Do not Trust a Trustee………….. (Without Authorization)

The question which arises when contracting with a trust is whether or not the trustee you are contracting with has the necessary authority to enter into a contract and bind the trust as an entity to the contract.

Firstly, one must briefly consider the nature of a trust to understand the legal implications of dealing with a trust. A trust can be defined as a legal institution in which a person, namely a trustee, holds and administers property separately from his own property for the benefit of another person. A trust is therefore created by a founder through a contract for the benefit of a third party who on the acceptance of the benefit acquires certain rights. In South African law we distinguish between two types of trusts, namely a trust set up by a living founder, legally referred to as an inter vivos trust, and a trust that is set up by a deceased person in his will, legally referred to as a mortis causa trust. 

It is common practice for a trustee of a trust to enter into a contract with a third party on behalf of its trust. It’s important to note that PRIOR WRITTEN authorization in the form of a resolution of all or in the case of some trusts, a majority of trustees is required before entering into contracts on behalf of a trust. If there is no prior written authority the contract will be void and cannot be ratified.. 

A void contract cannot be rectified by ratification, this was confirmed by our Supreme Court of Appeal in the case of Thorpe and Others v Trittenwein and Another 2007 (2) SA 172 (SCA).In this case one trustee (who was also the founder and a beneficiary of a trust) signed a sale agreement for the purchase of land without the prior written authority of the other trustees. The other trustees subsequently ratified the first trustee’s act but the Court held that this was not possible and the seller was free to sell to someone else.

The trust deed is vitally important as it provides for the appointment and powers of the trustees to act under the trust. If a trust deed for example provides a trustee with the power to sell trust property, this does not automatically include the authority to rent the property to third parties, unless the trust deed also makes provision for such powers.

Accordingly, when contracting with a trust it is important to have insight into the contents of the trust deed. The trust deed may contain provisions regarding which trustees may represent the trust and whether all of the trustees’ consent is necessary for the conclusion of a contract and if not, what authorisation is then required from the other trustees. 

It is clear in our law that, unless the trust deed specifically provides otherwise, trustees must act jointly when dealing with third parties if they are to validly bind the trust estate. Therefore a third party dealing with a trust should as a rule of thumb always assume that the contractual powers of the trustees have to be exercised jointly by all the trustees unless the trust deed specifies otherwise.

A recent Supreme Court of Appeal (SCA) judgment has again raised warnings about the implications of not complying with statutory requirements when buying and selling immovable property, as well as not ensuring that important procedures are followed when one of the contracting parties is a trust.

The assets and liabilities constituting the trust vest in the trustees and it is they who administer them. They are not the agents of the trust, nor for that matter of the beneficiaries. 

Trusts are registered with the Master of the High Court in terms of the Trust Property Control Act, 1988. When a trust is first registered, and subsequently when there are changes to the trustees, the Master issues letters of authority confirming the identity of the current trustees and the Trust Act provides that trustees may only act if authorized by letters of authority.

It is quite common for a trust to acquire and own immovable property. If you are dealing with a trust or if you are a trustee of a trust, you should be very careful to ensure that you are concluding a valid agreement. It is important to remember that:

  • A trust is not a Partnership and should not be treated as such;
  • The trustees are not the agents of the trust or beneficiaries;
  • The trustees must act jointly;
  • The trust deed must authorize the proposed transaction.

Third parties considering contracting with a trust should therefore call for:

  • The latest Letters of Authority for the trust to confirm who the current trustees are;
  • A resolution of trustees dated before the date of the transaction authorizing the transaction and the trustee who will sign the contract on behalf of the trust;
  • The trust deed to confirm that the trust deed authorizes the proposed transaction.

Furthermore, if the trust needs to finance such acquisition through a loan secured by a bond registered over the property, the trustees must also be authorized to mortgage the property being acquired. The trust deed should deal with how decisions of trustees are taken and usually provides that any sale or purchase of an important asset such as a property must be sanctioned by at least a majority of trustees, sometimes with approval of all trustees.

Important legislation governing the sale of immovable property includes the Alienation of Land Act, 1981. This provides that any property sale must be in writing and signed by the parties, and if the parties are represented by agents, the agents must also act on written authority. The Alienation Act provides that if these important formalities are not complied with, the sale is of no force and effect, and hence void.

