Trusts of property and the court's powers to intervene

Section 14 of the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA) is an important piece of legislation. It gives courts the power to make any order they see fit as to the exercise by trustees of their functions. But how wide is this power? And is the court constrained by the same principles of equity that apply to trustees? These are the questions with which the Court of Appeal recently grappled in Bagum v Hafiz and Hai [2015] EWCA Civ 801.

Mrs Bagum and her two sons (Mr Hafiz and Mr Hai) shared a house in Islington, which they owned in three equal shares under a trust. When family relations broke down, Hai moved out, whereupon Bagum applied to the court for an order under section 14 of TOLATA compelling him to sell his one-third beneficial interest in the property to Hafiz.

First instance decision

The first instance judge held that the court had no jurisdiction under TOLATA to order a beneficiary under a trust to sell their interest to another beneficiary. Instead, the judge ordered that the three trustees sell the property, but that before it appeared on the open market, there would be a period of several weeks during which Hafiz alone would be entitled to purchase the entire property for a price to be determined by valuation evidence.

Appeal agreement

The Court of Appeal held the first instance judge had been within her jurisdiction to make the order she had. The court agreed with the first instance judge that section 14 of TOLATA does not permit the court to order a beneficiary to sell their interest to another beneficiary; Bagum’s wish for an order compelling Hai to sell his interest to Hafiz thus fell on stony ground. The court rightly observed that section 14 only allows the court to make orders relating to the exercise by trustees of their functions, and that the direct disposal by a beneficiary of their interest in land is not a function of the trustees.

The court upheld the first instance judge’s order giving one beneficiary, Hafiz, a preferential right to buy the entire property before it was placed on the open market. For the Court of Appeal, the fact that this might have the same end result as compelling Hai to sell his interest to Hafiz did not mean that it was not permitted.

More generally, the court held that TOLATA gives the court a far wider discretion in what it can order than trustees themselves have under a trust. Hence the court is not constrained by the principles of equity, which limit trustees in how they exercise their powers – for instance, the principle of equity that trustees must advance the interests of all beneficiaries as a class, without preferring the interests of one beneficiary over the others. Accordingly, TOLATA permitted the court to give one beneficiary, Hafiz, a preferential right to buy the entire property over the other beneficiaries.

Lessons learnt

The Court of Appeal’s decision will have far-reaching consequences but it is a sensible one. Adult beneficiaries of sound mind can direct how trust property should be managed on the basis of their unanimous consent. Section 14 of TOLATA enables the court to step in and make decisions where that consent breaks down. In order for the court to be able to reach just decisions on how the trust property should be managed, it will often have to take a wider view of a case than the trustees themselves would when exercising their powers (hence section 15 reciting a range of factors which the court must take into account but which trustees would not). 

The decision is also an important statement by the Court of Appeal that, just because a particular result cannot be achieved by one legal route, it does not preclude the same result being achieved by another route. 

TOLATA gives the courts a substantial discretion in ordering how trust property should be managed. This decision makes clear just how wide that discretion is. SJ

Alexander Campbell is a barrister practising from Hardwicke @hardwickelaw www.hardwicke.co.uk