Be careful when contracting with a trust

letter of authority
26 Nov 2019

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 (Trust Act). 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. When contracting with a trust it is prudent to obtain not only a copy of the latest letters of authority, but also a copy of the trust deed. The trust deed should grant powers to the trustees to acquire immovable property on behalf of the trust. 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 (Alienation Act). 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 SCA case of Goldex 16 (Pty) Limited vs Capper NO & others in a judgment handed down in September 2019. A trust purchased property from Goldex, and Capper, 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 Capper 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.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

Wills, Estates & Trusts articles on GoLegal