Trusts — Trustees — Liabilities — Environmental Protection Act 1990 — Whether trustee entitled to lien over trust fund for future and contingent liabilities under 1990 Act — Whether trustee entitled to invest and vary investments — Appropriate directions
The claimant was the sole trustee of the will of the testator, who
died leaving his residuary estate, including land, on trust for his widow for
life with remainder to his children. Following the death of the life tenant,
the defendants became absolutely entitled to the residuary estate. The trustee
was concerned about the potential effect of the Environmental Protection Act
1990, which, when brought into force, would impose a new and far‑reaching
liability regime on owners of land and others for cleaning up contaminated
land. The trustee sought directions as to whether it had a lien over the trust
fund for liabilities, including future and contingent liabilities, in respect
of the testator’s land, and whether it had liberty to invest and vary
investments pursuant to the lien, to make a charge for acting as trustee, and
for other directions.
trustee over the trust fund extends to all the liabilities of the trustee as
such and includes liabilities under Part IIA of the Environmental Protection
Act 1990. In deciding how to invest the trust fund, the trustee was not
required to disregard its own position and interest by virtue of its lien; it
was entitled to take its own position and interest into account. However, it
would have to act fairly between the beneficiaries and its position. In
investing moneys, which the trustee held pursuant to the lien, it should have
the power conferred by the will. The trustee was not bound in any way, in
relation to its power to invest, to act on the wishes of the beneficiaries. The
trustee has a lien on the trust fund and the income arising from it for
liabilities properly incurred by it as trustee, and thus a right that has
priority over the rights of the beneficiaries. But the trustee should consider
the comments that the beneficiaries make, and take them into account to the
extent as appropriate.
The following cases are referred to in
this report.
Beddoe, Re
[1893] 1 Ch 547
Brockbank, Re;
Ward v Bates [1948] ChD 206; [1948] 1 All ER 287
Exhall Coal Co
Ltd, Re, ex parte Bleckley (1866) 35 Beav 449
Nestle v
National Westminster Bank plc unreported 29 June 1988, affirmed [1993] 1
WLR 1260; [1994] 1 All ER 118, CA
Pauling’s
Settlement Trusts, Re [1963] 1 All ER 857
Rylands v Fletcher
(1868) LR 3 HL 330
Stott v Milne
(1884) 25 ChD 710
Whiteley, Re;
Whiteley v Learoyd (1886) 33 ChD 347
This was an application by the claimant
trustee for directions relating to the management of a trust to which the
beneficiaries were the defendants.
Simon Taube (instructed by Herbert Smith) appeared for the
claimant; the defendants appeared in person and were not represented.
Giving judgment, ARDEN J
said: This is a trustee’s application for directions by the court under RSC
Ord
died leaving his residuary estate, including land, on trust for his widow for
life with remainder to his children. Following the death of the life tenant the
defendants were now absolutely entitled to the residuary estate. The application
arose out of concerns over the potential effect of the Environmental Protection
Act 1990, which, when brought into force, would impose a new and far-reaching
liability regime on owners of land and others for cleaning up contaminated
land. The trustee sought directions as to whether it had a lien over the trust
fund for liabilities, including future and contingent liabilities, in respect
of land held by the testator and might accordingly retain possession of the
land, whether it should be at liberty to invest and vary investments in
accordance with terms of the testator’s will in relation to investments
retained pursuant to its lien, to charge for acting as trustee in accordance
with the terms of the will and in relation to the land to exercise all the
powers of trustees of a trust of land, and whether it should notify the
beneficiaries where practicable of the proposed exercise by it of its powers of
investment and certain other powers about which it sought directions in
connection with the management of the land and give the beneficiaries an
opportunity to comment.
Contaminated land
I will now give a brief (and by no means comprehensive) description
of the legislation affecting contaminated land, so far as relevant to this
application.
The Environmental Protection Act 1990, in Part IIA (as amended by
the Environment Act 1995), contains a new regime for dealing with contaminated
land. However, the new regime has yet to be brought into force. The Act is
heavily dependent on statutory guidance, which is still in draft and has yet to
be finalised. References to sections below are to sections in the 1990 Act as
amended.
