Analysis
The claimants were the corporate trustees of two family trusts established respectively by a deed of variation relating to the will of Oliver Cutts (the 1997 trust), and by the will of Susan Cutts (the will trust). The beneficiaries of these trusts were Susan’s children, grandchildren and remoter issue who were living on or born before specified dates.
The primary asset of the trusts was Folds Farm, a farm in the New Forest in Hampshire comprising various buildings and farmland totalling almost 340 acres. The majority of the farm was within the will trust, while the 1997 trust comprised two cottages and an adjoining paddock.
Both trusts contained a power of appointment, allowing the claimants to appoint or apply trust capital to or for the benefit of any one or more of the beneficiaries to the exclusion of the others in their absolute discretion.
The will trust was supplemented by a letter of wishes from Susan Cutts, which gave the claimants extensive guidance on the approach which they should take in managing the trust. It averred that it was Susan’s wish that the farm was not sold unless absolutely necessary, and that retaining it for the future generations of the Cutts family required that it be run as a going concern.
It noted that Susan’s son Alister (the first defendant) had used Folds Farm as a base for his commercial contracting business, without paying rent during Susan’s lifetime, and that the claimants should enter into discussions with the first defendant to the intent that he should pay a proper commercial rent, in order to contribute fairly to the trust income, but also that Susan wished for the first defendant to be able to operate his business in a similar manner to that in which he had done prior to her death. However, in the event that the first defendant refused to pay a fair rent, it specified that he should be asked to vacate Folds Farm and should not receive any benefit from anything under Susan’s will.
It stated that the claimants should assist Susan’s daughter Charlotte (the third defendant) in her ambition to buy her property, although it recognised that such help may need to be limited and that the desire to assist the third defendant should not detract from the primary aim of retaining Folds Farm within the family. It also noted that Susan’s daughter Victoria (the second defendant) had been living in one of the properties subject to the trusts and was in significant arrears of rent, stating that she must be asked to make credible proposals as to how these would be paid off, and in the absence of such proposals be asked to leave the farm.
Finally, the letter of wishes stated that if Susan did not own Folds Farm at the date of her death, then the estate should be split as to 80% equally between her children and as to the remaining 20% equally between her grandchildren, and acknowledged that the letter of wishes could not fetter the trustees’ discretion.
The claimants sought the court’s approval or ‘blessing’ of their decision to appoint the farm to the first defendant in return for a payment of £4.2m (notwithstanding advice from Savills, who valued it at £6.3m), together with an overage provision requiring the first defendant to pay the claimants 10% of the gross proceeds of selling any part of the farm, the first defendant accepting a holdover of capital gains tax (CGT) that would otherwise be due from the claimants on a transfer of the farm and his agreement to certain other restrictions as set out in heads of terms earlier supplied to him.
All of the parties agreed that the claimants had the power to do what they had decided to do and had made their decision, subject only to receiving the court’s approval, but had not thereby surrendered their discretion to the court. Nonetheless they sought approval for their decision on the basis of the principles in Public Trustee v Cooper [2001], ie that it was of such significance and importance that it was appropriate to seek approval.
Nonetheless, the second and third defendants and another of Susan’s daughters, Cecilia (the fourth defendant), all opposed the proposed transaction, claiming that it was not one which a reasonable body of trustees could have arrived at, and further that it was vitiated by a conflict of interest.
The debts of the trusts were greater than £400,000, while the value of their cash assets was only approximately £12,000. The claimants could only pay this debt by selling at least part of the farm. There was furthermore no money in the will trust that could be used to improve the farm or to make significant capital provision for any of the beneficiaries. Although the trust assets had significant value, they generated comparatively modest income.
At one point the claimants had written to the children, setting out the debts and liabilities that needed to be paid, and informing the children that they had decided to sell part of the farm in order to do so. The children unanimously opposed this proposal. It was in that context that the claimants eventually came to propose the sale of the farm to the first defendant.
The claimants stated the benefits of the proposed transaction to be that:
- (a) it would greatly increase the likelihood of Folds Farm remaining in the ownership of a member of the family;
- (b) it would place Folds Farm in the ownership of someone who had the desire and the means to invest properly in its future, which the claimants lacked the resources to do;
- (c) it would give the claimants a significant cash fund they could use to provide much more meaningful and prompt benefit to the children, and also generate funds with which to help the grandchildren in due course; and
- (d) it would greatly reduce future administration expenses.
