Edmonds Judd

Trusts

Relationship Property Claims by a Partner – Part 1

Property, Relationships, Trusts
0

A Contracting Out Agreement (COA) is an estate planning necessity for blended families.

 

The relationship property landscape is changing, and some popular protection tools are becoming less effective. Trust busting cases like Clayton v Clayton show the court’s willingness to treat trust property as relationship property in the event of separation, especially where assets are transferred into a trust during a relationship.

 

A COA is the most effective tool to ensure a couple’s assets and liabilities are divided as they intended on separation or death.

 

If there is no COA, then couples in a marriage, de facto relationship or civil union are exposed to claims against potentially all of their assets and liabilities (even if in trust) on a 50/50 basis.

 

On death, the surviving partner can elect to either:

 

  • Apply for division of relationship property in accordance with the Property (Relationships) Act (the Act), the presumption being a 50/50 split; or

 

  • Accept the gift under their partner’s Will and retain any individually and jointly owned property.

 

A COA can prevent a surviving partner (or their children, as discussed in our next article) from making a claim for division of relationship property under the Act on death.

  Libby McDonnell.

Wait! Before you sign that pre-nup! Step 1 – Independent Lawyers

Relationships, Retirement, Trusts
0

In the first article of this series, we introduced the 3 key steps you must take before signing the contracting out agreement for it to be valid:

  1. Independent lawyers
  2. Disclosure
  3. Advice

 

In this article we will look more closely at Step 1 – Independent lawyers.

 

Does that mean we just get two different lawyers?

Not only does this mean you each need separate lawyers for the contracting out agreement, but those lawyers should also be at separate firms.  And it goes even further, the lawyer advising you should not have previously acted for your partner either.  This ensures that the lawyer who is advising you does not owe any ongoing duties to your partner as a client that would conflict with the lawyer’s duties to you as a client.  In some circumstances the lawyer may still be able to act for you, if you and your partner give fully informed consent.

 

So how does it benefit you?

The RPA states that the agreement is void unless you receive advice from an independent lawyer.

 

Your legal interests in protecting certain assets against a relationship property claim will often differ from your partner’s legal interests on separation.  Having an independent lawyer protects you and ensures the advice you receive is about how the agreement will affect your rights and what the implications are for you, independently of your partner’s interests in contracting out.  It can help ensure the agreement is future proofed, reducing your legal costs for updating the agreement as your relationship develops, and significantly reduces the risks of having the agreement overturned by a Court for being seriously unjust.

 

Next time Step 2 – Disclosure (and a hot tip on how to reduce your legal costs!)

 

Kerry Bowler, SolicitorKerry Bowler, solicitor

Contracting out agreements for relationships late in life

Estate, Property, Relationships, Trusts
0

A wise move as financial affairs are more complex

You may think that a ‘pre nup’ is most commonly used when a young couple begins a relationship and there is a significant difference in their financial position. However, these agreements, formally known as contracting out agreements (COAs), can be entered into at any time during a relationship. They are particularly useful for couples entering into a de facto relationship, or marrying later in life, as both parties are more likely to come to the relationship with more complex financial affairs.

 

 

Why have a COA?

One of the couple may have been through a previous separation or the loss of a spouse. They may have children – dependent or adult. They may also have trust or company structures that make their overall asset profile less straightforward from a relationship property perspective than younger couples who are just getting started with their lives together.

In these cases, a COA can give both parties (and their families) clarity about what will happen to their assets if one of them dies, or if they decide to separate.

A COA is a way of opting out of the default rules as to how the division of property is dealt with under the Property (Relationships) Act 1976 (PRA). Without a COA, the default approach would apply; this generally means that relationship property assets are divided 50:50. An equal split, however, is not always appropriate. In complex cases, parties can end up in protracted court cases trying to figure out how the PRA applies to their particular situation.

While the default rules are a helpful fallback position where people cannot agree how property will be divided, the PRA does not necessarily reflect what all couples would regard as ‘fairness.’ The legislation also does not take account of fact-specific or unusual cases. COAs allow couples to set in place clear and bespoke rules that apply to their particular circumstances, and their specific assets, in the event their relationship or marriage breaks down.

 

 

Opens up discussion

One of the benefits of considering a COA is that it opens up the discussion between a couple as to what they would like to happen to their property, or what they might consider fair, in the event that one of them dies or they separate. Often we find that couples have never had this conversation, but have made assumptions about what will happen or what their partner thinks should happen.

