Trustee Act 2000 and Settled Land Act Trusts

Martyn Frost provides some initial thoughts on how to address the changes to settled land that
the Trustee Act 2000 will bring amount
(taken from Issue No 14 – January 2001)

 

Many tenants for life under Settled Land Act 1925 trusts (or strict settlements) will probably never have fully understood the true extent and nature of their powers. A conscientious few may have however had understood them a little more fully.

If most tenants for life did not fully understand their powers in the first place, the chances of them understanding what is about to happen to their powers, and why, are very remote. To avoid confusion and dispute, some clarification ahead of the commencement of Trustee Act 2000 (on 01.02.01) is preferable. However, this should be seen against the background of it not being a trustee’s duty to give professional advice to a beneficiary (nor is a beneficiary’s legal advice on their powers and duties necessarily a trust expense, although a case can be made that, as a tenant for life’s powers are exercisable as though a trustee, some costs relating to advice on their trustee’s duties could be paid from capital monies (if there are any available); see Wolstenholme and Cherry’s Conveyancing Statutes 13th edition volume 3 p.220. Therefore, whilst warning the tenant for life of the changes now about to be brought about, the trustee should recommend that the beneficiary should take his own legal advice if they are concerned as to their own position or question the trustee’s interpretation of Trustee Act 2000.

It might be thought that as settled land is so much out of fashion today (and could not be created after the commencement of Trusts of Land and Appointment of Trustees Act 1996) that these reforms are little more than a footnote to trust management. I disagree for two reasons

[a] There is far more settled land than is generally realised. (It is often that the settled land has been forgotten, after it was vested in the tenant for life, until some          action by the trustee was required).

[b] Because the Settled Land Act 1925 regime was always regarded as being appropriate for larger landed estates, some of these trusts are of very considerable          size and importance

Category [a] above is potentially dangerous because of the need for the trustees to become active once capital monies arise (even if it is only to reinvest it in other land) and therefore they must understand what their duties now are after Trustee Act 2000. Category [b] is also difficult because of the values involved and also because it is most likely that in these trusts a strict settlement will have been created because the settlor wanted the tenant for life to have extensive powers (and the tenant for life will have become used to exercising those powers).

The reforms of the Trusts of Land and Appointment of Trustees Act 1996.

The writing was on the wall for the future of strict settlements with the passing of the Trusts of Land and Appointment of Trustees Act 1996.

  • s.2(1) prevented the creation of any new strict settlements under the provisions of the Settled Land Act 1925
  • s.2(4) provided that where any existing strict settlements ceased to hold land (or chattels settled on such trusts – the s.67 `heirlooms`) it thereupon ceased to be settled land and became, in respect of any later acquired land, a trust of land.

The interesting problem that s.2 created foreshadowed issues that will now arise from Trustee Act 2000, in that it was necessary after commencement of Trusts of Land and Appointment of Trustees Act 1996 (01.01.97) to tell some tenants for life that their powers over capital monies had been removed from them and transferred to the trustees

  • in a strict settlement that was wholly comprised of investments (i.e. no land or heirlooms), the tenant for life would have been used to exercising his powers to direct investment (s.75 Settled Land Act 1925), but from 01.01.97 all such powers reverted to the trustees, to the complete exclusion of any Settled Land Act 1925 powers of the life tenant to direct investment of capital monies
  • in a strict settlement where the tenant for life planned on disposing of all land or heirlooms after 01.01.97 he would lose all his Settled Land Act 1925powers if he did so

Reforms continue with Trustee Act 2000

This theme continues with Trustee Act 2000. Although changes to Settled Land Act 1925 were not envisaged by the original report of the Trust Law Committee, when the Law Commission published its report (Law Com 260), with a draft Bill, tucked away in schedule 2 (`Minor and Consequential Amendments`) wereparagraphs 7–17. There was no commentary within the body of the report as why these proposals had been introduced after the consultation process. These amendments are now paragraphs 7–17 Part II schedule 2 Trustee Act 2000.

The net effect of the changes is that all tenants for life under strict settlementslose all of their powers to direct investment `or other application` of capital monies as from the commencement of this Act. (N.B this does not affect the powers of management of land and leasing, but it does affect expenditure of capital monies on improvements.)