The above issues were the subject of the Supreme Court of Appeal case in the matter of Goldex 16 (Pty) Limited vs Capper NO & others. A trust purchased property from Goldex, one of two trustees signed the sale agreement without a resolution of the trust, and hence approval of the second trustee. The sale agreement also contained a warranty to the effect that the signatory of the purchaser was duly authorized to enter into the agreement on behalf of the trust, that all conditions were complied with to make the agreement binding on the trust, and that the trust would duly comply with all obligations under the agreement. 

The trust failed to comply with its obligations and Goldex instituted action against the trust for payment of the purchase price and against trustee in his personal capacity. Capex abandoned its action against the trustees conceding that that the alleged sale had not complied with the Alienation Act, and was therefore unenforceable. However the proceedings continued against the trustee in his personal capacity. 

The argument was that the claim is not one for specific performance of the invalid sale, but flows from the breach of the warranty when that sale could not be enforced.  The court held that what Goldex was essentially seeking is specific performance of a void and invalid contract against the person who signed that contract but was not a party to it – this on the basis that if he’d had the authority to sign, which he had not, the property would have been sold to another. This argument was firmly rejected by the court which was quite scathing about Goldex appealing the judgment of the High Court to the SCA.

Importantly, the judge delivering the judgment stated that while he was satisfied that theoretically the trustee could be held liable to Goldex for damages flowing from his breach of warranty,  no claim for damages was formulated in the Goldex claim and, most importantly, no evidence relevant to the quantum of damages was led.

This case emphasizes the need to ensure compliance with legal formalities when concluding property sale agreements, and in particular, when contracting with a trust, to ensure that the transaction is properly authorized by the trustees, prior to conclusion of a transaction. Trustees are also warned that they risk a damages claim against them if they do not follow proper procedure provided for in the trust deed and other legislation including the Trust Act and Alienation Act. Seeking proper legal advice prior to concluding important transactions of this nature will avoid potential disastrous consequences.

What then are the consequences of a third party entering into a contract with a trustee who is not authorised to act on behalf of the trust?

It has been suggested that in some instances a third party could still hold the trust bound to the terms of the agreement, notwithstanding the fact that the trustee was not authorised to represent the trust or conclude an agreement to bind the trust, if the third party can show that he was falsely misled to his detriment into a contract with an unauthorised trustee. The applicable remedy for the third party in that instance may be estoppel, unless the third party was aware of the contents of the trust deed and that it did not empower the trustees to delegate their powers to one of them, in which event the third party would not be able to rely on estoppel.

However, as a trust deed is a public document and accessible to the public, it is a far safer approach to request the other contracting party for a copy of the trust deed and authorising resolution providing the necessary authority. Additionally, obtaining a copy from the relevant Master’s office is also a possibility, although not necessarily an easy exercise. Once obtained, these need to be scrutinized to ensure that the trustee representing the trust has the necessary authority and that the trust deed makes provision for the type of agreement that is being entered into. 

One should also tread carefully if the trust deed allows for a trustee to be authorised, but that authorisation has not been given yet, even though verbally confirmed to be present or “will be provided” by the representing trustee. Our courts have held that in some cases an agreement, depending on the underlying requirements for the conclusion of a specific type of agreement, may be void in totality even though all of the trustees after the fact consented to the conclusion of the agreement.

In conclusion, it remains prudent to be cautious when contracting with a trust. Firstly, always request the third party for a copy of the trust deed and verify that the trustees who purport to represent the trust are indeed representatives of the trust. Secondly, you should have insight into the trust deed to establish whether the trust may conclude the type of agreement it intends to conclude. Thirdly, should there be more than one trustee, they must act jointly if the trust is to be held bound by the terms of the agreement unless the trust deed indicates otherwise. Finally, should a trustee indicate that he is authorised to act on behalf of all of the trustees, then a resolution by all the trustees to that effect and signed by all of the trustees must be provided together with clear provision in the trust deed that allows for such authorisation.  

To assist in ensuring that your transaction is successful and enforceable it is important that you request the assistance of a legal advisor to scrutinize the provided information and advise you regarding possible concerns in relation to the transaction and the authority of the purchaser to effectively bind the trust in your transaction.

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