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Session 1998-99
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Trustee Delegation Bill [H.L.]


 

These notes refer to the Trustee Delegation Bill [H.L.] as introduced in the House of Lords on 3rd December 1998 [HL Bill 6]

TRUSTEE DELEGATION BILL [H.L.]


EXPLANATORY NOTES

INTRODUCTION

1.      These explanatory notes relate to the Trustee Delegation Bill [H.L.] as introduced in the House of Lords on 3 December 1998. They have been prepared by the Lord Chancellor's Department in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. The notes comprise a summary of the Bill, an explanation of its background and a clause by clause commentary.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.

3.     Annexes A and B set out the amendments made by the Bill to the Powers of Attorney Act 1971 s 10 and the Trustee Act 1925 s 25 respectively. A glossary of technical terms used in these notes is provided at Annex C.

SUMMARY

4.     The Bill will implement, with minor modifications, the changes to the law recommended by the Law Commission in its report The Law of Trusts: Delegation by Individual Trustees (1994) Law Com No 220.

5.     The clauses in the Bill may conveniently be sub-divided into five groups.

  • Clauses 1 - 4 of the Bill create an exception to the general rule that the exercise of trustee functions may not be delegated.

  • Clauses 5 - 6 amend the general statutory conditions on which a trustee may delegate the exercise of his or her trustee functions and provide for the creation of a statutory form of power of attorney for use by a trustee.

  • Clauses 7 - 9 prevent the rules of law which require capital monies to be paid to at least two trustees from being circumvented by use of a power of attorney and make provision relating to registered enduring powers of attorney.

  • Clause 10 creates a rule of interpretation that an attorney's authority to do an act in relation to land includes authority to do that act in relation to any estate or interest in the land.

  • Clauses 11 - 13 deal with commencement and other supplementary matters.

BACKGROUND

6.     The primary responsibility of trustees has traditionally been to hold property on behalf of the beneficiaries under the trust. The trustee must safeguard the property and deal with it in the best interests of the beneficiaries. It is a general rule of trust law that trustees, having voluntarily agreed to act as such, cannot delegate the exercise of their powers and duties. The rule is subject to the following exceptions:

  • if the instrument establishing the trust specifically authorises delegation;

  • if delegation is permitted by all the beneficiaries (for this exception to apply, all the beneficiaries must be both mentally capable and at least eighteen years old);

  • if delegation is permitted under section 25 of the Trustee Act 1925 or section 3(3) of the Enduring Powers of Attorney Act 1985.

7.     Following criticism of section 3(3) the Law Commission was asked to consider the operation of the present law. It issued a consultation paper The Law of Trusts: Delegation by Individual Trustees CP No 118 in 1991. The response to the paper supported the Commission's provisional conclusion that section 3(3) was inappropriate for delegation by trustees in general, but that special provision should be made for co-owners of land who are trustees. In 1994 the Law Commission published its report The Law of Trusts: Delegation by Individual Trustees Law Com No 220. In the report, the Law Commission concluded that in relation to delegation by individual trustees generally the conditions imposed by section 25 of the Trustee Act 1925 were, subject to certain minor changes, appropriate but that section 3(3) was inappropriate. The Law Commission also concluded that some relaxation of the rules, designed to address the needs of beneficial co-owners of land, was justified.

THE BILL

8.     The Bill has thirteen clauses and one schedule which sets out the legislation that the Bill will repeal. It relates only to England and Wales.

COMMENTARY ON CLAUSES

Clause 1 creates a new statutory exception to the general rule that a trustee must exercise in person the functions vested in him or her as a trustee. The effect of the exception is that where a power of attorney authorises a donee to act on behalf of the donor in relation to property of the relevant kind, the donee will not be prevented from acting by the rule that the donor must exercise trustee functions in person.

The provision will be of particular benefit to co-owners of land. First, it will enable co-owners, who are essentially trustees for themselves, to delegate without having to comply with the restrictions which apply where trustees hold land only for third parties. The need for this special rule for co-owners of land arises because the 1925 property legislation requires land owned by more than one person to be held on trust. The result is that co-owners of land are, whether they appreciate it or not, trustees of a freehold or leasehold estate in land irrespective of whether they hold the land for themselves or other people. Secondly, the provision will enable a co-owner of land to make effective provision for the disposal of the co-owned land if he or she becomes mentally incapable. This is necessary because section 3(3) of the Enduring Powers of Attorney Act 1985 is to be repealed (clause 4). Finally, the provision will ensure that the donee is able to deal with the proceeds of sale and income from the land as well as the land itself. Without this additional scope the donee of a power of attorney could dispose of land under clause 1 but be unable to deal with the proceeds of sale.