Issues to be addressed

Without doubt these changes will come as a shock to the tenants for life of some of the bigger or more active SLA 1925 trusts, especially where the tenant for life is used to managing the landed estate. This is something that needs to be explained now rather than later, in order to establish a satisfactory way forward to deal with the following issues

[a] stock exchange investment;

[1] this will be more cumbersome for the trustee (when compared to non-strict settlement trust investments), as the trustee has a statutory duty to consult the life          tenant and give effect to his wishes `so far as is consistent with the general interest of the settlement` (the amended s.75(4) Settled Land Act 1925see
        paragraph 10 schedule 2 Trustee Act 2000).

[2]     if the trustee elects to delegate his powers of investment management under s.11 Trustee Act 2000, the statutory requirement to consult with the tenant for life           still remains with the trustee, not the agent (the amendeds.75(4B)and (4C) Settled Land Act 1925 see paragraph 10 schedule 2 Trustee Act 2000). To my           reading, this must prevent discretionary investment management being delegated.

[3] the net effect of this is that although strict settlements have been reformed we have still been left with such trusts requiring a different approach to investment          management. Therefore there will be plenty of scope for going wrong if strict settlement portfolios have not been correctly identified.

[4] try to avoid having capital monies invested at the direction of the court, if possible, as such investments cannot be changed without the tenant for life’s consent          (the amended s.75(4A) Settled Land Act 1925 see paragraph 10 schedule 2 Trustee Act 2000).

[b] sales and purchases of land

There appears to be a rather odd discrepancy as far as the reforms apply to land. Although the investment of capital monies is now at the discretion of the trustees, the sale and exchange of land is not.

  • If the tenant for life sells land under his continuing Settled Land Actpowers, the trustee invests the capital monies, but see new s.75A below.
  • If the money realised is to be reinvested in land or improvements to land; the trustee invests the capital monies
  • If the tenant for life exchanges the land for land and cash; the land acquisition is made by tenant for life and the trustee invests any cash balance.

Other changes

Paragraph 11 Part II schedule 2 Trustee Act 2000 introduces a new section (s.75A) into Settled Land Act 1925. This new section is closely based on s.10(2) Trustee Act 1925 (which is repealed by Trustee Act 2000). It provides for a tenant for life, with the consent of the trustee, to act as mortgagee to the purchaser, when selling settled land, for up to two thirds of the selling price.

The transfer of investment powers away from the tenant for life renders redundant the indemnity to the trustee for the tenant for life’s direction to invest capital monies and consequently s.98(1) and (2) Settled Land Act 1925 are revoked. The protection afforded to trustees by s.97 in respect of the tenant for life’s land transaction is still relevant and remains.

The specific authority given to trustees of Settled Land Act 1925 trusts to be reimbursed for their reasonably incurred expenses (s.100) is repealed as this issue is now covered in ss.31 & 32 Trustee Act 2000.

The new duty of care in schedule 1 of the new Act is also extended to some specific remaining powers of the tenant for life (e.g. the powers to insure trust property or employ agents) see the new s.107(1A) Settled Land Act 1925inserted by paragraph 17 Part II schedule 2 Trustee Act 1925.

Why the changes to the tenant for life’s powers?

The Settled Land Act 1925 has, certainly in recent years, been much criticised and probably the climate was there for changes to be made. In my experience the 1925 Act divides opinion fairly strongly between

  • those who sought major reform and maintained the Act was too outdated and
  • those who wanted minor reform to improve the Act and saw it as having continuing use and relevance

Once reform had been started with Trusts of Land and Appointment of Trustees Act 1996 further reform became inevitable. Strict settlements had a finite life after this Act and the tenant for life’s investment powers were seen as being an unsatisfactory anomaly in today’s trust investment world. It can also be argued that if a trustee’s investment powers were ripe for reform, then surely the tenant for life’s investment powers were as well. Whichever side on this particular divide one is on, the changes will now take place and the management of the changed position of the tenant for life is a practical matter for all trustees of strict settlements.

Martyn Frost is Head of Legal Services for Barclays Bank Trust Company’s Executorship & Trustee Service.