Posted by: RM | July 24, 2009

Trusts, Default Provisions & Powers of Appointment

Rather fortuitously a case popped up in my Lawtel updates this week which coincides with my teaching of the sometimes obscure topic of trust powers. The case is Howell & Ors v Lees-Millais & Ors [2009] EWHC 1754 (Ch). The case concerns a family settlement which was established in 1968 (“the 1968 Settlement”) by Major Joicey of Blenkinsopp Hall in Northumberland. A substantial amount of real property which forms part of the Blenkinsopp estate (“the Estate”) was conveyed into the 1968 Settlement. This property had been enjoyed by the settlor and his predecessors for many years. Clause 3 of the 1968 Settlement created a power of appointment in the trustees and Clause 4 made gifts in default of any appointment made under the authority of Clause 3. The gifts in default of appointment under Clause 4 meant that the property the subject of the 1968 Settlement would be likely to become divisible, the result being that the Estate would undoubtedly be broken up.

In 1977 an appointment (“the 1977 Appointment”) under Clause 3 was duly exercised by deed. The 1977 Appointment provided, in the absence of any trust expressly created as described therein, for a series of gifts in default, each being to one person only (which would avoid the possibility of the Estate having to be broken up to share it amongst numerous parties) with successive gifts to another one person only. The material provision of the 1977 Appointment is as follows:

2. As from the date hereof the Trust Fund and the income thereof shall be held upon such trusts and with and subject to such powers and provisions (including discretionary trusts or powers vested in any person or persons) in favour of any one or more exclusive of the other or others of the children and remoter issue of the Settlor as the Trustees shall from time to time during the Trust Period (but during the life of the Settlor only with his consent in writing) by deed or deeds revocable or irrevocable appoint…

…In default of and subject to any such appointment the Trust Fund shall be held upon trust for the first or only son of Lucinda who shall attain the age of twenty five years during the Trust Period absolutely or if there is no such son of Lucinda then upon trust for the first or only daughter of Lucinda who shall attain the age of twenty five years during the Trust Period absolutely and if there is no such daughter of Lucinda then upon similar trusts for the first or only son or if there is no son for the first or only daughter of Sabina then for such son or daughter of Fiona or if there are no such sons or daughters then upon trust for such of Lucinda Sabina and Fiona as shall attain the age of twenty five years during the Trust Period absolutely and if more than one in equal shares but if none of them shall attain that age then upon trust for the survivor of the said daughters of the Settlor absolutely

The eldest son of Lucinda, Alexander Newall (the sixth defendant), will attain the age of twenty five in late October of this year. The question for the court was whether a gift in default to Alexander in accordance with the 1977 Appointment would render any overriding power to appoint impotent, thereby making a gift in default to Alexander absolute and indefeasible. In essence, the court was being asked whether a gift to Alexander in default of the trustees exercising their overriding power of appointment could subsequently be undone.

Sir John Lindsay, sitting as a High Court Judge, reviewed what little authority exists, none of which is precisely on point. He went to some lengths to make it clear that in such cases as these, context is vitally important. It was argued by the trustees that upon attaining the age of twenty five and in the absence of any earlier appointment, Alexander would acquire an indefeasible interest in the whole of the 1968 Settlement, the trustees retaining no power thereafter to revoke that default appointment and appoint elsewhere. Relying upon the dictum of Sir John Pennycuick V-C in Re Sharp’s Settlement Trusts [1973] 1 Ch 331, 338, where he stated

The word “absolute” in its ordinary use in legal language denotes complete beneficial ownership and dominion over property, and I should have thought it an entirely unnatural use of the word to apply it to an interest which can be destroyed at any time by the exercise of a power or the fulfilment of a condition with the consequence that the property must be retained by the trustees until the power or the condition is spent…

it was suggested that the use of the word “absolutely” in the default provision of the 1977 Appointment was indicative that the interest which anyone acquired under that default provision was to be indefeasible. However, for some of the defendants it was argued that in Re Sharp’s ST the Vice-Chanellor recognised the possibility of some contexts requiring a meaning other than that which he described as the natural one (see para [20]). Re Sharp’s ST was concerned with the proper interpretation of “absolutely” within section 31(2)(i)(b) of the Trustee Act 1925. The Vice-Chancellor had qualified his acceptance that the word “absolutely” should be given its natural meaning  by saying that it should be so “apart from [in] some larger context”.

In the present case it was noted that there was a possibility that some contexts would require a meaning to be attached to the word “absolutely” other than that which had been described in Re Sharp’s ST as being the natural one. Referring to a passage from Fearne, Contingent Remainders and Executory Devises, 10th ed (1844), vol 2, p30, Sir John Lindsay noted that the word “absolute” was considered there to have varying meanings, one of which when referring to “the quality of interest” means interest which comprises entire ownership and another which, when being used “with reference to the certainty of duration” of an interest, means indefeasible. It was also noted that the V-C’s reference to the word’s use “in ordinary use in legal language” was in the context of construing a statutory provision as to which the presumed intention of Parliament is relevant.

It was not submitted that Re Sharp’s ST was binding upon the court in this case and the court felt free to arrive at a different conclusion as to the proper interpretation of the word “absolute” should a “larger context” so require. It was argued for the defendants that the power contained in Clause 3 of the 1968 settlement was an overriding power, this power having been exercised in 1977 in the execution of the Deed of Appointment. However, the power exercised in 1977 was not expressed to be irrevocable, the power therein having been described as being exercisable “from time to time during the Trust Period…by deed or deeds revocable or irrevocable”. The Trust Period runs from the date of settlement for 80 years, the conventional period for a trust. Hence, at the date of this litigation there is still a considerable proportion of the trust period still left to run. It was further noted that there is no provision that the power shall not, in whole or in part, be thereafter exercisable if an interest under the trusts in default of appointment has become vested.

Most importantly, however, Sir John Lindsay identified that the default trusts of Clause 3 are exactly that – default trusts. They are in default of and subject to any valid appointment made by the trustees during the Trust Period. There is nothing which provides that any further appointment, subsequent to any vesting of trust property in default, should not take effect in relation to that particular property. It was concluded that the appointors should not be taken to have lost the power to make further appointments, even in the context of property which has vested under the exercise of powers authorised by Clause 3, unless the ability of the appointors to do so is excluded by express provision or necessary implication, neither of which was be found in the present case.

The result is that if the trustees do not make any appointment under the 1977 Appointment, in late October of this year Alexander Newall will acquire a vested interest in the property of the 1968 Settlement. Despite this, if the trustees consider it proper at some later date to make some alternative appointment, thereby defeating the interest which Alexander will acquire later this year, they may, apparently, freely do so.

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