Among the many objections pursued by the second to fourth defendants were:
- (a) that the claimants’ evidence and disclosure were insufficient to discharge the burden of proof on them;
- (b) that the level of the ‘discount’ (ie the difference between the market value of the farm and the sum to be paid by the first defendant in return for its appointment to him) was so outside the boundaries of reasonableness that no reasonable body of trustees could have arrived at it;
- (c) that the claimants had failed to take into account various relevant matters including that the value of the farm could be increased by serving a notice to quit on the first defendant so that it would be valued with vacant possession;
- (d) that the claimants had taken into account various irrelevant matters including threats of legal action made by the first defendant after the claimants had communicated to him that they may not go ahead with the planned appointment to him of the farm, including that he would pursue claims in proprietary estoppel and/or compensation for the substantial investment he had made in the farm over the years in repairing, maintaining and improving it; and finally
- (e) that there was a ‘clear link’ on the evidence between the first defendant and the directors of the claimants, which demonstrated that there had been a conflict of interest which had impacted upon the decision.
Held:
The claimants’ decision would be approved.
The trusts were discretionary; none of the beneficiaries had an entitlement to either income or capital, as the claimants had unfettered discretion to make the decision to benefit a beneficiary. It was therefore unarguable that each of the children was entitled to an equal division of the assets of the trusts, or that the claimants could only properly exercise their discretion by treating the beneficiaries equally. The letter of wishes did not affect the position, both because it expressly acknowledged that it cannot fetter the trustees’ discretion, and also because the only circumstances in which it contemplated an equal division was if the farm was not in Susan’s estate at the date of her death, which had not come to pass.
As to the ‘discount’ complained of, the claimants were entitled to prefer the valuation on which they relied, from Savills, to the much higher valuation on which the other siblings relied, from Fox Grant, based on, among other things, Savills’ reputation; the fact that many valuations had been obtained and Savills’ was at the mid-point of these valuations, whereas the Fox Grant valuation was an outlier; and that even after the claimants provided Fox Grant’s report to Savills, Savills had not altered its valuation.
In determining that the ‘discount’ was acceptable the claimants had also taken into account that the first defendant’s position was that £4.2m was the most he was willing to pay; that forcing him to borrow too much might result in him having to sell the land, thereby defeating Susan’s intention that it be retained within the family; that the first defendant had invested in the farm in an amount of approximately £313,000; and that there would be a saving to the trusts through the appointment of the farm to the first defendant of estate agents and legal fees, estimated at about £130,000, which would have been incurred if the farm had been sold on the open market. These factors were properly taken into account and demonstrated that the ‘discount’ applied was not irrational.
The court also rejected the submission that the claimants were required to sell the farm on the open market in order to ascertain its true value. Such an open-market sale would have meant that the farm would (or might) no longer be retained for the benefit of any member of the Cutts family. More importantly, the claimants were not required rigidly to link, and did not link, the price to be paid by the first defendant to the open-market value of the farm.
The submission that the claimants should have served a notice to quit on the first defendant before they had decided what course to take, in order to allow the estimated value of the farm to be its value with vacant possession, was also rejected. If such a notice had taken effect, this would have deprived the trusts of its main income, and seriously damaged the farming business at the farm.
While it was complained that the claimants had improperly taken into account the various burdens and obligations which the first defendant would take on if the farm were transferred to him, including loan interest, CGT, the overage obligation under the proposed heads of terms, and stamp duty land tax, the claimants were entitled to have regard to this, and also to the need for the first defendant to invest (the claimants estimated about £300,000) in the farm in order to produce a sustainable income from it. By contrast, the capital sum of about £800,000 which the claimants envisaged appointing to each of the daughters would not require any expenditure on their part, nor would it be burdened with any financial obligations.
It was correct that the claimants had not disclosed all the written records of their decisions. However, the question for the court was merely whether the claimants had provided sufficient material upon which the court could act. The claimants had sufficiently explained their reasoning, and the factors taken into account by them. If and to the extent that the second to fourth defendants wished to challenge the accuracy and completeness of the material provided by the claimants in this regard, it would have been open to them to seek an order for disclosure at the directions hearings in the claim, but they had not done so.