Clause 1(1) provides that, where the donee of a power of attorney would only be prevented from doing an act because doing it would involve the exercise of a function of the donor as a trustee, the donee may nevertheless do that act if:

  • the act relates to land (as defined in clause 11(1)), the capital proceeds of a conveyance (as defined in clause 1 (2)) of land, or income from land; and

  • at the time the act is done, the donor has a beneficial interest of any size or nature in the land, proceeds or income to which the act relates.

The person creating the trust or the donor may, however, exclude or restrict this provision in the document creating the trust or the power of attorney (as the case may be) (clause 1(3) and (5)).

Clause 1(2) defines land and the reference to trustee function of the donor for the purpose of clause 1. The definitions are set out in the glossary.

Clause 1(3) provides that the terms of the deed creating a power of attorney may limit or exclude delegation under this clause. A donor is therefore not compelled to allow the donee to exercise a function by virtue of clause 1.

Clause 1(4) addresses the issue of liability. It makes clear that although a trustee is not liable for permitting a delegate to act under subsection (1), a trustee is liable for what a delegate does or fails to do. Subsection (4) is subject to subsection (5).

Clause 1(5) provides that a person creating a trust may limit or exclude the effect of subsections (1) and (4) by making express provision in the document creating the trust. There is a similar provision in relation to section 25 of the Trustee Act 1925 (Trustee Act 1925 69(2)).

Clause 1(6) replicates in relation to the exercise of trustee functions under subsection (1) the general effect of section 25(7) of the Trustee Act 1925 in relation to delegation under that section. It enables the bank or company in whose books shares and stocks are registered to ignore the notice of the trust which it would otherwise receive when dealing with a donee acting under clause 1(1): for example where the donee uses the proceeds of sale of land to acquire stock from a company. This provision is necessary because a company registered in England and Wales is prohibited from entering notice of any trust on its register of members (Companies Act 1985 s 360).

Clause 1(7) addresses a particular problem arising from the operation of the doctrine of conversion. It provides that where that doctrine deems a trustee of land to have an interest in the proceeds of sale of the land rather than the land itself, the interest shall be treated for the purposes of clauses 1 and 2 as being an interest in the land. The doctrine of conversion in relation to land held on trust for sale was largely abolished by section 3(1) of the Trusts of Land and Appointment of Trustees Act 1996. However, the doctrine still applies to trusts created by wills where the testator died before 1 January 1997. Subsection (7) avoids any arguments as to whether the donor has an interest in the land or the proceeds of sale where the doctrine still applies.

Clause 1(8) did not appear in the draft Bill attached to the Law Commission's Report. The subsection makes it clear that clause 1 will only take effect where a donee of a power of attorney is not otherwise authorised to exercise trustee functions. See also clause 4(6).

Clause 1(9) prevents the new provision from applying to powers of attorney granted before the Bill comes into force.

Clause 2 supports clause 1. A person dealing with a donee under clause 1 has to know whether the donor has a beneficial interest in the relevant property (clause 1(1)). This could be left to investigation. However, investigation of title to beneficial interests is notoriously complicated. Clause 2 simplifies the transaction by providing a mechanism on which the person dealing with the donee can rely. The result is that a purchaser, whose title depends upon a donee of a power of attorney having the right to exercise a trustee function by virtue of clause 1(1), can rely on a written statement by the donee that, at the time that he or she exercised the trustee function, the donor had a beneficial interest in the relevant property.

Clause 2(1) states that clause 2 applies to a purchaser whose interest depends on clause 1 applying to a particular power of attorney.

Clause 2(2) and 2(3) provides that where clause 2 applies, an "appropriate statement" (as defined in subsection (3)) is, in favour of a purchaser, conclusive evidence that the donor had the necessary beneficial interest in the land, capital proceeds of a conveyance of land or income from land (as the case may be) at the time the donee exercised the trustee function by virtue of clause 1(1). Such evidence may be displaced by fraud or inaccuracy on the face of the statement.

    * An "appropriate statement" is a signed statement made by the donee that the donor has a beneficial interest in the property at the time that the donee exercises the trustee function by virtue of clause 1. The statement must be made by the donee during the period of three months that begins with the day that the trustee function is exercised under clause 1.

