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Recent Claims: Trustees (& Others) Take Note!

Several important and interesting private wealth disputes claims have been decided recently:

1. Equity Trust v Halabi – Ranking of creditors of insolvent Jersey Trusts

Equity was sued as trustee of a (now “insolvent”) Jersey trust over a letter of comfort it had signed for architects on a project in Mayfair before being replaced as trustee in 2008. The claim was compromised on a drop-hands basis and Equity sought reimbursement from the new trustee of circa £18 million out of the trust assets. Equity argued that the new trustee ought to prioritise its debt (over other debts of other creditors of the trust) because the debt was first in time. The current trustee, Mr Halabi, argued that all debts should rank pari passu, such that Equity’s recovery would be reduced from circa £6 million to £330,000.

The Royal Court of Jersey’s decision in favour of Mr Halabi was reversed by the Court of Appeal of Jersey, which held that Equity’s lien was first in time and therefore took priority.

On appeal, the Privy Council disagreed, holding, among other things, (by a 4 to 3 majority) that the former trustee’s right of indemnity (which was held unanimously to survive the transfer of the trust assets to a new trustee) ranks equally with the right of indemnity of the successor trustee. The crux of the decision was that trustees’ liens should not have to compete where the trust assets are inadequate, because both trustees have suffered a shared misfortune.

Note that under Jersey law, the liability of Trustees is generally limited to the trust assets.

This outcome will likely prompt Jersey trustees to insist upon greater protection on their replacement to limit their potential exposure, by indemnity from the incoming trustee or otherwise. Well-advised third parties who are contracting with trustees are also likely to seek additional comfort if their counterparty ceases to be trustee, given that the claims of that counterparty trustee will rank equally with those of successor trustees in an insolvency scenario.

Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36.

2. Guest v Guest – Proprietary estoppel and accelerated receipt

A farmer had made consistent promises to his son that he would inherit the family farm and business. In exchange, the son worked for several years on low wages. The relationship then broke down such that there was no prospect of them living and working together, and the son claimed for proprietary estoppel to enforce the father’s promise. The High Court decided that the son should be paid a lump sum representing 50% of the business and 40% of the farm property, in order to achieve a clean break. While that outcome would require a sale of the farm, the decision was upheld by the Court of Appeal.

The Supreme Court allowed the appeal insofar as it related to the decision to grant the son 40% of the value of the farm at the date of judgment. By the judgment, the son would receive his expectation earlier than anticipated, and the court had erred in not applying an appropriate discount for that accelerated receipt.

Two options were available to accommodate this finding; either (i) a clean break as set out by the High Court, but with an appropriate discount, or (ii) granting the son a reversionary interest under a trust of the farm, with the parents retaining a life interest in the meantime. The Supreme Court decided that it was up to the parents to choose between the two forms of relief. Since the aim of the remedy was to prevent an unconscionable outcome, the persons against whom the equity is asserted should in principle be the ones to decide between two different potential remedies against them.

Parties in claims of proprietary estoppel should think carefully about the impact of accelerated receipt of the expectation by one party and unfairness to the other. Those considerations may not be sufficient to cause potential claimants to seek alternative remedies, but they should be borne in mind in assessing potential outcomes.

Guest and another v Guest [2022] UKSC 27 (Supreme Court).

3. Abadir v Credit Suisse – Setting aside transactions due to a mistake

Here, a UK resident (but non-domiciled) individual voluntarily transferred assets to an offshore discretionary trust. The individual’s advisers had not appreciated that their client would be deemed non-domiciled for inheritance tax purposes such that the assets did not qualify as excluded property, giving rise to a UK tax liability of £4.6 million. The individual sought to set aside the transfer on the grounds of mistake and neither the trustee nor HMRC contested the claim.

The Court set aside the transfer, noting that it was a matter of “vanilla tax planning” for non-domiciled individuals to use offshore trusts for IHT planning purposes.

Trustees may consider it worthwhile to check that transferors of assets into the trust have sought and received sound tax planning advice.

Abadir v Credit Suisse Trust Ltd [2021] EWHC 2573 (Ch).

4. Property title fraud – Cautionary tales

Several stories have emerged in the news recently concerning increasing attempts at property title fraud. In 2020, the Land Registry paid out £3.5 million in compensation to victims of property title fraud, a 60% increase from 2019. Often this fraud will be committed over properties which are mortgage-free, to avoid the difficulty of vacating the legal charge when title is transferred.

We illustrate the risk with two recent cases:

Ms Jones

Ms Jones went away on a three-week trip in September 2018. While Ms Jones was away, Ms Catherine Walder attempted to take ownership of Ms Jones’ mortgage-free home, valued at £850,000, by taping up the letterbox at the property and affixing a fake letterbox to the front door. Ms Jones noticed this and reported the matter to the police, but no action was taken. Two months later, Ms Jones received a notification from the Land Registry that she no longer held the registered title to her house. Ms Walder had paid an £80 transfer fee by anonymous postal order. The Land Registry initially treated the issue as a civil dispute and not fraud and said Ms Jones had to seek permission from the current registered proprietor to have the title put back in her name. In the event, Ms Walder did agree to the transfer of title back to Ms Jones when notified that Ms Jones was preparing to file a civil case with the Lands Tribunal.

Reverend Hall

Reverend Mike Hall went to work in Wales for a few weeks. While away, he was contacted by a neighbour to say someone had been entering his house. In the short time that he had been away from the property, his identity had been stolen, the house sold, locks changed, and the Land Registry title transferred. On returning to the house, Rev. Hall found builders remodelling it, which is when he called the police, and the builders in turn called the new owners. The new owners said they had bought the house in July 2021. Initially the police said this was a civil matter, before arresting a man on criminal charges four months later. As of October 2022, Rev. Hall still has not had the title restored to his home, and the new owners are contesting his appeal.

There have been other instances of short-term tenants adopting fake IDs and transferring the legal title to themselves, before selling to innocent third parties and then disappearing.

Trustees should be vigilant against the risk of real property title fraud, particularly where the property is free of mortgage and frequently unoccupied or unoccupied for any extended period. Properties which are not regularly occupied, and which have utility bills or other identity documents sent to them, are particularly vulnerable.

To defend against this fraud, parties can make use of the Land Registry’s free Property Alert service, which sends automatic notifications of any application to change a property’s title. Alternatively, parties can place a restriction on the property’s title to prevent any changes to the register without the certificate of a designated solicitor or conveyancer.

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