The case of a Will Trust, a Public House and proprietary estoppel

 In Comment

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Preedy v Dunne [2015] EWHC 2713 Ch

IntroductionCase Summary from LawSkills | Private Client specialist trainers

The Claimants in this case were the trustees of a will trust, in which capacity they were the freehold owners of the Albert Arms Public House (the ‘Property’). There were three Defendants: one of the children of the deceased creator of the will trust, together with two companies owned by him. The Claimants sought possession of the Property from the Defendants, who had been carrying on the pub and restaurant business at the Property. The Defendants acknowledged the Claimants’ title to, and right to possession of, the Property, but defended this possession action on the basis of a proprietary estoppel.

The facts

During her life Mrs Montgomery, as sole beneficial owner of the Property, had run the Albert Arms in partnership with her second husband Mr Montgomery. Mrs Montgomery had three children from her first marriage: Sarah, Peter and Jonathan. By her will she left her interest in the Property to her trustees to be held on the following trusts:

  1. To pay the income of the Property to her husband Mr Montgomery for life in the event that he did not wish to continue to run the business after her death. If he did wish to continue to run the business at the Property he might do so so long as her trustees in their absolute discretion deemed appropriate and so long as he ran the business he was to enjoy all the income of that business.
  2. She expressed the ‘wish and hope’ that for so long as Mr Montgomery continued to run the business he allowed her son Jonathan to assist in the business at reasonable remuneration.
  3. Subject to a. and b. above, the Property was to be held for her three children in equal shares absolutely.

Mrs Montgomery died on 6 September 1997. The executors and original trustees of her will were Mr Shilson, her solicitor, and Mr Preedy, an accountant (and incidentally her sister’s husband). In 2003 Mr Preedy retired as trustee, being replaced by Mr Lewis, and in 2008 both Mr Lewis and Mr Shilson retired as trustees. It was at that time that the claimants, Mr Preedy and Mr Baker, a local farmer and family friend, took over trusteeship of the will trust.

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The somewhat complex facts of the case spread over many years, and revolved around matters relating to the running of the Albert Arms. It was following the death of Mr Montgomery, on 1 February 2013, that serious disagreements began to emerge.  The trustees wanted possession of the Property so that it could be sold and the sale proceeds divided equally among Mrs Montgomery’s three children, in accordance with the terms of her will. Jonathan challenged their right to seek possession not on the basis of legal rights, but by virtue of a proprietary estoppel created which allowed him to continue in possession of the Property for life, or for so long as he wished.

A timeline of the basic facts is as follows:

  • Mr Montgomery carried on the pub business at the Albert Arms after the death of his wife in 1997, in premises belonging to the will trustees. Jonathan, who had helped with the running of the business before his mother’s death, now became more heavily involved. He had an office on the premises and assisted Mr Montgomery whenever he needed help.
  • By 1999 it had become apparent that Mr Montgomery’s management of the business was deteriorating, and the premises were falling into disrepair. At around this time Jonathan took over the running of the pub business.
  • Matters came to a head when an electrical fire damaged the premises, and all agreed that renovation of the ground floor and first floor on the Property was needed. Initially it was hoped that a bank loan would be obtained to undertake this work, but this was proving to be difficult. Consequently, in 1999-2000 Jonathan, with the knowledge of Mr Shilson and his siblings, paid over £200,000 for the refurbishment of the ground floor of the pub.
  • In 2001 Mr Montgomery sold 50% of his interest in the business to Jonathan.
  • In 2003 Jonathan paid over £100,000 (perhaps as much as £140,000) for the refurbishment of the first floor. A draft loan agreement was drawn up but never completed.

The dispute at the heart of the case concerns the basis on which the loans by Jonathan were made, representations that he claimed had been made by one or more trustees and whether the trustees  could be estopped from relying on their legal rights in relation to the Property.

The Doctrine of Proprietary Estoppel

The general principle of proprietary estoppel was not a point of disagreement between the parties. The Claimants relied on the summary of the principle provided by Megarry & Wade’s The Law of Property, 8th ed at para 16-001:

“An equity arises where:

  1. The owner of land (O) induces, encourages or allows the claimant (C) to believe that he has or will enjoy some right or benefit over O’s property;
  2. In reliance upon this belief, C acts to his detriment to the knowledge of O; and
  3. O then seeks to take unconscionable advantage of C by denying him the right or benefit which he expected to receive.”