Clause 2(4) provides that a donee who makes a false statement is liable to the penalties which apply on making a false statutory declaration under section 5 of the Perjury Act 1911: a penalty on summary conviction of imprisonment for up to six months and/or a fine not exceeding £5,000; on indictment, the penalty would be imprisonment for up to two years and/or an unlimited fine.

Clause 3 provides that a donee of a general power of attorney in the form prescribed by section 10 of the Powers of Attorney Act 1971 may by virtue of clause 1(1) exercise the trustee functions of the donor in relation to relevant property. To this extent, the clause reverses the effect of Walia v. Michael Naughton Ltd [1985] 1 WLR 1115 (see note to clause 4). The relevant extracts from the 1971 Act showing the amendments to be effected by the Bill are set out in Annex A.

Clause 4 repeals section 3(3) of the Enduring Powers of Attorney Act 1985 subject to various transitional provisions.

    Section 3(3) provides that "Subject to any conditions or restrictions contained in the instrument, an attorney under an enduring power, whether general or limited, may (without obtaining any consent) execute or exercise all or any of the trusts, powers or discretions vested in the donor as trustee and may (without the concurrence of any other person) give valid receipt for capital or other money paid."

This provision was introduced late in the passage of the Bill which became the Enduring Powers of Attorney Act 1985. It was intended to stop the combination of clause 2(8) of the then Bill (a power of attorney under Trustee Act 1925 s 25 cannot be an enduring power) and the effect of the decision in Walia v Michael Naughton Limited [1985] 1 WLR 1115 from reducing the efficacy of the enduring powers of attorney scheme by preventing an attorney under an enduring power from disposing of any of the donor's property held on trust. In that case it was held that a power of attorney granted under section 10 of the Powers of Attorney Act 1971 was not appropriate to entitle the donee to execute a transfer of the legal estate in co-owned land, because the transferor, whether or not purporting to convey as beneficial owner, was exercising the function of a trustee. Section 3(3) may however have gone much further than was necessary to achieve the desired result and may have the much wider, and undesirable, effect of delegating all the donor's functions as a trustee whether or not he or she owns the property in question.

The repeal implements the policy that trustees who hold property only for third parties should only be able to delegate their trustee functions by statute subject to the safeguards imposed by section 25 of the Trustee Act 1925 (see clause 5). The repeal will bring to an end the existence of the inconsistent but overlapping regimes for delegation by individual trustees under section 25 of the Trustee Act 1925 and section 3(3) of the Enduring Powers of Attorney Act 1985. The transitional provisions are necessary because it is likely that there are in existence enduring powers of attorney in relation to which the donor is no longer mentally capable of making new provision for the delegation of trustee functions.

Clause 4(1) provides that the repeal of section 3(3) applies, without transitional provisions, to all enduring powers of attorney created after the Bill comes into force.

Clause 4(2) - (4) provides that, for enduring powers in existence when the Bill comes into force, the repeal takes effect one year after the Bill comes into force unless the enduring power is registered pursuant to an application for registration made before or within that year, in which case, section 3(3) continues to apply to it until the registration is cancelled. The period of a year will enable donors of enduring powers who are mentally capable to make new arrangements, whilst the exception will preserve the effect of delegations where the donor is no longer capable of delegating his or her functions. In cases where such applications are unsuccessful section 3(3) continues to apply while the application is pending until final refusal (as defined in clause 4(5)). Where section 3(3) ceases to apply, clause 1 may take effect in relation to the power (see clause 4(6)).

The expressions 'registration'; 'registered' and 'cancelled' are defined by reference to the 1985 Act. Under that Act, if the donee of an enduring power has reason to believe that the donor is or is becoming mentally incapable, the donee must apply to the Court of Protection for registration of the instrument creating the power (Enduring Power of Attorney Act 1985 s 4). On the donor becoming mentally incapable, the donee may not, except in certain limited circumstances, exercise the enduring power of attorney (Enduring Powers of Attorney Act 1985 s 1). On registration, the donee may exercise the power of attorney and a revocation of the power by the donor is only valid if confirmed by the Court of Protection (Enduring Powers of Attorney Act 1985 ss 1(1), 7 and 8(3)). The circumstances in which the Court of Protection can cancel a registration are set out in section 8(4) of the 1985 Act. They include confirmation by the Court of Protection of a revocation by the donor.

