04 April 2017
Trustees selling trust property – tips and traps
Being appointed as a trustee carries great responsibilities. A trustee is appointed in the trust instrument (such as a trust deed or a will) or by the Court. Under the Trustee Act 1925 (the Act), a trustee by definition includes a Court appointed executor or administrator.
In order to carry out the trustee’s duties, the trustee has certain powers and discretion as to the exercise of those powers. It is usually here that the trustee may face a difficult situation where a dissatisfied beneficiary objects to what the trustee has done or is about to do. This can even lead to a beneficiary making a claim for breach of trust and requesting the trustee to be removed from its office.
The purpose of this article is to provide an overview on trustee powers and responsibilities in relation to the sale of real estate in NSW as well as provide some risk management strategies.
A trustee can be a natural person or a company, but it must have capacity to hold and deal with property. Companies should check that their constitutional documents allow them this capacity.
Minors cannot act as trustees in NSW.
If a trustee is unable, unfit or unwilling to act, a new trustee may be appointed according to the provisions of the trust instrument. If there is no such provision in the instrument, a new trustee may be appointed by the Court under section 6 of the Act.
Before a trustee can exercise a power of sale, it must satisfy itself that it has that power. Trustees do not have a general power to sell the trust’s property because of their paramount obligation to preserve trust property.
The power to sell can arise from the trust instrument, statute (section 38 of the Act) or a Court order.
The trustee must exercise the power according to the standard of care, diligence and skill a prudent person of business would exercise in managing the affairs of another person (section 14A of the Act).
The sale process
Before the property can be sold, it may require some work to be done on it. Trustees have the power to effect repairs and improvement of the property under sections 82 and 82A of the Act. However, the sale should not be delayed and must take place within a reasonable time for a fair and reasonable price.
The trustee must have the original Certificate of Title in respect of the property and the title must be in the trustee’s name before the sale to the purchaser can be completed. If the original Certificate of Title is lost, the trustee must apply for a replacement with Land & Property Information and this may delay completion of the sale.
The trustee will need to engage a real estate agent to market the property and a solicitor to prepare the contract for sale and act on the conveyance. To ensure the property sells for fair market value and to avoid any breach of trust claim for not obtaining the best price possible, it is prudent to sell by a properly marketed public auction. If the property is sold by private treaty, the trustee should satisfy itself as to the purchase price by obtaining a valuation from a registered valuer to ensure the property is not sold below market value, which may then invite claims from the beneficiaries.
Throughout the sale process, the trustee must remember that its duty towards the beneficiaries is paramount and it must put the interests of the beneficiaries first (Cowan v Scargill  1 Ch 270 at 288).
Trustees should ensure that any money received from the proceeds of the sale are deposited into the trust bank account. Beneficiaries have the right to inspect trust accounts and documents and trustees must keep these up to date and ensure they are accurate (Hancock v Rinehart  NSWSC 646 at ).
A trustee will only be accountable for its own acts, receipts, neglects or defaults and not for those of any other trustee, nor for any banker, broker or other person with whom any trust moneys or securities may be deposited unless any loss occurs through the trustee’s own willful neglect or default (section 59(2) of the Act).
However, in Dalrymple v Melville (1932) 32 SR (NSW) 596 it was found that where an honest trustee allowed his fellow trustee (who was also a solicitor) to sell property and that trustee misappropriated the proceeds of the sale, the first trustee was not relieved of liability because it was his duty to safeguard the interests of the trust and he failed in this respect.
The court also has power to relieve the trustee from liability under section 85 of the Act, provided the trustee acted honestly, reasonably and ought to be excused.
Reimbursement and exoneration (but no remuneration)
Being a trustee can be a costly exercise. When selling a property, the trustee will incur legal costs, valuation costs and agent costs (amongst others).
Trustees have the right to be indemnified for costs and expenses which they incur as part of the proper administration of the relevant trust. This right arises either from the trust instrument itself, statute (see section 59(4) of the Act) or in equity (see Franknelly Nominees Pty Ltd v Abrugiato  WASCA 285 at ). Any expenses must have been properly incurred in the course of exercising the trustee’s duty, otherwise the indemnity may be reduced or completely denied to the trustee.
If the trustee is subsequently sued in its capacity as trustee, it is entitled to be indemnified in respect of its legal costs incurred in defending itself in the lawsuit (Wales v Wales (No 3)  VSC 151).
A trustee cannot make any profit or borrow money from the trust unless the trust instrument allows it, it has been agreed with the beneficiaries or it has been ordered by the Court.
Trustees are allowed to request advice and directions from the court (section 63 of the Act). The court must determine what should be done in the best interests of the trust (Application by Mary Joy Cottee; Estate of Gwenyth Shirley Smith  NSWSC 464 at ). A case example involved a person who had been appointed a trustee for sale by Court order pursuant to section 66G of the Conveyancing Act 1919 (NSW). The trustee sought advice as to whether he should complete a sale in circumstances where the persons beneficially entitled to the property requested that he terminate the contract and refund the deposit. Judicial advice was given that the trustee would be justified in completing the sale (Application of Richard Albarran; Harb v Harb  NSWSC 1251).
Bartier Perry has a trusts/estates team which can advise trustees on the trust instrument and a property team which can assist with the sale (and purchase) of property.
Authors: Gerard Basha & Irene Horan