In particular, these assumptions can be harshly tested and shown to be wrong when a partner dies unexpectedly. The surviving partner may find that they have radically different expectations about what will happen compared with the deceased partner’s children and any other parties involved in such an estate.

The same issue can arise if a couple separates. Efforts to resolve relationship property issues may be made in circumstances where the partners’ perceptions of fairness have changed over time. There may have been unequal financial contributions made during the relationship or owing to events, such as infidelity, that have occurred during or which ended the relationship.

 

 

Complex finances

Where a couple has a complex financial situation, including trust and company structures, a COA should be supported by documents between the parties and the trusts or companies, so that no assets fall through the cracks or fail to be taken into consideration. It is important for couples to seek independent advice about the types of documents required, and their effect.

 

 

Review a COA regularly

It is also critical that couples review their COA as life changes. When properties are bought and sold, home improvements funded or other big changes happen, the COA may become out of date and difficult to apply. A new agreement, or an amendment to an existing agreement, can ensure that everyone has clarity about what the changes mean and what their effect will be if there is a death or separation.

A COA can only be enforced if both parties have received independent legal advice and both lawyers certify the agreement. This requirement ensures that both parties are fully informed about the effect of the agreement.

 

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Do I still need a trust?

Commercial, Estate, House, Property, Retirement, Rural, Trusts, Your Own Business
0

Thousands of Kiwis have, over the years, established family trusts for a variety of reasons. However, it’s well worth considering whether those reasons are still relevant today and evaluating whether your trust may have outlived its usefulness.

You may have established your family trust for:

  1. Avoiding estate duty: before 1992 it was common for high value assets (such as farms) to be transferred to a trust so your personal estate would not have to pay estate duty
  2. Eligibility for the residential care subsidy: trusts were often settled to increase the likelihood of being eligible for the residential care subsidy; the Ministry of Social Development (MSD) only considered assets you owned personally when considering eligibility for the subsidy
  3. Minimising tax: Fluctuating tax rates over the years have sometimes provided a lower tax rate for trusts than the highest rate of personal tax
  4. Creditor protection: Transferring your personal assets to trust ownership means that your personal creditors may have more difficulty accessing those assets to recover personal debts you owe
  5. Estate planning: Children may make claims against their parents’ estates where they believe their parents have made no, or inadequate, provision for them. Transferring assets to a trust during one’s lifetime leaves little or nothing for children to claim against on your death. Trusts also allow assets to be ring-fenced to help with the care of differently abled children
  6. Relationship property: settling a trust, either before your relationship is ‘in contemplation’ or afterwards (provided a contracting out agreement is also signed), is one way to help remove assets from the potential pool of relationship property that would be available for division if your relationship ends.

Things have changed

These days, however, estate (and gift) duty is no more, the top personal tax rates will soon be realigned with trust tax rates, and MSD takes a closer look at trusts when considering residential care subsidy applications. There has also been increasing court action on trusts where it is believed they may have been used to avoid creditors, claims by children and relationship property claims.

In addition, there are further consequences in settling trusts in New Zealand if you are an American citizen, from the UK (even though you may be tax resident in New Zealand), or if you are tax resident in Australia.

Notwithstanding the above, trusts are still very useful vehicles, particularly for creditor protection, estate planning and relationship property purposes.

Trust deeds, however, should be carefully drafted and have the correct documentation in place around them. Excellent legal, accounting and tax advice is needed to ensure that your trust will do the job you want it to.

If you have a family trust that may no longer be fit for purpose, or you think you need an asset protection plan, please talk with us about the options available to you.

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Can your ex-spouse claim your property when you die?

Property, Relationships, Trusts
0

Agreeing on a division of relationship property after you and your spouse separate can be fraught. Usually, emotions are highly charged.

When de facto couples separate, they can resolve their relationship property division immediately, and have no further financial involvement with each other. When married couples separate, however, they cannot divorce for two years and often divide their relationship property while still married. When a divorce does not take place immediately, this can mean the separated spouses still have rights – for example, to inherit if one of them dies. If the separated spouses do not intend this, their relationship property division must specifically address inheritance in order to prevent unintended consequences.

