Breach of Trust – Jeffrey v Gretton & Russell [2011]

 In Trusts

Disclaimer: LawSkills provides training for the legal industry and does not provide legal advice to members of the public. For help or guidance please seek the services of a qualified practitioner.

Trustees who took a decision to carry out work to trust property over a period of six years rather than sell it without taking professional advice were in breach of their duty of care owed to the beneficiaries.  However, fortunately for them, the result was not a loss to the beneficiaries and so no personal liability which would otherwise have fallen on the trustees. As the judge said “it is a case of a thoughtless breach of trust that happens to have turned out well.”

The facts

The case arose following a family dispute. Mrs Paula Ida Beken was married twice: first to Mr Gretton and secondly to Mr Beken. She acquired Townsend House, a Grade II listed townhouse on the front at Cowes and relied on advice from her friend Mr Russell (a Director of a national house-building firm) on how best to care for it.

Mrs Beken died in 2001 having made her last Will on 30 September 1992. She made a specific legacy of Townsend House to her executors (Denis Gretton – her son; and Mr Russell – her friend) to hold it on trust for her second husband Mr Beken for life and thereafter for Denis, his daughter Mrs Jeffrey and his son, Nicholas Gretton in equal shares.

Following Mrs Beken’s death the executors took advice about the tax efficiency of the legacy and were advised by Grant Thornton that it would save IHT on Mr Beken’s death if there was a Deed of Variation in which Mr Beken gave up his life interest, thereby accelerating the gifts in remainder. If this was done it was understood that he would not be able to continue to live there as this would be a reservation of benefit.

FREE monthly newsletter

Wills | Probate | Trusts | Tax  | Elderly & Vulnerable Client

  • Relevant learning and development opportunities
  • News, articles and LawSkills’ services
  • Communications which help you find appropriate training in your area

Mr Beken was liked by all who knew him. He was an internationally renowned photographer and had two sons from his first marriage – Anthony and Kevin. He was willing to help Paula’s family and given his failing health he was in agreement about moving out of Townsend House to go and live with his son Kevin, who also lived in Cowes.

Mr Gretton agreed that Mr Beken could spend time at the property mostly because it was helpful to the family who did not live locally to have someone able to call regularly to satisfy the insurers. There was some conflicting evidence as to whether he actually still continued to live at the property.

As a result of the Deed of Variation there was some £58,000 of IHT to pay but there was no cash in the estate with which to pay it. The residue of Paula Beken’s estate was mostly jointly owned assets which passed to Mr Beken by survivorship. Mr Russell agreed to fund the payments on the basis of the instalment option until the property was sold.

The key problem was whether to sell immediately or whether to put it in a better state of repair either to let or sell. In the event Mr Gretton decided that he would work on the property and when the repairs were done the property would be put on the market. He did, however, also contemplate retaining the property until Mr Beken’s death although this decision was subject to some dispute in the evidence. In the event the property was not sold until 2008, which was after Mr Beken’s death.

The dispute

Mrs Jeffrey claimed that she had lost out by the executors’ failure to sell the property following the Deed of Variation and by their failure to review the trust investments during the time it was retained; in particular whether it might be let out until sale. She argued this was because Mr and Mrs Gretton liked staying there and treated it as a second home.

She argued that she had not been told about the 1992 Will, the Deed of Variation or the decision to defer the sale until Mr Beken’s death and only found out about Mr Beken’s death some months after he had died when her mother-in-law told her. She held the trustees responsible for this failure of communication, in particular her father and said it was because he wished to keep her in ignorance because her parents did not approve of her husband and that Mr Gretton wished to acquire Townsend House for himself.

She also argued that Mr Beken did in fact regard Townsend House as his home following the Deed of Variation and she sought an indemnity against any further IHT which might arise from this reservation of benefit.

There was evidence that she had been made aware of the 1992 Will and Deed of Variation. There was also evidence that Mr Beken might have spent time there but only by inadvertence slept there if he had fallen asleep in the chair. He definitely lived with his son Kevin and had become frail since suffering a stroke before he died.

The Grettons and the Jeffreys had indeed fallen out in 2006 when the Jeffreys decided to emigrate to France but their daughter Samantha, who was 17 at the time, did not wish to go and ended up living with her grandparents, the Grettons, instead. Understandably this created a fissure in relations. It was said to fuel the arguments about the Grettons dislike of Mr Jeffreys. Samantha’s evidence at trial of his bullying attitude towards her mother supported the contention that this action was of his making and that Mr Gretton was worried about Mr Jeffreys getting his hands on his daughter’s share of Townsend House given his rather chequered financial and potentially criminal, history.

However, family disputes aside, the questions which had to be decided were:

  1. Was Mrs Jeffrey told about the Deed of Variation?
  2. Did Mr Beken reside at the property after the execution of the Deed of Variation?
  3. Was there an agreement not to sell Townsend House during Mr Beken’s lifetime?
  4. Did the defendants comply with their duties as executors and trustees in not exercising their power to sell the House?
  5. Should the Defendants have commercially repaired and let the property?
  6. If the Defendants are in breach of their duties as trustees by reason of the decisions they made, did the Claimant give effective consent to those decisions?
  7. Should the Defendants be relieved from the consequences of any breach of trust by reason of the operation of s.61 Trustee Act 1925?
  8. If there is a liability to account by reason of breach of trust, what is the quantum of loss? The Claimant seeks an account on the footing of wilful default.
  9. If the Defendants and Mr Beken agreed that notwithstanding the Deed of Variation they would not sell Townsend House until after his death, should they be required to given an indemnity against any further liability (it is suggested to tax) that might arise by reason of that agreement?