Clause 4(5) provides that an application is deemed to be "finally refused" when the applicant has withdrawn or abandoned the application or the right to appeal has been exhausted.

Clause 4(6) did not appear in the Bill annexed to the Law Commission Report. The Law Commission had proposed that on section 3(3) ceasing to have effect, an enduring power made before the Bill came into force would no longer have been effective to delegate trustee functions. Subsection (6) provides that on section 3(3) ceasing to apply, clause 1 may take effect in relation to an enduring power (see also clause 1(8)). Thus, where the donor of an enduring power does not make a new delegation in the one year transitional period, the enduring power may still be effective in relation to property falling within clause 1. Without this provision, all donors of enduring powers created before the Bill comes into force would have to grant new enduring powers to delegate trustee functions after section 3(3) ceases to apply.

Clause 5 amends section 25 of the Trustee Act 1925 in relation to powers of attorney granted after the Bill comes into force. Section 25 allows a trustee to delegate by power of attorney for a period of up to twelve months the exercise of the trusts, powers and discretions (i.e. functions) vested in him or her as trustee. This power to delegate is, however, subject to various safeguards intended to protect the interests of beneficiaries from excessive delegation. In brief, these are that the trustee may not delegate to a sole co-trustee (unless a trust corporation); must give notice of each appointment to specified persons; and remains liable for the acts and omissions of the attorney. The powers conferred by section 25 may be excluded or restricted by the document, if any, creating the trust (Trustee Act 1925 s 69(2)). The text of section 25 (showing the changes that would be effected by the Bill) is set out at Annex B.

Clause 5(1) provides that the amended section 25 does not apply to powers of attorney granted before the Bill comes into force.

Clauses 5(2) and (3) preserve the current twelve month time limit imposed by section 25(1) but clarify its effect. The result is that, subject to that maximum, a power of attorney can define the period for which it has effect. If nothing is said, the power is to apply for twelve months from the date of its execution by the donor.

Clause 5(4) removes the prohibition on a sole co-trustee being the donee of a power of attorney granted under section 25. This prohibition is ineffective for two reasons. First, it does not apply if there are more than two trustees all except one of whom delegates to one co-trustee. Second, it does not take account of the possibility of delegation by several trustees to one attorney. The objective of securing the involvement at the relevant time of at least two persons can be better secured by other means (see clause 7).

Clause 5(5) repeals section 25(3) (instrument creating a power of attorney to be attested by at least one witness). Subsection (3) has been superseded by section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989. Section 1(3) specifies that an instrument is only validly executed as a deed if it is signed by the person making the deed either in the presence of a witness who attests the signature or at his or her direction and in his or her presence and the presence of two witnesses who each attest the signature; and, in either case, it is delivered as a deed by him or her or a person authorised to do so on his or her behalf. No special provision for executing powers of attorney under section 25 is therefore required.

Clause 5(6) inserts two new subsections into section 25. Taken together these new subsections provide a new prescribed form of power of attorney which may be used by a single trustee wishing to delegate all of his or her trustee functions in relation to a single trust to a single attorney. This new form is similar to that created by section 10 of the Powers of Attorney Act 1971 which cannot be used by trustees but is widely used generally. A power of attorney differing in immaterial respects only will have the same effect as a power in the prescribed form.

Clause 6 repeals section 2(8) of the Enduring Powers of Attorney Act 1985 (which provided that a power of attorney granted under section 25 could not be an enduring power). The repeal allows an enduring power of attorney to be used to delegate trustee functions under section 25 of the Trustee Act 1925 after the Bill comes into force. The requirements of section 25 will apply.

Clause 7 specifies the circumstances when a person acting alone cannot satisfy a statutory requirement that two trustees are to receive trust money (the "two trustee rules"). These requirements are that:

    (a) capital monies arising from land must be paid to, or at the direction of, at least two trustees (Settled Land Act 1925, ss. 18(1)(c), 94(1); Law of Property Act 1925, s27 (2));

    (b) a valid receipt for such capital monies must be given otherwise than by a sole trustee (Trustee Act 1925, s.14(2)); and

    (c) a conveyance or deed must be made by at least two trustees to overreach any powers or interests affecting a legal estate in land (Law of Property Act 1925, s.2(1)(ii)).