 

Relationship property agreement

A recent High Court decision[1] illustrates the type of problems that can arise. Alan O’Donoghue and Marc Comia married in 2016 and separated in 2019. The couple entered into a 2020 agreement about the division of their relationship property which was stated to be ‘in full and final settlement of all property claims each party has against the other, under any statutory enactment, in equity or in common law.’ The marriage was never formally dissolved. Alan died in 2021 without a will, so was ‘intestate.’

 

Separated spouse to benefit from intestacy?

Alan and Marc had no children. Alan was survived by his mother, but she gave up any interest in his estate. In those circumstances, unless the 2020 agreement was effective to resolve inheritance as well as relationship property matters, then Marc, as Alan’s husband (despite the separation) was entitled to the whole of Alan’s estate by virtue of section 77 of the Administration Act 1969, the legislation that sets out the shares in which surviving relatives are entitled to an intestate deceased’s estate.

Usually, unless there are special circumstances, the person with the highest beneficial interest in an estate will also be appointed administrator. Marc applied for letters of administration in Alan’s estate without disclosing the existence of the agreement. Marc knew that Alan’s brother, Russell, took the view that the agreement meant Marc was no longer entitled to inherit any of Alan’s property. If Marc had contracted out of any entitlements under s77 then Russell, rather than Marc, was entitled to his late brother’s estate and therefore entitled to letters of administration.

 

Contracting out of succession rights

The High Court had to grapple with the question of whether it was possible to contract out of a statutory entitlement to inherit on intestacy under s77. Cases considering this issue are rare because it is usual for a person who has separated and entered a relationship property settlement to make a new will.

Further, the issue only arises where a marriage has not been formally dissolved after a separation; de facto relationships come to an end when the relationship finishes. It is only a marriage which can subsist after separation, and until the parties formally divorce.

The High Court determined, following a 2013 case,[2] that, as a matter of policy, contracting out of an interest under s77 was possible. However, for the ‘contracting out’ to be effective, the agreement in which it is undertaken must comply with the safe-guarding conditions set out in the Property Relationships Act 1976 (PRA). These conditions include that each party to the agreement receives independent legal advice before signing and that a lawyer who witnesses a party’s signature must certify that the implications of the agreement have been explained to that party.

In Donoghue the agreement did not comply with these requirements. However, there is a procedure whereby a non-complying agreement can be declared to have effect anyway. Therefore, the court recalled the grant of letters of administration to Marc, appointed Russell as administrator of his brother’s estate and directed Russell to apply to the Family Court for a determination on the effectiveness of the agreement.

All these extra steps could have been avoided.

 

Lessons to be learned

It is very welcome that the High Court has confirmed that it is possible for separating spouses to contract out of their entitlements under the Administration Act 1969. Naturally for any such agreement to be effective, it must comply with requirements of the PRA. The situation in which Alan left his brother Russell could have been avoided entirely if Alan had made a new will at the same time the agreement was entered into in 2020, which should be usual practice, or if Alan and Marc had divorced after their separation.

If you are going through a separation, we strongly recommend you both make a new will immediately after the separation documentation is completed and/or you divorce as soon as practicable. It could save you and your family a great deal of time, money and emotion.

[1] O’Donoghue v Comia [2023] NZHC 2735.

[2] Warrender v Warrender [2013] NZHC 787.

 

 

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Estates and guarantees

Estate, Trusts
0

Can cause difficult legal issues

Guarantees entered into by a person during their lifetime can create some difficult legal issues for their executor after they die.

 

Limiting a guarantee

The terms of most guarantees allow a guarantor to give notice; this stops further liabilities accruing. In an estate situation, this will not alter the liabilities accrued to date, however the executor who is aware that an estate is liable under a guarantee may need to issue a stop notice to protect the estate’s position to maximise the value of the estate.

This can be a difficult decision for an executor, particularly where (for example) a guarantee is important for the ongoing viability of, say, a family member’s business.  However, where the estate does not have an interest in that business, the executor may need to do this anyway as the estate’s position is the executor’s responsibility, and the interests of all beneficiaries must be prioritised, even if the decision causes dissatisfaction for one.

 

Calling up a guarantee

Where a guarantor has died, and the guarantee is called up after their death, the estate is liable to the lender in the usual way.

In the situation where the estate is only one of several co-guarantors, the executor may need to decide whether to seek contributions from the co-guarantors. The executor may also need to take legal action to enforce payment by co-guarantors.

Where any of the co-guarantors are also beneficiaries of the estate, it may also be necessary for the executor to take advice about the extent to which any liability for contribution to the guarantee can be met by funds that the beneficiary is to receive under the terms of the will.

