this product is unavailable for purchase using a firm account, please log in with a personal account to make this purchase.

Unsettling repercussions

Cover Story

Cite as: Jan/Feb 2010 84(1/2) LIJ, p.30

Failure to comply with the Settled Land Act 1958 is a ticking time bomb, which may lead to a professional negligence claim and disinherited beneficiaries. 

By Simon Gannon

The Settled Land Act 1958 (Vic) (the Act) governs interests in land which are less than absolute.

A common settlement of land to which the Act applies is a life interest created by will. Life interests are likely to become more common as testators in second marriages make wills leaving a life interest in the family home to their current spouse and the remainder to the children of a previous marriage.

However, the Act is often ignored in drafting wills. Lack of compliance with the Act may lead to a professional negligence claim against a solicitor and deprive beneficiaries of their entitlements. This article aims to raise awareness of the Act by setting out practical considerations for practitioners as well as suggesting possible reforms.

Scenario

A testatrix knows her only son has a gambling problem but wishes to provide for him. By her will, she leaves her house to her son for his life and on his death to her three grandchildren in equal shares. Out of caution, she appoints several alternative executors, including a firm of solicitors.

Following the death of the testatrix all the executors renounce probate, having been persuaded to do so by the son. There is no executor of the will and an administrator must be appointed.

The son enlists a local solicitor to apply for letters of administration with the will annexed in his sole name. The solicitor unquestioningly does so. The deceased’s house is registered in the son’s name as administrator of the estate. The solicitor has sown the seeds of negligence and the future lies in the hands of the prodigal son.

The son decides his mother’s house is too small and sells it. He is able to do so because he is the registered proprietor as sole administrator of his mother’s estate. The son’s solicitor acts in the sale and conveyance and does not see anything amiss. The purchaser is not to know, nor needs to know, that the son holds the property for life only, subject to the interests of the deceased’s grandchildren as remaindermen.

The son purchases another house, which he registers in the joint names of his girlfriend and himself, without reference to his role as administrator of his mother’s estate. The purchase is achieved using the proceeds of sale of the mother’s house and a substantial mortgage. The son’s trusty solicitor acts again.

The mortgage is drawn down to feed the gambling habits of the prodigal son and his willing girlfriend. Eventually, due to gambling debts, the couple decide to sell and a contract is executed. At this point the remaindermen discover the sale and preceding transactions and their solicitor immediately lodges a caveat over the property.

The sale proceeds on the condition that the son’s solicitor holds the proceeds which, after discharge of the mortgage, are only a fraction of the value of the deceased mother’s property. The prodigal son and his girlfriend are penniless. The ultimate beneficiaries of the estate, the grandchildren, have lost their benefit in the estate. It will be for the son’s negligent solicitor to compensate the unfortunate grandchildren.

The Act and its practical implications

The Act has its origins in the English law of property and a desire by the landed aristocracy to keep land within the family. A Settled Land Act was introduced in England in 1882 and mirrored by Victoria in 1909.1 The 1958 Act is largely in the same terms. The purpose of these Acts was to give the tenant for life wide powers to deal with the land and to protect the interests of beneficiaries.2

The Act has been the subject of very little litigation. The most recent case in Victoria was Royal Melbourne Hospital & Ors v Equity Trustees Ltd & Ors,3 in which Bell AJA set out some of the history of the Act.

Section 8 of the Act defines what constitutes a settlement of land, being an interest in land which is limited or less than absolute created by deed, will or other instrument. In the scenario above, the mother’s life interest to the son created a settlement of land for the purposes of the Act.

A key requirement of the Act is that where life interests arise under a will, two trustees of settlement must be appointed unless a trustee company is the trustee of settlement: s30(3). Where there are no trustees of settlement, the Court4 has power to appoint them or to appoint new trustees on application by an interested person: s36.