The Defendants cited various cases in support of their claim, the Master referring in his judgment to the dictum of Lord Walker in Thorner v Major [2009]1 WLR 776:

“…most scholars agree that the doctrine [of proprietary estoppel] is based on three main elements, although they express them in slightly different terms: a representation or assurance made to the claimant; reliance on it by the claimant; and detriment to the claimant in consequence of his (reasonable) reliance”

Master Matthews noted that Lord Walker’s summary covered the three elements set out in the Megarry & Wade summary. The present case, however, was not one of a representation of the present legal position that led another to think his or her legal rights were different from what they actually were. Instead, the case put by the Defendants was that, “promises  (even agreements) were made about what would be the position in the future. This case is about promises which are alleged to have been made, binding in equity although not binding in law”.

Proprietary estoppel in relation to trusts and trustees

Master Matthews continued his discussion of the application of proprietary estoppel to the facts of this case by identifying two distinguishing features which arose because it concerned two co-owners of land who held on trust for others as beneficiaries:

  • To what extent could one of two or more joint owners by words or actions (or indeed inactions) bind the other or others? – the ‘trustee unanimity point’.
  • How far can trustees, even acting jointly, create a proprietary estoppel which is binding on the beneficiaries ?- the ‘trustee/ beneficiary point’.

Trustee unanimity

The general law on this point was not in issue: unless authorised to act by a majority, trustees of a private trust are required to exercise trustee powers unanimously. Authority can be conferred by the terms of the trust, the court or the unanimous decision of the beneficiaries (all being of full capacity). No one argued in this case that any such authority had been conferred.

Master Matthews considered first the case where there are two beneficial owners of an estate and the action of one only gives rise to an estoppel. In such a case, it is only the interest of that person that will be affected by the estoppel. The Master concluded that the same reasoning ought to apply to the trustee situation:

“If, for the protection of the beneficiaries themselves, the rule is that trustees must (in the absence of authority to the contrary) be unanimous in exercising a power to bind beneficiaries, I fail to see how it can be unconscionable for trust beneficiaries, innocent of any conduct putting their beneficial interests at risk, to assert those interests against a person to whom a representation or promise even inside the trustees’ limited powers has been made by one only of those trustees. At best, the equities are equal. And a representation or promise outside trustees’ powers would be a fortiori.”

It followed that the innocent trustee could only be affected by the estoppel if it could be shown that either:

  • the innocent trustee encouraged the promise to be made or knew of the promise and stood by and said nothing; or
  • the other trustee was acting as agent for him at the time of the representation.

Can a trustee bind a beneficiary?

The second legal question to be addressed by Master Matthews was when, if ever, the representations of a trustee could bind the beneficiaries of a trust by way of an estoppel. The Claimants argued that it was impossible for the trustees, even acting jointly, to have created an equity of proprietary estoppel binding on the trust estate and the beneficiaries. The Defendants, however, argued that the trustees, by virtue of s.6 (1) Trusts of Land and Appointment of Trustees Act 1996 (‘TOLATA’) had ‘all the powers of an absolute owner of land’. This gave them the power (inter alia) to mortgage, sell, or lease or license the land to Jonathan, which would be binding on the beneficiaries. They could therefore enter into the arrangements with him which it was alleged that they did.

The Master confirmed his understanding that a power to give away trust property is dispositive, but the powers conferred by s.6(1) TOLATA were administrative. He continued: “…although the words of s.6(1) are wide (‘all the powers of an absolute owner’), in my judgment the proper protection of the beneficiaries demands that these words be confined to formally and substantively complete transactions.” On a separate point, he noted that where a trustee acts outside his powers but confers a benefit on the beneficiaries, the beneficiaries may ratify the transaction and take the benefit if they wish, but they do not have to.

The Defendants raised a second argument that the trust beneficiaries, including Jonathan, had a right under ss12-13 TOLATA to occupy the trust property. These sections give a beneficiary with an interest in possession certain rights to occupy the land (s.12) and allow trustees to let one or more beneficiary occupy property to the exclusion of others (s.13). During Mr Montgomery’s lifetime, he was the only beneficiary with an interest in possession, and Master Matthews concluded that the trustees could not have used any power under TOLATA to deprive him of that. After his death, all three siblings became together absolutely beneficially entitled. Because there was now more than one person with a beneficial interest in possession, in theory the discretion under s.13 could arise. This argument failed on more than one ground. First, the dispute was now really among co-owners, any of whom could ask the court for an order for sale under s.14 TOLATA.  Secondly, far from the trustees seeking to exercise s.13 powers in favour of Jonathan, they had decided to seek possession against him. Moreover, the mere fact that the trustees might have a theoretical power to exclude others and enable Jonathan to stay was not an authority for trustees to be able to create a proprietary estoppel equity binding on the beneficiaries. “Section 13 is essentially a power of management of land that does not take away a beneficiaries’ (sic) interest in it. Proprietary estoppel, however, is a doctrine which alters beneficial interests.”