 

Rights of contribution between co-guarantors

The default position is that co-guarantors share an equal liability to meet a common debt. Where one guarantor pays more than their fair share of the debt to the lender, they are entitled at equity to seek an equal contribution from their co-guarantors.

Complications can arise, however, where a co-guarantor is insolvent. In that situation, the other solvent co-guarantors may have to contribute proportionally to meet the shared debt. This means that an estate might be held liable for more than its ‘fair’ share of the debt.

 

Co-guarantors who are also beneficiaries

The situation becomes more complex when a co-guarantor is also a beneficiary of the estate that has paid the debt. Can the executor claim contributions towards the debt paid by withholding the beneficiary’s share of that debt from their entitlement under the will? Although the court has confirmed that a beneficiary owing money to an estate cannot claim a share of their interest without first settling the debt, an executor should not automatically deduct a debt from a beneficiary’s entitlement.

Rather, the first step will usually be for the executor to approach the relevant beneficiary first by letter and then a formal demand. If a beneficiary persistently refuses to fulfil their debt, an executor can then retain that beneficiary’s share or interest to recover their relevant contribution. The executor should then seek the approval of the High Court to deduct the beneficiary’s share of the debt from their estate entitlement.

 

Interests of beneficiaries take priority

Personal guarantees can create tricky issues for an executor to deal with, particularly in family situations. The estate’s position is the executor’s responsibility, and the interests of the beneficiaries of the estate must be the executor’s priority – even if it means one beneficiary is unhappy because they are affected by the executor’s decision.

While it does not commonly arise, the right of contribution is also something the executor may need to explore for the benefit of the estate as a whole and seek some advice. In some circumstances the executor may also need to go to the High Court for assistance where one beneficiary will not cooperate.

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Making a bequest to a charity

Estate, Trusts
0

Careful will drafting is essential

For many charities, gifts in wills (bequests) are a significant source of funding.

Sometimes, however, charitable bequests cannot take effect when wills are not carefully drafted. There can be considerable time and cost associated with addressing that situation and trying to ensure the bequest can go to the charity you intended. This article looks at ways your wishes for a charitable bequest have the best prospect of being fulfilled.

Most of the time, bequests to charities fail (and cannot take effect) because there are changes in charitable organisations over time, the will is not updated for many years and/or the will does not contain a suitable power for the executors to address these situations.

 

Changes in charities over time

It is common for charities to restructure.  Many charities once had a number of local branches, which were all registered as individual charities, but they have now consolidated into one overall national organisation, and the local branches  disestablished. Some organisations may have changed their name or amalgamated with other charities.

Wills frequently misdescribe charities. The name of the charity may not have been checked on the Charities Register to ensure it was correctly described or the organisation may have restructured since the will was prepared. Wills commonly leave bequests to charities that no longer exist. This can mean the bequest fails.

 

Wills can include special clauses

In some cases, these problems can be addressed by careful will drafting. Wills can include clauses addressing the potential for charitable organisations to be misdescribed or to change over time. Also, many wills contain a power for an executor to pay funds to the trustees or officers of a charitable organisation without being required to follow up on how the gift is then used. For example:

  • A power could be included providing that if a charitable organisation has been misdescribed, the executor of the will may pay the gift, at their discretion, to what they consider to be the correct organisation, and
  • A power could be included that says that if a particular charitable organisation no longer exists in the form described, the gift may be paid to:
  • Any successor organisation
  • Any amalgamated organisation which the named organisation became a part of or its assets were transferred to, or
  • If the organisation has entirely ceased to exist, to such charitable organisation as the trustees, at their discretion, consider most closely carries out the same charitable purposes.

Where wills do not contain clauses to this effect, the High Court may be able to assist, although this can be very expensive.

 

An example

In a recent case[1], Margaret Barrow’s will (which was drafted in 2000) left funds to the Medical Research Council of New Zealand (MRC). The MRC existed until 1990 when it was dissolved by Parliament, and a new Crown entity, the Health Research Council of New Zealand (HRC), was created in its place.

Ms Barrow’s executor applied to the High Court to interpret the reference to the MRC as referring to the HRC.