The son in the scenario was obliged to appoint a second trustee of the settlement to act with him pursuant to s30(3) of the Act. The son’s solicitor was negligent in failing to advise him to do so. Until the son appointed a second trustee, he could not exercise any of the powers of a tenant for life under the Act without obtaining a court order: s20. The sale of the property by the son and the purchase of the further property were thus in breach of the powers of sale of a tenant for life contained in s38.

Part II of the Act regulates the manner in which settled land may be sold or let and the trustee’s powers in dealing with the land. In selling his mother’s house, the son was legally obliged to only deal with the settlement in accordance with the Act.

The Act prescribes the type of consideration which may be obtained for the sale and the trustee must obtain the best price or rent available. A tenant for life may purchase the settled land subject to the limitations of the settlement, notwithstanding that they are a trustee of it, but only with an order of the Court: s68(4). The solicitor in the scenario above completely ignored these requirements and those of the Act generally.

Section 71 of the Act empowers the tenant for life to raise money by mortgage, but only for limited purposes. These include making improvements authorised by the Act, partitioning the land or discharging incumbrances on the land. The son in the scenario did not comply with these provisions. The money raised by the mortgage was used entirely for his own purposes and was mingled with the mortgage funds to purchase the property.

Part III of the Act closely regulates what may be done with “capital money” arising under the Act, which is defined as “money arising under the powers and provisions of this Act . . . receivable for the trusts and purposes of the settlement . . . ”: s3 “Definitions”. The money may be used for investment in approved government securities, improvements to the land authorised by the Act or purchase of freehold or limited leasehold land: s73.

Any land acquired or exchanged using capital money arising under the Act is deemed to be settled land and subject to the original settlement: s82. The proceeds of sale of the mother’s house in the above scenario was capital money arising under the Act and subject to the settlement. Accordingly, the second property purchased also became “settled land” pursuant to s82 and was subject to the life interest. In other words, once land is settled within the meaning of the Act, any proceeds of sale or dealings with that land are subject to the same settlement.

Part IV of the Act, which did not arise in the above scenario, authorises improvements to the land using capital money or otherwise. In Victorian times, a great jurisprudence grew up surrounding the duties of trustees of settled land and what improvements were permissible.5 The Act permits only specific authorised improvements which are redolent of another age.6 The limitations on improvements to settled land may create practical difficulties in the modern day.

Practical considerations

In drawing a will containing a life interest, the choice of executor and trustee is of great importance. In light of the above discussion, it is advisable to appoint two independent executors and trustees. To do so will clearly separate the interests of the trustees and the beneficiaries and impress on the trustees their duty to act independently in the best interests of the beneficiaries. As the duties of the trustees will endure until the death of the tenant for life, it would be prudent to seek their consent before appointment.

While it is permissible for a life tenant to be one of the two trustees of the life tenancy, it would seem unwise to incorporate this into the drafting of a will. If one trustee of settlement were to resign, another trustee would need to be appointed. If this were not done (by omission or design), the settlement would be solely in the hands of the life tenant, giving rise to the above scenario.

Obviously the practitioner settling the will must consider the facts of each situation and there may be practical reasons for having the life tenant as one of the trustees, such as a simple, small and harmonious estate. However, the potential for conflict exists between the life tenant’s wishes and the views of the independent trustee. Disputes between executors or trustees can often be bitter and costly and should be avoided.7

A key distinction between the former Settled Land Act 1925 (UK) and the Victorian Act is that under the English Act any improper transaction concerning the settled land could be set aside as void under s13.8 No such provision exists in the Victorian Act. In the above scenario, the primary action would be against the son and his solicitor. In reality, the son has no assets, so it would be the solicitor’s insurer which would compensate the beneficiaries. Were there a similar provision to the English provision in the Victorian Act, the remedies would be quite different.