The clause is intended to strengthen and clarify the operation of the "two trustee rules" by making it clear that so long as there are at least two trustees, the rules could be satisfied either by two people acting in different capacities or by two people acting jointly in the same capacity but not by one person acting in two capacities. For example, where A and B are the only trustees: if A and B each appoint X as attorney, X (acting alone) would not satisfy the two-trustee rules. However, if A appointed X as his attorney and B appointed Y as his, X and Y could act together and satisfy the requirement. Similarly, if A appointed X and Y as his joint attorneys and B appointed X and Y as his joint attorneys, X and Y can satisfy the requirement.

Clause 7(3) provides that clause 7 takes effect in relation to all powers of attorney whenever created. However, it does not prevent an attorney under an enduring power to which section 3(3) still applies (see clause 4) from acting pursuant to that section.

Clause 8 inserts four new subsections in section 36 of the Trustee Act 1925 (power of appointing new or additional trustees). The new subsections give the donee of an enduring power of attorney created after the commencement of the Act a new but limited power of appointment of new trustees in certain circumstances. The new power is necessary to prevent the strengthened "two trustee rules" (clause 7) from frustrating the new power for an attorney under an enduring power to exercise the trustee functions of the donor (clause 1). For example, A holds land for himself and B. A appoints X as his attorney under an enduring power. A loses mental capacity and the power is registered. X wants to sell the land but cannot satisfy the "two trustee rules" unless a new trustee is appointed.

Clause 8(1) inserts subsections 36(6A) - (6D) into section 36 of the Trustee Act 1925.

  • Subsection (6A) provides that a person ('the attorney') who satisfies subsection (6B) may appoint a new trustee under section 36(6)(b) if the attorney is either a trustee and an attorney under a registered enduring power of attorney (defined in subsection (6C)) for all the other trustees (to a maximum of two) or an attorney for all the trustees (to a maximum of three). The maximum of three is specified because section 36(6) cannot be used to increase the number of trustees beyond four.

  • Subsection (6B) is satisfied if the attorney intends to exercise a trustee function in relation to land, capital proceeds of a conveyance of land or income from land under clause 1(1), section 25 of the Trustee Act 1925 or the instrument creating the trust.

  • Subsection (6C) defines a 'registered power' as an enduring power of attorney registered under section 6 of the Enduring Powers of Attorney Act 1985 (see the note to clause 4(3) and 4(4) as to when a duty to register arises).

  • Subsection (6D) provides that the power in subsection (6A) may be excluded or limited in the document creating the power of attorney or the trust (as the case may be).

Clause 8(2) provides that the power to appoint a new trustee does not apply to an attorney appointed by a power granted before the commencement of the Bill.

Clause 9 inserts a new subsection into section 22 of the Law of Property Act 1925. Section 22(2) provides that if land subject to a trust of land is vested, solely or jointly, in a trustee, who is incapable by reason of mental disorder of exercising his or her functions as a trustee, the trustee shall be discharged before the legal estate is dealt with. This provision might prevent an attorney for an incapable trustee under a registered enduring power from dealing with the legal estate and thereby defeat the policy underlying the Enduring Powers of Attorney Act 1985 and clause 1. The new section 22(3) provides that no discharge is necessary if there is an attorney under an enduring power (as defined in Enduring Powers of Attorney Act 1985 s 2) entitled to act for the incapable trustee. The new subsection (3) applies whenever the enduring power was created.

Clause 10 creates a general rule of interpretation in relation to the extent of the authority conferred by a power of attorney in relation to land. The new rule will provide that in powers of attorney created after the commencement of the Bill, a reference to land will, subject to any contrary intention in the power of attorney, include a reference to all the interests of the donor of the power of attorney in the land at the time that the donee acts. This new provision will prevent the technical distinctions between legal and equitable interests in land frustrating the intentions of donors of powers of attorney who may not appreciate the legal niceties. For example, A and B are a married couple who own their own house. In creating a power of attorney A may refer to "my house" even if it is jointly owned, but even if he says "our house" he is unlikely to make it clear whether he is referring to his legal interest, which he holds as trustee, or his equitable interest of which he is the beneficial owner.

Clause 10(1) provides that a reference to land (as defined in clause 11(1)) in a power of attorney includes a reference to every estate and interest (whether legal or equitable) which the donor has in that land for the time being.

Clause 10(2) provides that the donor of a power of attorney may exclude or restrict the effect of subsection (1) by expressing a contrary intention in the power.

Clause 10(3) limits the rule of interpretation to powers of attorney granted after the commencement of the Bill.

Clause 11 defines 'land' and 'enduring power' for the purposes of the Bill. The definitions are set out in the glossary.

 
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