Under the new regime, contaminated land is defined (in section
78A(2)) as:
any land which appears to the local authority in whose area it is
situated to be in such a condition, by reason of substances in, on or under it
that —
(a) significant harm is being caused or there is a significant
possibility of such harm being caused; or
(b) pollution of controlled waters is being, or is likely to be,
caused;
Harm is defined as harm to the health of any living organisms, any
other interference with their ecological systems and includes harm to property:
section 78A(4). ‘Substance’ is defined
in section 78A(9) as any natural or artificial substance, whether in
solid, liquid or gaseous form.
Under the Act, a local authority will be under a duty to inspect
their area from time to time to identify contaminated land: section 78B. There
is a consultation period in which the local authority must reasonably endeavour
to consult the persons on whom a remediation notice may be served as to what is
to be done by way of remediation as
voluntary clean up.
After the consultation period has ended, the local authority must
serve a ‘remediation notice’ on each ‘appropriate person’ specifying what is to
be done by way of remediation: section 78E. ‘Remediation’ includes clean up,
the doing of works for the prevention or minimisation of harm or the
restoration of land to its former state and subsequent inspections to keep the
condition of the land under review: section 78A(7). However, the local
authority can only require remediation for that which they consider reasonable
having regard to the cost and seriousness of the harm: section 78E(4). Failure
to comply with a remediation notice without reasonable excuse is an offence:
section 78M.
As I have explained, if land is contaminated within the legal
definition, statutory liability for clean-up costs attaches to the ‘appropriate
person’ or ‘persons’, as defined in section 78F. There are two types of
appropriate persons:
the person or any of the persons who caused or knowingly permitted
substances or any of the substances to be in, on or under the land, and
if no such person has been found after reasonable enquiry, the
owner or occupier for the time being of the contaminated land.
Where a person is liable because he caused or knowingly permitted
substances to be on land, he can in principle be held liable for the clean-up
costs referable to that substance: section 78F(3). However, provision is made
for the case where a chemical reaction occurs and that substance indirectly
causes pollution, and for the case where that substance escapes on to other
land. However, a person may be liable as a person who has caused land to be
contaminated even after he has sold the land, and, even if he did not cause the
land to be contaminated, it is arguable that he could be liable as a person who
knowingly permitted contaminating substances to be on land if he sold the land
knowing of the contamination and not having removed it.
‘Owner’ is defined as a person (other than a mortgagee not in
possession) who, whether in his own right or as trustee for any other person,
is or would be entitled to receive the rack-rent of the land. A rack-rent means
a rent reflecting the full annual value: section 78A(9). Thus, a trustee may be
an ‘owner’ even though he has no beneficial interest in the land. However, a
person cannot by reason of being the owner or occupier of land be made liable
to take remediation measures on land that he does not own: section 78K.
While land can only be classified as contaminated after the 1995
Act comes into force, it appears that it applies even if the activities that
cause the land to be contaminated occur before that date.
As mentioned above, statutory guidance is to be issued. The draft
statutory guideline provides that a person may be excluded from liability where
certain tests apply. Thus, a person may escape liability where that was
incurred solely by reason of a specified activity, for example, as owner of
land, licensing its occupation by another, except for the purpose of waste
disposal, or issuing a statutory licence by reason of which another person
causes or knowingly permits the presence of pollutants. Under another proposed
test, a person will not be liable for pollution if he caused or knowingly
permitted the presence of contaminants but sold it ensuring that the purchaser
had information as to the presence of contaminants.
Even though Part IIA of the Environmental Protection Act 1990 is
not yet in force, an abatement notice could be served on the trustee as owner
of the site under the existing statutory nuisance provisions of the Act, and,
in addition, the owner may be liable at common law for nuisance or under the
rule in Rylands v Fletcher (1868) LR 3 HL 330.
Does the trustee have a lien over the
trust fund for the liabilities to which it may be subject in respect of land
held by the testator?
This is the first question I have to decide. Counsel for the
trustee referred me to a number of authorities, including Re Exhall Coal Co
Ltd, ex parte Bleckley (1866) 35 Beav 449, Stott v Milne
(1884) 25 ChD 710, Re Beddoe [1893] 1 Ch 547, Re Pauling’s Settlement
Trusts [1963] 1 All ER 857 and Halsbury’s
Laws of England, 4th ed, vol 48 para 785. These authorities show that a
trustee has a lien over the trust fund for his proper costs and expenses and
that these extend to an indemnity against future liabilities. (In addition,
there is authority for the proposition that the trustee will be entitled to
have proper protection from liabilities that he has incurred as a trustee
before he retires as a trustee: see Re Brockbank [1948] ChD 206 at p211
and section 19(3) of the Trusts of Land and Appointment of Trustees Act 1996).
