Trust of land: when to make a Bagum order

The usual order made regarding the sale of property subject to a trust of land is that all beneficiaries will be entitled to bid. However, there may be circumstances where one beneficiary is given the opportunity to buy the property before the others. I refer to this as a ‘Bagum order’ as the issue arose for determination in Bagum v Hafiz [2016] Ch 241.

Mrs Bagum’s late husband purchased the property, a four-bedroom house, as a right to buy tenant in 2003, two years before his death intestate. Those family members with an interest in his intestate estate gave up their interests to Mrs Bagum, so that she became the sole registered owner of the property. She, her three sons, and one of her daughters continued to live at the property, to the purchase of which her two eldest sons, Mr Hafiz and Mr Hai, had made financial contributions.

They both married and started families of their own. The increasingly crowded conditions in the house led to tensions, in particular between the two wives, which eventually led to Mr and Mrs Hai leaving to find a separate rented property of their own. Shortly before he left, Mr Hai sought to protect his investment in the property (which by then included his original contribution to its purchase and contribution to mortgage payments thereafter) by securing his mother’s and brother’s agreement to the making of a declaration of trust, by which they declared themselves to be trustees of the property for the three of them in equal shares.

Mr Hai made various proposals to release some funds from the property to him through rental, remortgage, or even sale. Eventually, the family agreed to sell, prepared the property, marketed it, and obtained an offer. When it came to it, however, Mr Hai refused to sign the transfer document, instead offering to purchase the house himself. Mrs Bagum, who had not wanted to move out, refused to consent to this.

In her particulars of claim, Mrs Bagum asserted that, in the light of the family division, she wished: (i) to sell the property; or (ii) for Mr Hai to sell his interest in the property to Mr Hafiz. She contended that Mr Hai had demonstrated a reluctance to co-operate with any sale or transfer of the property to herself, to Mr Hafiz, or to a third party.

In his defence, Mr Hai agreed the property should be sold and denied that he had been un-cooperative.

General powers

Section 6 of TOLATA, headed ‘General powers of trustees’, provides:

‘(1) For the purpose of exercising their functions as trustees, the trustees of land have in relation to the land subject to the trust all the powers of an absolute owner…

(5) In exercising the powers conferred by this section, trustees shall have regard to the rights of the beneficiaries.

(6) The powers conferred by this section shall not be exercised in contravention of, or of any order made in pursuance of, any other enactment or any rule of law or equity.’

Section 14, headed ‘Applications for order’, provides as follows:

‘(1) Any person who is a trustee of land or has an interest in property subject to a trust of land may make an application to the court for an order under this section.

(2) On an application for an order under this section the court may make any such order – (a) relating to the exercise by the trustees of any of their functions (including an order relieving them of any obligation to obtain the consent of, or to consult, any person in connection with the exercise of any of their functions), or (b) declaring the nature or extent of a person’s interest in property subject to the trust, as the court thinks fit.’

Relevant matters

Section 15, headed ‘Matters relevant in determining applications’, provides:

‘(1) The matters to which the court is to have regard in determining an application for an order under section 14 include – (a) the intentions of the person or persons (if any) who created the trust, (b) the purposes for which the property subject to the trust is held, (c) the welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home, and (d) the interests of any secured creditor of any beneficiary.’

Subsection (3) provides, save for irrelevant exceptions, that the matters to which the court is to have regard ‘also include the circumstances and wishes of any beneficiaries of full age and entitled to an interest in possession in property subject to the trust or (in case of dispute) of the majority (according to the value of their combined interests).’

At the trial of a preliminary issue, namely, Mrs Bagum’s claim for an order that Mr Hai sell and transfer his interest in the property to Mr Hafiz, the judge concluded that she had no jurisdiction to make such an order, but that she both could and should make an order directing the trustees to sell the property, on terms that Mr Hafiz should first have the opportunity to buy it for a price to be determined on valuation evidence by the court, failing which (within six weeks of that determination) the property should be sold on the open market, with liberty for all the beneficial owners to bid.

Mr Hai appealed, asserting, first, that the judge had no jurisdiction to make such an order and, second, if she did, that it was not a proper exercise of her jurisdiction under TOLATA.

In agreement with the judge, and with the dicta of Mr Thomas Ivory QC in Rahnema v Rahbari [2008] 2 P & CR DG5, the Court of Appeal held that the court had no power to order or direct one beneficiary under a trust of land to sell or transfer their beneficial interest to another beneficiary. Lord Justice Briggs said the direct disposal of a beneficiary’s interest, whether on sale to another beneficiary or otherwise, is, quite simply, not a function of trustees of land.

Directing trustees

The next question was whether the court has the power under section 14 to direct trustees of land to sell the trust property to particular beneficiaries, without the consent of the beneficiary or beneficiaries to whom the land is not being sold. It was submitted on behalf of Mr Hai that the court had no such power for three reasons:

1. Such a sale would have the same effect as a compulsory transfer of the non-consenting beneficiary’s interest to the other beneficiaries. Briggs LJ acknowledged that, save perhaps for certain tax consequences, a sale by trustees of the trust property to beneficiaries A and B has much the same effect as a compulsory transfer of beneficiary C’s interest to beneficiaries A and B, in exchange for money. However, it did not follow from the fact that one type of transaction lies outside the functions of a trustee that another type of transaction must do as well, merely because it has broadly the same economic effect.

2. Such a sale would be contrary to the established rule of equity that the overriding duty of a trustee of land, on sale, is to obtain the best price for the beneficiaries as a whole.

3. Such a sale would also be contrary to the established rule of equity that trustees may not exercise their powers with a view to advance the particular purposes of one party interested in the execution of the trust at the expense of another party.

Briggs LJ considered that the purpose of section 6(6) is not to define the extent of the trustees’ powers or even functions, but rather to prohibit the trustees from exercising them in certain ways. He said it was in marked contrast with the effect of section 14(2), by which the court is given the widest discretion to make orders relating to the exercise by the trustees of any of their functions, having regard, in particular, to the non-exclusive list of the matters to which the court is to have regard, set out in section 15(1)(3).

Wider discretion

More generally, he took the view that the clear object and effect of sections 14 and 15 is to confer on the court a substantially wider discretion, exercised on the basis of wider considerations than might be enjoyed by the trustees themselves, acting without either the consent of the beneficiaries or an order of the court.The Court of Appeal held that the judge’s order that there should be a sale of the trust property, preceded by the conferring on Mr Hafiz of an opportunity to be the purchaser, should he within the stated time pay the amount determined by a valuation of the property by the court, fell squarely within her jurisdiction under section 14(2).

However, the court acknowledged that it was an unusual form of order and that in many similar cases the court has ordered a sale of the trust property, with liberty to all beneficiaries to bid, thereby maximising the prospects of the achievement of best value.

It may be drawn from the judgment that the following circumstances may persuade a court to make a similar order in future cases:

a) Where the risk of undervaluation is low due to the large number of available comparables;

b) Where one of the beneficiaries (A) had moved out of the property, but the others (B and C) wished to retain it.

Where a) applied, it would minimise the risks that the interests of B and C in continued occupation, and the interests of A in obtaining a payment representing the proper value of his interest, might be materially compromised.

Stephen Boyd is a barrister at Selborne Chambers

@SelborneTweets

selbornechambers.co.uk