Despite the fact that the MRC had not existed for 10 years when the will was drafted, it appeared that neither Ms Barrow nor her lawyer had realised that the MRC had been succeeded by the HRC. The will file, which was more than 20 years old, had been destroyed, so there was no record of Ms Barrow’s instructions to her lawyer. Evidence was given, however, that in 2000, there was no online register of charities, and it is possible that this was the reason for the misdescription.

The High Court noted that the assets and liabilities of the MRC had become the assets and liabilities of the HRC, and the HRC was clearly the successor organisation. It ordered that Ms Barrow’s will should be interpreted as referring to the HRC rather than the MRC.

If the High Court had not been able to interpret Ms Barrow’s will to refer to the HRC, the next step may have been to prepare a scheme under the Charitable Trusts Act 1957. That process is time-consuming and often more expensive than applying to the High Court to interpret a will. If an application to interpret the will is an option, it will usually be faster and less expensive. However, it is best if an application to the High Court can be avoided entirely.

 

Check the Charities Register

When making bequests to a charity, it is prudent to check the Charities Register here to ensure that charity still exists. It is also useful to include clauses in wills that address the possibility of the charity being restructured or disestablished. This can save time and cost, and help carry out a will-maker’s intentions more effectively.

[1] Re Barrow [2023] NZHC 1146.

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Refusing an inheritance

Estate, Trusts
0

What options does a trustee have?

What is the trustee of an estate supposed to do when a beneficiary will not accept their inheritance?

This was the question faced by Mr Holland, executor and trustee of the estates of Margaret Glue and her husband, Ian Glue.[1] Margaret died in 2005, leaving a life interest in her estate to her husband Ian, and her remaining estate to her two sons. Ian died in 2009, also leaving his estate equally to his two sons, David and John.

 

Best efforts to contact beneficiary

John received his inheritance shortly after Ian’s death in 2009; John died in 2019. David, however, was unable to be contacted, despite Mr Holland’s efforts to contact him for well over a decade. His inheritance was worth approximately $300,000 as at August 2022. Mr Holland had written to David advising him of his inheritance and asking for a bank account number so the funds could be deposited.

David lived in London. Mr Holland had arranged for a professional investigator to confirm that David lived at the address known to him, and where correspondence had been sent. It was confirmed that David did live at that address; this was understood to be local authority housing (similar to ‘council housing’ in New Zealand).

 

Actively avoiding contact?

There was a suggestion that David may have wished to avoid receiving his inheritance as it could have disqualified him from living in that property. Welfare or social housing benefits are means-tested in many countries; it is common for these to become unavailable if a recipient’s assets exceed a certain threshold.

It is possible that David did not want to receive his inheritance because he thought he would be better off with stable and affordable housing, rather than receiving his inheritance that would then be dissipated on more expensive housing and eventually leave him in the same position. There was no specific evidence on the point, however, as David would not engage with the trustee, so this was only conjecture.

 

What next?

Mr Holland had held the inheritance for more than a decade and he wanted to be freed from his trustee obligations to David. Mr Holland applied to the High Court for an order[2] asking for permission to distribute the inheritance to John’s children, on the basis that David was ‘missing’ and his entitlement should be disregarded. Mr Holland swore an affidavit that he had known Margaret and Ian Glue for many years, and they would have wanted their descendants to benefit from their estate. He thought that Margaret and Ian would have preferred that the beneficiaries of John’s estate (i.e. his children) receive the inheritance, than for the money to sit indefinitely in case David eventually decided to accept it.

The High Court noted that section 136 of the Trusts Act 2019 applied to beneficiaries who are ‘missing.’ It said that David was ‘decidedly not missing’; he could be found, but he simply would not engage with the trustee or accept his inheritance. Initially the court proposed that the money be paid to the Crown to be held in case David ever made a claim, but it was persuaded that this was not what Margaret and Ian would have wanted.

The High Court found that even though David was not missing, section 136 applied anyway because:

  1. The trustee had taken reasonable steps to bring the inheritance to David’s attention, over more than 10 years
  2. More than 60 days had passed since the trustee’s last attempt to contact David, and
  3. In the circumstances, it was reasonable to disregard David’s position and direct that the inheritance be paid to John’s estate (and therefore to his beneficiaries), as though David did not exist.

 

The lessons in this case

While it is unusual for a beneficiary to fail to claim their inheritance, it can happen, and they may have good reasons for doing so. That can, however, make things difficult for an executor or trustee who is holding funds on their behalf.

This case is a good reminder that a trustee who is in this situation may have other options and will not be forced to hold the funds indefinitely.

