Protecting land held in trust

When land is held in trust it can be more difficult to ascertain your rights in regard to that land. The Property (Relationships) Act (“PRA”) applies to property owned by either or both parties to a relationship. The problem that arises with trust property is that it sits outside the relationship property pool, as it is owned by the trustees of the trust and not the parties. Fortunately there are ways to challenge trust ownership and attempt to bring property into the relationship pool. However, this can take time leaving property vulnerable.

What can you do to protect the land in the meantime?

Notices of interest against title

Section 42 of the PRA can be used to protect land which is held in trust. Section 42 allows a person who claims an interest in the land, whether held in trust or not, to lodge a notice on the title. The interest claimed must be by virtue of the PRA. The notice acts as a “stop” sign and prevents the land being sold or otherwise dealt with. It is essential that the person lodging the notice is or was the spouse, civil union partner or de facto partner of a person who either owns the land (the registered proprietor) or is otherwise entitled to or beneficially interested in the land.

Application of section 42

While s 42 can provide useful protection, the section does have its limitations which have been explored in the recent Court of Appeal case Heazlewood v Joie de Vivre Canterbury Limited. In that case the parties bought and sold investment properties. To facilitate their business ventures they used a number of trusts and companies. Neither party personally owned any significant property. When the parties separated there were a large number of properties held by trusts of which the wife was not a beneficiary. In an attempt to protect her interests and prevent the properties being sold the wife lodged s 42 notices. The notices were on the basis that she had an interest in the various pieces of land because:

• there was a constructive trust
• the trusts were a sham; and
• her husband was beneficially entitled to the properties.

The issue was whether the various interests alleged by the wife were sufficient in law to sustain the s 42 notices.

Constructive Trust

To make a successful argument of constructive trust the applicant must show they have made contributions, direct or indirect, to the property with the reasonable expectation that they would gain an interest, and that it is reasonable the respondent should expect to yield an interest. The wife argued she had made active contributions to the acquisition of the properties and that, although the trusts were created for tax purposes, they were also for the benefit of the parties, and therefore she expected to have an interest in the trust owned properties. The Court of Appeal agreed there was an arguable case that the properties were held on constructive trust for both parties, and that if the wife was successful in her constructive trust claim then she would have a claim in both her own right and to share in her husband’s share of the constructive trust under the PRA. Therefore, the Court found that s 42 notices were sustainable on the basis of a constructive trust argument.

Sham Trusts

A trust requires certainty of intention. A sham trust exists where the subjective intention of the settlor and the trustee (those creating the trust) is that there will be an appearance of a trust but not the substance; in other words, that the trust will be used for ulterior purposes. It is difficult to prove that such an intention exists and generally the Courts will not lightly concede that a trust is a sham. While it was arguable that some of the trusts could be shams, the Court of Appeal noted that the wife’s sham allegation could not independently sustain the s 42 notices. This was because the interest claimed by the wife was not by virtue of the PRA. The wife was complaining she was excluded as a beneficiary of the trusts. That fact did not question the bona fides of the trust (i.e. whether the trust was a sham), but rather it challenged the husband’s intention and whether he intended to defeat her rights. The sham allegation did not support an interest which existed under the PRA.

Intention to Defeat

While the wife had not argued an interest based on s 44 of the PRA, the Court considered whether such an argument could sustain a s 42 notice in the circumstances of the case. Section 44 of the PRA allows an applicant to challenge dispositions of property where the disposition has been made with the intention of defeating their claim. One of the trusts in Heazlewood had been created around the same time as the separation. The Court noted that it was arguable that the transaction was designed to defeat the wife’s claim, and therefore an order could be made under s 44. However, because no order under s 44 had been made, the Court considered the wife’s potential interest was not sufficient to sustain a s 42 notice. The Court determined that until an order was made s 44 did not confer upon the wife a present interest in the property.

Beneficial Interest

The Property (Relationships) Act’s definition of “property” can be applied to cover powers of appointment. A power of appointment allows a person to select who will hold a particular job or position. Such powers are not in themselves fiduciary and can be characterised as relationship property. The powers vested in the husband in Heazlewood gave him the ability to appoint and remove trustees and beneficiaries which meant he could establish himself as the sole beneficiary of the trusts. However, the Court of Appeal found that until the husband’s powers of appointment were exercised, he did not have a present interest in the land to which the wife’s claim could attach.

Conclusion

Therefore, while s 42 notices can be used to protect land, their applicability can be limited where the land is held on trust. To sustain a s 42 notice on property held in trusts it is crucial that the applicant’s spouse or partner has a present interest in the land. This means where the spouse or partner only holds a discretionary interest (i.e. is a discretionary beneficiary of a trust) or powers of appointment, it may not be possible to sustain a claim. Where the applicant has a potential claim under constructive trust or division of relationship property then it is likely the property can be protected by a s 42 notice. The position is less clear with s 44 or 44C claims. Heazlewood suggests that s 44 does not create a present interest to which a notice can attach until an order has been made. However, earlier cases have upheld notices where there have been potential claims under s 44 or 44C.

Summary

So, while there are options to protect and access property held in trust it can be a long and difficult battle where the outcomes are often uncertain. In clear cut cases s 42 can be a vital tool in safeguarding interests. This is especially so where the applicant is not involved in the operation of the trust, and therefore is not able to prevent any sale or transfer of property which could interfere with their rights.

"The information posted on this website is prepared for a general audience, without investigation into the facts of any particular case. This information is no substitute for legal advice and does not create a lawyer-client relationship; you are advised to consult with a lawyer on any legal issue."