered will be entitled to compensation, to the value of the interest he loses; the Chowood rule will still apply.

Further, under Schedule 8 paragraph 5(1), no indemnity is payable where the claimant’s loss is wholly or partly due to his own fraud, or wholly due to his own lack of proper care. A rule similar to contributory negligence in the law of tort also operates under paragraph 5(2). If a person is refused rectification, he or she may still receive an indemnity payment under Schedule 8 paragraph 1(b).


SETTLEMENTS

Settlements are beneficial interests in land created in favour of a series of persons. The rules for settlements were changed greatly in 1925; this was designed partly to prevent the creation of long-lasting settlements, and partly to overcome various problems with the old doctrine of ‘strict settlements’. Today all settlements take effect as trusts for land under the Trusts of Land and Appointment of Trustees Act 1996 (TLATA), although some problems still exist. You need to understand the problems under the old law so that you will be able to appreciate the major changes introduced by TLATA.

Background to settlements

The broad purpose of a settlement is to create a series of beneficial interests in favour of a succession of persons. So, if S wants to transfer his land to A for life, then to B in fee simple, this will be a settlement. Historically, settlements were used particularly by the wealthy and the aristocracy in order to keep land in the ownership of one family for a very long time, preventing its fragmentation. In 1925 there were several key reforms to deter the creation of long-lasting settlements, including: a limitation upon the length of time for which they could run (the rule against perpetuities, of which you do not need to know the details); punitive tax regulation; and the Settled Land Act 1925, which introduced complex and costly rules for the running of ‘strict settlements’, a particular form of settlement which created consecutive interests in the land e.g. to A for life, then to B absolutely.

Since 1925, all strict settlements must involve a trust. But, as is indicated below, it became clear that strict settlements were beset by problems for all involved and they were largely replaced by ‘trusts for sale’. The terminology is however difficult: strict settlements (which can no longer be created) were only one form of settlement, and the term ‘strict settlement’ is still sometimes used to describe a chain of successive interests in land. Until 1997 a trust for sale operated whenever concurrent interests were created in land (e.g. where it was held by a cohabiting couple, co-ownership), or where the term ‘trust for sale’ was applied expressly to a settlement creating consecutive interests. Again, it became clear that the trust for sale was not the most appropriate mechanism for family arrangements which created beneficial interests in land, since its logic was that the trustees of the land had a duty to sell it but only a power to postpone sale; a family rarely views land as only a financial asset, and far more frequently buys land for the primary purpose of retaining it as a home rather than selling it.

The greatest change in this area came in 1997 when a key 1996 statute came into force. While formerly a settlement of land was created either by way of strict settlement, where the purchaser took his title from the tenant for life under the SLA 1925, or by way of trust for sale, where he took it from the trustees for sale, today all settlements take effect as trusts for land under the Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996 ss.2, 4, 5). The Act came into force on 1 January 1997. Existing SLA settlements are unaffected and will continue to be governed by the complex rules summarised below, but as no new SLA settlements can be created, this area of the law will become increasingly less important, though there are a number of significant pre-1997 cases to appreciate which you will still need an understanding of the scheme of the SLA. All trusts for sale (existing and future, express and implied) now take effect as trusts of land and are governed to a large extent by the TLATA. Thus the focus of your reading should be firmly upon trusts of land under TLATA; it is important to remember that strict settlements are obsolete except for the very few historical ones which still exist; and that there are no longer any trusts for sale.

Cases on trusts for sale will however be useful in interpreting some of the rules of the trusts of land which now replace them. It is important to understand the fundamental difference between a settlement of land (where two or more persons have successive interests in the same land, now almost always under a trust of land) and co-ownership (where two or more persons have concurrent interests in the same land, again now under a trust of land). While the same mechanism now governs both, they are conceptually and historically different.


