What to watch out for before you contract with a trust

People are often nervous about entering into contracts with a trust due to the unique nature of trusts. Often a contracting party requests a resolution whereby the trustees authorise the trust to enter into a particular transaction. This is particularly true in the case of the purchase or sale of immovable property. In terms of the Land Alienation Act, any deed of sale of immovable property has to be in writing and the parties thereto or their agents have to be legally authorised to act at the time of signing of the contract. The Thorpe v Trittenwein case of 2007 confirmed the principle that where one trustee is authorised to act on behalf of other trustees, and the sale of land is involved, such authorisation must be received in writing. This case confirmed that a sale cannot be ratified by the signature of a written authorisation to act after the fact. The written authority therefore must be granted prior to the signature of the deed of sale to the duly authorised trustee. 

Any deed of sale entered into by one trustee purporting to act on behalf of other trustees, where that trustee is not authorised to do so by his/her co-trustees, may be deemed null and void. This is because it will not comply with the requirements of the Alienation of Land Act (Section 2), and cannot be ratified thereafter. 

When can trustees act?

In view of the fact that trustees cannot enter into agreements until they have been issued with Letters of Authority by the Master of the High Court, it should be noted that no person may enter into an agreement "on behalf of a trust to be formed". This is only possible in the case of companies and close corporations. With regards to a trust, the trust must already be in existence at the time the agreement is entered into. Any offer to purchase or agreement of sale signed by a trustee or trustees before they have been appointed in writing by the Master of the High Court (and a Letters of Authority has been issued) is void and unenforceable. 

Which actions can trustees take?

It is also important to ascertain whether or not the trustees have the power to act on behalf of the trust. The powers of the trustees are set out in the trust deed and the trustees are confined to the powers set out in this document. They have no powers wider than those provided in the trust deed.

Some important points to check before contracting with a trust:

Firstly, obtain a copy of the trust deed to check whether the trustees have the relevant legal power to enter into the contract.

Secondly, obtain a copy of the Letters of Authority granted by the Master of the High Court to check whether those who are representing themselves as acting on behalf of the trust, are in fact capable of binding the trust.

Thirdly, establish whether the required minimum number of trustees as stipulated in the trust instrument is in place. Without this, an agreement will not be binding (Land & Agricultural Bank of SA v Parker case of 2005).

Fourthly, confirm that the trustees are qualified to act. If a trustee is disqualified, that person cannot validly represent the trust and any agreement will be void.

Fifthly, ensure that the “Joint Action Rule” is adhered to. Co-trustees are required to always act jointly in terms of trust administration. When dealing with third parties, even if a decision can be made by the majority of trustees, as per the trust deed, all trustees are required to be involved in the decision. All trustees must be notified during the decision making process, bearing in mind that a trust operates on resolutions (Steyn v Blockpave case of 2011). Even when the trust instrument stipulates that the majority of trustees can make a decision, the resolutions must be signed by all trustees. If there is more than one trustee, and there is no provision in the trust deed to determine how decisions should be made, a unanimous vote will be required in matters of substance (Coetzee v Peet Smith Trust case of 2003). It is a fundamental rule of trust law that, in the absence of contrary provisions in the trust deed, the trustees must act jointly if the trust’s estate is to be bound by their acts. The rule derives itself from the nature of the trustees' joint ownership of the trust property. Since co-owners must act jointly, trustees must also act jointly (Nieuwoudt v Vrystaat Mielies case of 2004). Also when dealing with third parties, the Joint Action Rule applies. This also stems from joint ownership (Land & Agricultural Bank of SA v Parker case of 2005).