The decision of Wilberforce J in Re Pauling’s Settlement Trusts is
instructive. The question was whether the existing trustee should be replaced.
The existing (among other things) trustee claimed that it would be deprived of
the security of the trust fund for costs in respect of litigation against it as
trustee. It also claimed that it would remain liable for possible future estate
duty in respect of advances made to the children of the life tenant in the
event of the life tenant dying within five years. Wilberforce J held that the
trustee’s right of indemnity extended to any costs awarded in its favour and to
the possible liabilities for estate duty. In the circumstances, the court declined
to appoint new trustees until the situation was clarified.
The lien extends to all the liabilities of the trustee as such. In
my judgment, these include liabilities under Part IIA of the Environmental
Protection Act 1990 even though they are contingent upon a number of matters,
including the commencement of Part IIA.
The trustee’s power to invest funds
that it holds pursuant to its lien
The testator’s will gives the trustee power:
To invest trust money and transpose investments with the same
unrestricted freedom in their choice of investment as if they were absolute
owners beneficially entitled and to purchase retain or improve a freehold or
leasehold house or other dwelling on trust for sale (with power to postpone the
sale) to be used as a residence by my wife or any one or more of my children or
remoter issue.
This is a wide power of investment. Where, however, wide powers of
investment are given to trustees, the beneficiaries have the protection of the
duties imposed on trustees by the general law. Under the general law, the
trustee must take such care as an ordinary prudent person would take if he were
minded to make for the benefit of other people for whom he felt morally bound
to provide: per Lindley LJ in Re Whiteley, Whiteley v Learoyd
(1886) 33 ChD 347. There is a further principle that provides protection to
beneficiaries of a trust, and that is the duty imposed by the general law on
trustees to act fairly. Thus, in deciding how funds should be invested, a
trustee must act fairly as between the beneficiaries. Hoffmann J explained some
of the implications of this duty in Nestle v National Westminster
Bank plc unreported 29 June 1988:
A trustee may act fairly in making investment decisions which may
have different consequences for differing classes of beneficiaries … The
trustees have a wide discretion. They are, for example, entitled to take into
account the income needs of the tenant for life or the fact that the tenant for
life was a person know to the settlor and a primary object of the trust whereas
the remainderman is a remoter relative or a stranger. Of course, these cannot
be allowed to become the overriding considerations but the concepts of fairness
between classes of beneficiaries does not require them to be excluded. It would
be an inhuman ride which required trustees to adhere to some mechanical ride
for preserving the real value of capital when the tenant for life was the
testator’s widow who had fallen upon hard times and the remainderman was young
and well off.
The same point was made by Staughton LJ in the Court of Appeal in
the same case: [1993] 1 WLR 1260.
Counsel’s submissions were as follows. The trustee has a right to
be indemnified against liabilities that it incurs as trustee, and it has a lien
on the trust fund for this purpose. Since the trustee’s lien arises by
operation of law, it is implicit in the terms of trust that the trustee’s
powers to manage the trust property continue to apply even where the lien has
arisen. In those circumstances, on counsel’s submission, the trustee, when
deciding what investments to make, can take into account its own interest by
virtue of its lien. However, it must act impartially as between itself and the
other beneficiaries. Counsel was not aware of any authority on this point.
In my judgment, counsel’s submissions are correct. The law does not
require the trustee to disregard its own position and interest by virtue of its
lien when it decides how to invest the trust funds. It can take its position
and interest into account. However, it must act fairly as between the
beneficiaries and itself. It must act in an even-handed way, taking into
account the different rights and interests of the parties in the trust assets.
This case is thus distinguishable from Re Pauling’s Settlement
Trusts. In that case, the trustee had been held liable to refund
substantial sums to the capital of the trust fund. It claimed (in separate
proceedings) the right to be recouped out of the income of the trust fund, but
the life interest had by then vested in Guardian Assurance Co as mortgagee.