Strict settlement


SLA 1925 s.1(1) defined a settlement as an instrument under which land stands limited in trust for any persons by way of succession or for an infant in possession for an estate in fee simple or for a term of years absolute. This means that whenever successive interests in land were created, a strict settlement arose, as in the simple example used above: ‘to A for life, then to B absolutely’, or even ‘to A for life, remainder to B for life, remainder to C absolutely’. After 1925 a settlement under the SLA had to be created by two deeds:

1 a vesting deed, which vests the legal fee simple in the tenant for life, describes the property and names the trustees, and

2 the trust instrument, which declares the trusts arising under the settlement.
Where the settlement was made by will, the will constituted the trust instrument and the executors made a vesting assent in favour of the tenant for life. In this way the legal estate was separated from the beneficial interests, as has long been the case with trusts for sale. If no vesting deed was executed the tenant for life or statutory owner could require the trustees of the settlement to execute one (SLA 1925 s.9(2)), and until this was done, no disposition of the land inter vivos could operate to pass a legal estate, unless it was made in favour of a purchaser without notice of the fact that the tenant for life or statutory owner had become entitled to have a vesting deed executed in his favour (SLA 1925 s.13, the ‘paralysing
section’, so-called because it is designed to prevent evasion of the Act by making it generally impossible to dispose of the legal estate).

To illustrate the SLA machinery, suppose that in 1950 land is settled by will on A for life, remainder to B for life, remainder to C in fee simple. The will is the trust instrument and the executors must execute a vesting assent in favour of A. A now holds the legal estate on trust for himself for life and for B and C. Since 1925 life interests and future interests are necessarily equitable. On A’s death the settlement continues. The legal estate vests in A’s special personal representatives (the trustees of the settlement) and B may call on them to vest the legal estate in him, which he will then hold on trust for himself and C. On B’s death the settlement is at an end. The legal estate devolves on B’s general personal representatives
who are bound to convey it by ordinary assent to C, the absolute owner. (The remaining discussion of a strict settlement assumes that the settlement was created validly before 1997.)

Roles and rights

Tenant for life


The tenant for life is defined as any person who is of full age and beneficially entitled to possession (SLA 1925 ss.19, 20) and in the rare cases where there is no tenant for life or the tenant for life is a minor, the legal estate is to be vested in the statutory owner (usually the trustees of the settlement). Since 1925 the legal estate and the statutory powers are vested in the same person (usually the tenant for life) to hold on trust for those entitled under the settlement. The tenant for life has considerable powers, the most important of which (the powers to sell, lease and mortgage) are exercisable upon giving notice to the trustees of the settlement. There are certain statutory restrictions on the exercise of these powers (SLA 1925 ss.41, 71) and dispositions which do not comply with the requirements of the Act are void (s.18), but as long as the tenant for life acts bona fide, it appears that neither the trustees nor the court may interfere with the exercise of his or her powers.

The powers of the tenant for life are not assignable and although the settlement may confer upon him or her additional powers, any provision designed to cut down his or her powers is void (SLA 1925 s.106). Consider a proviso that the tenant for life is to forfeit her interest on ceasing to reside on the settled land. If the tenant for life ceases to reside in the exercise of his statutory powers (e.g. as a result of selling the land), the proviso is void, but if she ceases to reside for some other reason, the proviso is operative and his interest determines: see Re Ames and Re Acklom.A residence condition (a requirement that a tenant for life must reside on the settled land) can be more effectively enforced if the land is settled on a trust of land.


Trustees of the settlement


SLA 1925 s.30 defines who shall be the trustees of the settlement. Although the legal estate in the settled land is not vested in them as trustees, they have important functions in relation to the settlement. They give consent to certain transactions and they receive notice from the tenant for life of his intention to effect certain transactions. Moreover, they receive and hold capital money (e.g. money arising from the sale, lease or mortgage of the land) and they must apply it in one of the ways set out in the SLA s.73, as the tenant for life may direct.


Purchaser of settled land


A purchaser is not entitled to see the trust instrument and he or she is entitled and bound to assume that the particulars in the vesting deed are correct (SLA 1925 s.110(2)). A purchaser dealing in good faith with the tenant for life is taken – as against all parties entitled under the settlement – to have given the best price that could reasonably be obtained, and to have complied with all the requisitions of the Act (SLA 1925 s.110(1)). Provided that he pays the purchase money to the trustees of the settlement, to a trust corporation or into court (as the tenant for life may direct), he gets a good title; the beneficial interests under the settlement are overreached and take effect in the purchase money. The general scheme is clear: the beneficiaries are protected by the requirement that the purchaser pay the purchase money to the trustees of the settlement and the purchaser is protected as long as he or she complies with the provisions of the Act.