Lastly, a practical consideration touching on life interests. Provision of a mere life interest to a spouse may give rise to a claim for further provision under Part IV of the Administration and Probate Act 1958 (Vic). It is now recognised that a life interest is not adequate provision for the spouse of a long marriage.9

Proposed reform

Victorian Attorney-General Rob Hulls has announced a wholesale reform of the law of property in Victoria as part of the Justice Statement II.10 Hopefully the Act will be included in any such reform. The major question is whether life interests should remain as a legal institution. They have been abolished since 1997 in England, where no settlement of land can now be created.11 Instead, the trust for sale has become the dominant instrument for interests in property which are less than absolute.

There is much to be done to reform the current system if life tenancies are to remain. At present there is no obligation to repair or insure the property subject to the life interest. The remaindermen may be faced with a dilapidated property of diminished value at the end of the life tenancy. A well drawn life interest under the present system should include provisions for upkeep of the property, but a will drafter is not required to do so. There should be a positive obligation on a life tenant to insure and maintain the property.

The provisions in the Act concerning investment of capital money and permissible improvements to settled land hail from another age and are unduly restrictive. The beneficiaries of the settlement should be given better protection. A similar power to that in the English Act to set aside transactions in breach of the Act may achieve this.

Conclusion

The Settled Land Act 1958 is an arcane and often little known Act conceived in a time of landed gentry.12 It was designed to guard the interests of beneficiaries and to permit limited dealings with settled land.

Modern circumstances are likely to bring an increase in life interests where a second husband or wife wishes to provide for the spouse but also for their children of a prior relationship.

A working knowledge of the Act is essential for practitioners, in particular the requirement that two trustees of settlement be appointed and the provisions for dealing with settled land. A will appointing the life tenant as sole executor and trustee is problematic. There would be an obvious conflict between the interests of the life tenant and those of the remaindermen. At the very least, a further trustee must be appointed on the death of the testator.

The golden rule is to always appoint two trustees of settlement where a life interest is concerned. Should any questions arise during the terms of the life tenancy, they are thus more likely to be dealt with in accordance with the Act.

It may be that, as in England, life interests have no future place in our law. However, there may be some use in preserving this useful legal institution, subject to significant reform.

SIMON GANNON is a Victorian barrister practising in wills, property law, commercial law and trusts. He is a contributor to Butterworths’ Court Forms Precedents and Pleadings Victoria and Leo Cussen Institute’s Wills and Probate Bulletin Victoria.

1. Settled Land Act 1882 (UK); Settled Land Act 1909 (Vic).

2. See Megarry, Wade and Harpum, The Law of Real Property (6th edn), 2000, Sweet & Maxwell, p373. The term “remainderman” is customarily used. No gender-neutral term has replaced it.

3. [2007] VSCA 162 (22 August 2007), per Bell AJA at [245].

4. “Court” is defined by s3 as the Supreme Court or County Court.

5. For example, Gover, WH, Capital and Income as Between Life Tenant & Remainderman, 1901, Sweet & Maxwell.

6. For example, improvements to: “Houses for land bailiffs, woodmen, gamekeepers and other persons employed on the settled land . . . saw-mills, scutch-mills, water-wheels, engine-houses and kilns . . . sea-walls, river banks, dykes” etc. (Second Schedule of the Act).

7. See S Gannon, “When executors cannot agree”, Wills & Probate Bulletin (Leo Cussen Institute), issue 52, June 2008, p10.

8. Note 2 above, p395. In Weston v Henshaw [1950] Ch 510 improper mortgages procured by the life tenant were set aside under s18 such that the mortgagee lost the security. In Bevan v Johnston [1900] 2 EGLR 33 an oral lease by a tenant for life contrary to the Act was set aside.

9. See Boaden, Collins, Phillips and Sparke, Wills Probate and Administration Service Victoria, 2003, Butterworths, at [35,350].

10. Victorian Department of Justice, 2008.

11. Trusts of Lands and Appointment of Trustees Act 1996 (England and Wales) s2(1) and Land Registration Act 1997 (England and Wales).

12. Jane Austen, Pride and Prejudice. Mr Bennett’s estate was settled on the invidious Mr Collins as an estate tail.

Comments




Leave message



 
 Security code
 
LIV Social
Footer