Wilberforce J (as he then was) held that it was not necessary for the trustee
to be in actual possession of the trust fund in order to enforce any right of
recoupment. The trustee, however, contended that it had a right to control the
investment of the trust fund so that it was not invested in such a way as to
prejudice its right to be recouped out of income. Wilberforce J rejected that
argument. It was the duty of any trustee to exercise his powers of investment
in such a way as to hold the balance properly between capital and income, and
to preserve an equitable balance. In other words, the trustee in that case could
not be in any better position than the life tenant, as its right of recoupment
for the advances that it was ordered to repay extended only to income. That is
not the position in the present case. The trustee’s rights are not limited to
the income of the trust fund. Moreover, the trustee in this case does not claim
that investment decisions should be made in its interest alone.
On counsel’s analysis, the power to invest conferred by the will
continues to apply. However, if there is any doubt as to the power of the
trustee in this case to invest moneys that it holds pursuant to its lien, in my
judgment it should have the power conferred by the will. This is consistent
with the other investment powers that it has. Even though this is a wide power,
the beneficiaries have the protection of the principles of the general law to
which I referred above.
A direction would be made that the trustee should have power to
invest and vary investments in accordance with the power of investment
conferred by the testator’s will in relation to investments retained pursuant
to its lien, that it should have power to charge in accordance with the terms
of the will and that, in relation to the trust land, it should have power to
exercise all the powers of trustees of a trust of land.
Consultation with the beneficiaries
The trustee sought a direction that so far as reasonably
practicable before exercising any of the powers set out in the court’s
directions, it should notify the beneficiaries of its intention to do so and
give them an opportunity to comment.
The trustee has been advised by other counsel specialising in
trusts as to its duties now that the interest of the life tenant has come to an
end. Counsel advised that:
The life interest having terminated, it is undoubtedly the trustee’s
duty to consult the beneficiaries as to their wishes concerning the trust
property and to have the fullest regard to those wishes in deciding how to
proceed in the best interests of the trust, subject to the trustee’s rights
under its lien.
Counsel further advised (among other things) that the trustee
should proceed along the following lines:
(1) keep the beneficiaries informed and ascertain their wishes;
The direction sought by the trustee — to notify the beneficiaries
of its intention to exercise any of the powers subject to the directions and to
give them the opportunity to comment — does not go as far as this.
However, counsel appearing on this application submits that
counsel’s advice set out above went beyond what the law requires. Trustees have
no obligation to consult the beneficiaries, unless they are required to do so
by the terms of the trust or there is some relevant statutory provision. In
this case there is neither any relevant provision in the testator’s will nor
any relevant statutory provision. Neither section 26(3) of the Law of Property
Act 1925 or section 11(1) of the Trusts of Land and Appointment of Trustees Act
1996 (which would impose an obligation to consult in certain circumstances)
applies in this case.
I accept that the trustee has no obligation to consult, but
I note what was said by Wilberforce J at the end of his judgment in Re
Pauling’s Settlement Trusts. Wilberforce J expressed the hope and
understanding that the trustee would give an undertaking that (at p863F):
they will confer with the plaintiffs as to the investments held in
the trust fund, and will give consideration to every suggestion made by them
with regard to the investments and will not object to any suggestion which is
in reasonable terms.
Counsel told me that, in this case, the trustee was not happy at
the idea of putting itself in a position where it was obliged to do what the
beneficiaries asked unless it could think of a good reason not to do so. The
investment decisions might be complex, the beneficiaries might disagree and in
the immediate future the trustee’s lien would take priority. I accept the
trustee should not be bound in any way to act on the wishes of the
beneficiaries. It suffices to say that the trustee has a lien on the trust fund
and income arising from it for liabilities properly incurred by it as trustee,
and thus a right that has priority over the rights of the beneficiaries. On the
other hand, I regard it as implicit in the direction sought that the trustee
should consider any comments that the beneficiaries make, and take them into
account to the extent appropriate. In addition, the proposed direction imposes
an obligation on the trustee to make prior disclosure to the beneficiaries of
the matters to which it applies. Given the parties’ potentially differing
interests in those matters, I consider that this is an appropriate and sensible
discipline for the trustee. Accordingly, I propose to make the direction as
asked.