Problems with strict settlements

Strict settlements were a strange anomalous form of trust, with trustees who had few real powers and with the most important powers given to the life tenant, a beneficiary. There were also very old-fashioned restrictions upon the life tenant’s ability to dispose of the land other than by sale, e.g. he could not lease it for more than fifty years, and the ability to mortgage the land for such an important reason as to raise money with which to improve the land was severely limited. The documentation required was complex and the wording of the SLA was antiquated. Further, although most lawyers avoided them whenever possible, strict settlements could be created accidentally, particularly when a person wrote his own will and thus created successive interests (e.g. ‘my house is to go to my husband for his life, and then to our son’). The husband in that example would have a power to sell the house as life tenant, with nobody able to prevent him from doing so.

Trusts for sale: Between 1925 and the beginning of 1997, the express creation of ‘an immediate binding trust for sale’ was the method of avoidance of strict settlements. A trust for sale essentially gave the trustees of the land a duty to sell it, and a power to postpone the sale. This was a very artificial way of looking at most land ownership since the equitable interests behind the trust attached to the proceeds of sale rather than to the land itself, with the help of overreaching. The consent of named persons could be required for a sale, and this was sometimes used to make the exercise of the duty of sale difficult. Since the duty to sell was paramount, if one trustee wanted a sale then he could impose his decision on the other(s). Section 30 of the Law of Property Act 1925 gave a discretion to the courts in deciding whether a sale should be imposed in spite of contrary wishes, and a great deal of case law was generated on the issue of how a court should balance competing desires of beneficiaries to sell the land or reside on it. There was also until 1955 a denial that beneficiaries had any right to occupy the land held on trust for sale! See Lord Denning’s speech in Bull v Bull
SG08 Land law.indb 51 18/08/2008 12:10:16[1955] 1 All ER 253 where he held that a beneficiary did have the right to occupy the land; this has been almost universally accepted since. The main problem with the trust for sale’s application to land law was that its premise was simply incompatible with the nature of family trusts of land: a duty to sell, the doctrine of conversion and the initial denial of a beneficiary’s right to occupy the land are not a good fit with the reality of the situation where land provides a home and people care about more than its value as a financial asset.

Trust of land: According to s.1 of TLATA 1996, ‘trust of land’ means ‘…any trust of property which consists of or includes land…’, whether express, implied, resulting or constructive, and whether created before or after the Act itself came into force, except for existing strict settlements. Where a settlement takes effect by way of a trust of land (as all post-1996 settlements will), the legal estate is vested in the trustees of land. All trusts for sale of land are thus converted into ‘trusts of land’. Trustees of land have broader powers than those previously enjoyed by trustees for sale under the LPA ss.28 and 29 (TLATA 1996, ss.6–9), including the power to delegate any of their powers to beneficiaries of full age beneficially entitled to possession. Unlike pre-1997 trustees for sale, they are under no duty to sell the land (TLATA 1996, ss.4, 5). The doctrine of conversion (whereby the interest of a beneficiary under a trust for sale was regarded as an interest in personal property) is abolished (TLATA 1996, s.3), but the overreaching machinery (whereby on payment of the purchase money to two trustees or a trust corporation the interests of the beneficiaries are overreached) is retained. Beneficiaries will generally have the right to occupy the trust land (TLATA 1996, ss.12, 13).

The rules relating to consents and consultation are similar to those which applied to trusts for sale and which were formerly contained in the LPA s.26, but TLATA ss.14 and 15 go much further than LPA s.30 in their provisions, allowing a trustee or beneficiary to apply to the court for an order relating to the exercise of the trustees’ functions, and in the provisions setting out the matters to be considered by the court in determining such an application. It is important that you fully understand the effect of the TLATA on both settlements of land and the co-ownership of land. Co-ownership is considered in Chapter 5, where we shall return to TLATA in more detail.

Strict settlements were a historical method of keeping land in the family for generations. Trusts for sale saw land as just an investment. TLATA has replaced both with a ‘new’ trust of land (although some strict settlements do still exist), where trustees have power to either sell or to retain the land. Both strict settlements and trusts for sale had disadvantages for the beneficiaries and strict settlements in particular were unnecessarily complex. The new trust of land has many advantages over its predecessors, and the courts have a clear role in resolving disputes between trustees and/or beneficiaries. Trustees of land now have the same powers as if they were absolute owners of the land (subject to contrary provisions in the trust instrument), and so are much freer to deal with the land in accordance with the true purposes of the trust. But they also have corresponding duties to consult the beneficiaries and to exercise reasonably their discretion about matters such as which beneficiary may occupy the land. We shall return