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DECEMBER 2014

Property owned by trust not immune
from claims by former spouses / de facto partners (Part 1)

It is generally understood that by holding property such as a house in a Trust a spouse or de facto partner will be prevented from subsequently being able to bring a successful claim in respect of that property in the event of separation. This is on the basis that the property concerned is not owned by the claimant’s spouse or partner, but rather was owned by the Trust. Whilst it is certainly correct that having property owned by a Trust can provide a considerable degree of protection, that protection is not absolute. Furthermore, the protection that might otherwise have been gained as a result of property being held in a Trust can be lost if the Trust is not managed properly. In a recent case, the Court of Appeal has confirmed that a former spouse could bring a claim for work that she had undertaken to a property even though that property was owned by a Trust.

The Facts

Ms M and Mr H commenced a de facto relationship in 2002. Two years later, they moved into a house under construction. The house was being constructed by a building company operated by Mr H. The property was owned by Mr H’s family trust.

Over the following years, the construction of the house was finished and the section landscaped. During this period, Ms M helped improve the property by undertaking painting and interior decorating, landscaping and similar tasks. Following the parties’ separation in 2010, Ms M brought a claim for a share of the property based on her contributions alleging that a constructive trust had arisen.

For present purposes, there are two types of trusts that are relevant. The first is an express trust which is where by agreement (whether orally or pursuant to a formal deed of trust) it is agreed that the property is held by the legal owner as trustee for the beneficiaries. Mr H’s family trust is an example of this. The second type of trust that is relevant in this case is a constructive trust. Such a trust arises where although there may be no express agreement that the property is held on trust, the Court nevertheless considers in the circumstances of the case the property should be treated as being held on trust.

In the context of relationship property matters, a constructive trust would ordinarily be imposed where the following requirements have been met:

  • There have been direct or indirect contributions to the property; and
  • There is an expectation of an interest in the property arising from the contributions; and
  • That such expectation is reasonable; and
  • That the property owner should be expected to surrender an interest in the property to the claimant.

The High Court Decision

As noted above, the property in question was not owned by Mr H personally, but by his family trust. Ms M nevertheless argued that in the circumstances her contributions gave rise to a constructive trust. The High Court found that all of the evidence to give rise to a constructive trust was necessary in terms of there being contributions giving rise to an expectation of an interest in the property but held that because the property was owned by Mr H’s family trust, that interest was not enforceable. The rationale for this is that while Mr H was aware of and acquiesced in Ms M’s contributions, the property was not owned by Mr H in his own right. Rather he was only one of two owners of the property (the other being the independent trustee of the trust who knew nothing of any contributions made by Ms M).

The Court of Appeal Decision

Ms M appealed to the Court of Appeal. The Court of Appeal held that there was no reason in principle why a constructive trust claim should not succeed in respect of a property owned by a trust if the grounds for a constructive trust claim were otherwise made out. Accordingly, the Court of Appeal allowed Ms M’s appeal.

In coming to its decision, the Court of Appeal was influenced significantly by the fact that the independent trustee, Mr H’s solicitor, was content to leave all matters relating to the construction of the dwelling on the property to Mr H. Therefore, the independent trustee allowed Mr H to bind the trustees to contracts relating to the construction of the house and implicitly accepted that the trust was liable to pay amounts owing under those contracts. As such, Mr H’s actions in relation to the construction of the house were treated as the actions of both trustees. The Court of Appeal held that in those circumstances, it would be unconscionable for the trustees to deny Ms M’s claim on the basis that the independent trustee had effectively allowed Mr H to permit Ms M to make contributions to the property and in doing so giving rise to an expectation on her part that those contributions would be recognised.

The Court of Appeal also observed that if that were not the case, the Trust would have been unjustly enriched as a result of Ms M’s contributions to the trust property.

Conclusions

The case demonstrates the potential pitfalls of all trustees not being fully involved in making decisions concerning trust property. In this instance, it resulted in the protection that having the property in a trust might otherwise have provided being lost. Independent trustees need to be fully involved in the management of trust assets and not leave such matters in the hands of the other trustees.

Aside from assuring that independent trustees are involved in all trust decisions, there are other steps that can be taken to minimise the chances of similar claims being successful. We therefore strongly recommend that clients who have properties in family trusts seek advice from us if the property is to be used as a relationship home, especially if their partner or spouse is to be undertaking any work or other improvements on the property.

Postscript

On 12 November 2014, the Supreme Court dismissed an application by the trustees for leave (permission) to appeal against the decision of the Court of Appeal on the grounds that the case was decided on its particular facts and the proposed appeal did not involve any issues of general or public importance (which are the criteria that need to be satisfied before the Supreme Court will grant leave to appeal).