Contractual licences

One final argument was put forward by the Defendants: Jonathan claimed an enforceable contractual licence against the trustees and and equitable right of occupation until the loans were repaid.

Master Matthew stated that:

“…the modern law holds that a licence granted for consideration and coupled with an agreement not to revoke until a specified time or event is irrevocable until that time or event…It seems to me that, in contrast to a licence under the old common law unprotected by equitable remedies…this is very close to an interest in property. The fact that it is non-assignable and cannot be turned into a right to income is irrelevant…The crucial question is whether the licence binds third parties.”

After further discussion, the Master concluded that a contractual licence could be created potentially binding on the trust estate and  therefore on the beneficiaries.

Judgment

On the facts of this case the Master found that no promise was made by Mr Shilson to Jonathan, and no agreement between them, to the effect that Jonathan could continue to occupy the building and run the business for as long as he wanted, or at least until he was repaid. In case he was wrong about that, he also found separately that Mr Preedy made no such promise or agreement nor was aware of or acquiesced (whether by silence or otherwise) in any that Mr Shilson might have made, and (again separately) that Sarah and Peter neither knew of, acquiesced in nor made or consented to any such promise or agreement. As a consequence, the question of whether Jonathan acted in reliance on the promise or agreement, in the sense that he would not have acted as he did but for the promise, did not arise.

The question of authority of Mr Shilson to bind Mr Preedy was then considered. The Defendants had argued that he had ostensible authority, based on the ‘casual way’ in which the trustees separately dealt with third parties, including the bank. Master Matthews disagreed. He stated that there is a ‘world of difference’ between relatively trivial matters clearly within the scope of the trustees, such as operating a bank account, and making promises (outside the scope of the powers conferred) intended to bind the land subject to the trust. It would not be safe to infer from the way the trustees dealt with the bank that Mr Preedy was thereby representing to Jonathan that Mr Shilson was authorised to bind him in matters relating to the trust land.

On the facts of this case Master Matthews found that there was no contractual agreement for a licence to entitle Jonathan to remain on the premises until he was repaid the money he had put into the refurbishment.

Points of interest

  • Master Matthews commented near the end of his judgment that,“The fundamental problem for Jonathan in this case has been that he paid for the refurbishment without securing a clear commitment from the trustees or his siblings as to whether any of them and if so who should repay him for them.” Practitioners will want to be alert to a client who is planning to agree (or indeed may already have agreed) informal financial arrangements, especially where the arrangements are being made between family members and formality might be thought to be unnecessary.  Clear agreement should always be sought as to the terms of a loan, and those terms should be set down in writing.
  • Practitioners should be aware of the need to remind trustees, and indeed beneficiaries, that trustees must act unanimously. Trustees should also be reminded that where only one of them is consulted, he should make it clear to the benficiary/ies concerned that he must seek the agreement of his co-trustees.
  • Practitioners and trustees should keep clear, comprehensive and contemporaneous notes of meetings, and trustees should be encouraged to hold regular trustee meetings: at least once a year is advisable.
  • The Master’s dicta on the question of whether trustees can bind beneficiaries has caused concern in some quarters. He reasoned that s.6 TOLATA applied only to formally and substantively complete transactions, on the basis that the section was merely administrative. Some believe that the distinction between different types of transaction for the purposes of this section is somewhat arbitrary. It can be argued that rights created by an estoppel, while not created in a formal manner, are still valid property rights. In a similar vein, the power under s.13 TOLATA was taken to be essentially a power of management. This, the Master concluded, did no allow for the creation of an estoppel. Some would argue, however, that there is no reason why an estoppel cannot affect the management powers of trustees. While these are perhaps rather esoteric points, they highlight a potential need to address further the question whether trustee action can generate an estoppel which takes precedence over beneficiary rights. It will be interesting to see if future cases pick up this issue more clearly and comprehensively.
  • Some practitioners are also nervous about Master Matthews’ dicta (albeit obiter) in relation to contractual licences. He had commented that a modern contractual licence is ‘very close’ to an interest in property, despite authority that a contractual licence is not akin to a property right (eg Ashburn Anstalt v Arnold [1989] Ch 1)

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