While it had been submitted that it was unfair (and a relevant factor which the claimants failed to take into account) that the administrative costs of the appointment, including the costs of this claim, should fall onto the trusts, and not therefore on to the first defendant, that would not on its own justify refusing approval, and in any event, no order had yet been made as to the incidence of the costs; it might be appropriate for the court to make an order that the first defendant should bear a share of the costs of the claim.
As to the overage provisions, for the third and fourth defendants it had been submitted that the provisions featured in the heads of terms were insufficiently detailed to enable the court to decide whether the beneficiaries’ interests would be properly protected. While the court accepted that more detailed provisions would need to be drafted, the court’s function was not to micromanage the claimants but to approve the decision, and to leave to the claimants the details of implementing the decision. Therefore, the lack of precision of the proposed overage terms was not a reason for refusing to bless the claimants’ decision.
The second to fourth defendants also criticised the claimants for not making more extensive inquires into the first defendant’s financial resources and his ability to pay more than the £4.2m to which he had agreed. This criticism relied, in the view of the court, on the false assumption that the claimants were obliged to compel the first defendant to pay the most he could possibly afford. In truth, the claimants’ position was instead that, taking into account various factors, including those already addressed, the price they were asking of the first defendant was fair and reasonable. That position was a perfectly rational one.
As to the suggestion that the claimants were pressurised by the first defendant’s threats of legal action, the correspondence showed that the other siblings had made their own allegations of breach of trust. Both of the directors of the claimants who had given evidence said that they took no notice of any threats by any of the beneficiaries, and one director had said in his written evidence that the claimants had been advised that there was no proper basis on which the first defendant could have pursued claims based on proprietary estoppel, or for a declaration that he has a beneficial interest in the farm. In any event, the claimants had appropriately managed any conflict that such threats might have posed by seeking the court’s approval for the decision.
By contrast, the claimants had taken into account that the first defendant’s business had a strong case to argue that it had a tenancy protected by the Landlord and Tenant Act 1954 of a portion of the farm. However, the parties’ experts’ agreed position was that it was likely that the first defendant’s business enjoyed security of tenure and a right to extend the lease, and given that this was true, it was perfectly appropriate for the claimants to have regard to it; it formed part of the factual circumstances within which the decision was made and could not be considered irrelevant.
The allegations on which the suggestion of conflict of interest were based were inadequate to make out any such conflict. Although one of the directors had, in his capacity as a partner of Symonds & Sampson, advised the first defendant, he had also provided advice to all of the children as and when they needed it, and had set out specific occasions when he had provided help and advice (without charge) to the third and fourth defendants. None of this served to show a bias in the first defendant’s favour. There was also an episode which involved the first defendant letting one of the directors know that a stuffed pike that had previously belonged to the director’s father was coming up for sale at an auction, and bidding for it on the director’s behalf, after which the director reimbursed him and paid him an additional sum for the trouble of one of the first defendant’s assistants involved in this. Again, it was unarguable that this showed a level of closeness capable of affecting the trustee’s decision-making.
Also rejected as not showing any conflict of interest were the claimants’ decision to allow the first defendant to occupy the farm for commercial purposes, failure to treat the first defendant as stringently as the letter of wishes had requested, and failure to increase the price demanded for the farm following receipt of the Fox Grant valuation. The first defendant had been the only child seeking to occupy the farm for commercial purposes and hence the decision to allow him to do so showed no favouritism; the claimants had not shown any of the children the ‘tough love’ anticipated by the letter of wishes; and the failure to raise the price reflected the entirely proper range of factors which had already been addressed when considering the level of the ‘discount’.
JUDGMENT MASTER CLARK: [1] In this claim, trustees seek the court’s approval or ‘blessing’ of a decision (‘the Decision’) that is within their powers as trustees, but is of such significance and importance that they seek that approval. Parties [2] The claimants, Folds Farm Trustees Limited and Cutts Trustees Limited (‘the trustees’), are trustees of …Continue reading "Folds Farm Trustees Ltd & anr v Cutts & ors [2024] WTLR 503"