The decision

Leslie Blohm QC decided on the evidence that Mrs Jeffrey did know about the Deed of Variation prior to its execution. He also decided that after the execution of the Deed of Variation Mr Beken did not reside at Townsend House as the evidence of his two sons, who had nothing to be gained by it, was clear and categoric.

The question of whether or not there was an agreement with Mr Beken not to sell the House during his lifetime was more problematic. Mr Blohm decided that Mr Russell was certainly not a party to any such agreement and neither was there any suggestion that Mr Beken had made this part of the ‘arrangement’ a condition of signing the Deed of Variation. In the end it was a decision which Mr Gretton made personally out of friendship and kindness to Mr Beken and following the recognition that Mr Beken had a routine that involved ‘popping in’ to Townsend House to feed his cat (which still lived there), and to work in the garden or on his book.

The key question was whether the executors complied with their duty of care under s.1 Trustee Act 2000 in not exercising their power of sale or complying with their obligation to act with care in deciding to exercise any power of investment. The judge did not accept that the executors had a duty to sell or a power to postpone sale – they have to balance their portfolio between the life tenant and the remaindermen. They do not necessarily have to sell non-income producing assets, although that may be sensible.

He did recognise that a trustee who fails to exercise a power that he ought to exercise will be in breach of trust and the question of review is at the heart of the Trustee Act 2000 – s.4(2). Although the Will here gave the executors the power to invest as a beneficial owner this did not remove the duty to review the investments from time to time and within a reasonable time. The Judge found that the trustees were in breach of their duty to review the investments – they had the power to come to the conclusion they did (about not selling and only doing repair work personally over a long period) but this was not a reasonable decision.

The test that is applicable is whether the conduct of the trustee has fallen below that of a prudent man of business dealing with his own property – Learoyd v Whiteley (1887) 12 App Cas 727. The decision to carry out works on the scale carried out over a period of six years, without taking professional advice, was a breach of the duties owed by the trustees to the beneficiaries.

As to whether Mrs Jeffrey gave her consent to any such breach of duty the relevant test is from Re Pauling’s Settlement Trusts [1962] 1 WLR 86: given the beneficiary’s knowledge, it is in all of the circumstances fair and equitable that by reason of her lack of complaint at the time she should be deprived of a remedy. Whilst it was decided she did know about the Deed of Variation, the retention of the property, the fact that the Grettons were carrying out the work it did not appear that she knew how long it would take or that the trustees had not sought any professional advice on approaching it this way nor of not selling the property until Mr Beken’s death. It was not the case that what she knew was sufficient to consent to the trustees’ actions.

s.61 Trustee Act 1925 provides relief for a trustee who is accused of a breach of trust if he acted honestly and reasonably but it did not apply to the actions of the executors and trustees in this case. They should have taken professional advice about the repairs and renovations given the age and type of property and on whether delaying a sale was appropriate.

To assess the quantum of damages Mrs Jeffrey argued that this should be calculated on the basis of wilful default, which would mean that the trustees would be charged for the value of the fund that they ought to have obtained or recovered during their trusteeship.

Whilst the Judge decided that the trustees should not have retained the property without the beneficiaries consent but should have sold it the property was in a poor state of repair at Mrs Beken’s death and there was no money in the estate to pay for repairs. They would have been advised not to borrow to carry out the repairs but to sell it as it was in its then state of repair.

Had the trustees sold the property in December 2002 the evidence suggested that they would have received £610,000. The judge estimated the costs of sale at 3.5% so the net sale proceeds would have been £588,650. After the deduction of the IHT of £58,087 this would leave a net balance for division of £530,563 with Mrs Jeffrey’s one third share amounting to £176,846. If this had been invested at 6% interest (the Special Account Rate during the period) the value of the share at September 2007 would be £237,857.87.

As it was, the delay in selling the property resulted in a sale price of £885,000. After IHT and sale costs at 3.5% there was a balance of £799,067 of which a one-third share would have been £266,356 – substantially more than if it had been sold in 2002 with the subsequent interest added.

The Judge therefore found that whilst there had been a breach of trust there was no loss to the beneficiaries and so dismissed the claim.

He also said that there was no agreement between the trustees or either of them and Mr Beken to let him occupy Townsend House as part of the Deed of Variation or subsequently and there was no prospect of a challenge by HMRC over the IHT bill as a result. This meant there was no need to provide an indemnity for the beneficiaries against this risk.

The LawSkills Monthly Digest

Subscribe to our comprehensive Monthly Digest for insightful feedback on Wills, Probate, Trusts, Tax and Elderly & Vulnerable client matters

Not complicated to read  |  Requires no internet searching |  Simply an informative pdf emailed to your inbox including practice points & tips

Subscribe now for monthly insightful feedback on key issues.

All for only £120 + VAT per year
(£97.50 for 10+)

Lawskills Digest
Recent Posts