[1] Re Holland [2023] NZHC 464.

[2] Under section 136 of the Trusts Act 2019.

 

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Decision in ‘Alphabet case’ could change succession landscape

Kids, Property, Relationships, Trusts
0

Significant issues raised

In June 2023, the Supreme Court heard the ‘Alphabet case.’ To understand the significance of what is at stake in this case, it is worth considering the facts that gave rise to the litigation and the High Court’s decision.

 

Abuse of A, B and C by Mr Z

Mr Z and Ms J married in 1958 and separated in 1981. They had four children: G (1960-2015), A (b 1961), B (b 1963) and C (b 1971).

Mr Z severely abused Ms J and the children physically, psychologically and sexually. A was repeatedly raped between the ages of seven and 13, but she did not disclose the abuse to anyone until 1983. She did not tell her mother until 1991. A was unable to face taking action against Mr Z.

Mr Z died in 2016 leaving an estate valued at $46,839. He had, however, settled a trust two years previously for the express purpose of preventing his family from “chasing” his assets, to which he had gifted his home and investments worth $700,000. The children were not beneficiaries of Mr Z’s estate or the trust; rather, the trust’s beneficiaries were the children of Mr Z’s former partner.

 

Children’s claims

That should have been the end of the matter because the Family Protection Act 1955 (FPA), that allows children to challenge their parents’ wills, only applies to assets a deceased owned in their personal names; it doesn’t apply to trust assets.

However, the children argued that their father owed them a fiduciary duty and, that because of the abuse, he continued to have obligations to them even after they became adults. They said that Mr Z had breached that duty when he gifted his home and shares to the trust in order to prevent his children from claiming against those assets under the FPA.

 

In the High Court

In the High Court,[1] Justice Gwyn agreed with the children and said they could bring claims under the FPA against the assets that had been transferred to the trust.

The trustees of Mr Z’s estate and trust appealed to the Court of Appeal.

 

Court of Appeal divided over case

The Court of Appeal[2] accepted that Mr Z owed a fiduciary duty to his children and that he breached that duty when he abused them. The issue was whether Mr Z continued to owe those fiduciary duties to his adult children at the time he gifted his assets to the trust.

The majority of the Court of Appeal judges disagreed; they said that the appropriate remedy for the breach of fiduciary duty was equitable compensation (and the children had run out of time to make that claim).

However, one judge said that in some circumstances the inherently fiduciary relationship between a parent and a child may continue after a child becomes an adult (for example, in the case of a severely disabled child).

The judge (who was in the minority, so their views don’t affect the final outcome) decided that A’s position, owing to the abuse she suffered, was analogous to that of a disabled child. Mr Z therefore had a continuing duty to take steps to remedy, as best he could, the enormous harm he inflicted on A, not only when she was living in his care, but also during her adult life. This meant he was required to protect her interests when considering gifting his principal assets to the trust, and failed to do so.

 

Decision awaited

The Supreme Court will tell us whether Mr Z owed a continuing fiduciary duty to A into her adult life because of the abuse he perpetrated on her. Many commentators believe that it is stretching the concept of a child/parent fiduciary duty too far.

If legal principles cannot evolve, however, a situation may emerge where extraordinarily meritorious claimants are left with no effective relief, simply because too much time has passed, and/or because their parent transferred their assets into a trust to prevent claims after they have died.

That raises two questions:

  1. Should time count against people such as A, who have been so seriously abused by a parent?
  2. Should parents be allowed to transfer their assets into a trust in order to prevent their children making claims after their death?

[1] [2021] NZHC 2997.

[2] [2022] NZCA 430.

 

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Land Covenants

Property, Rural, Trusts
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Now commonplace in residential developments

With all the property development over the last 20 years or so, land covenants have become commonplace in new build residential developments.

If you are buying a property in a newly or recently built residential subdivision, the odds are that the title will come with various covenants registered against it. These covenants are likely to place restrictions on the ways in which the owners can use and enjoy their properties.

What are land covenants?

Land covenants are usually put in place to ensure that the aesthetics and maintenance of the subdivision are built and kept up to a certain standard. In other instances, a landowner may subdivide part of their property and wish to restrict what can be done on the subdivided land to protect their use and enjoyment of their remaining land, for example, by restricting the location and size of any buildings to protect their view.

Whilst life in a subdivision is not for everyone, urban development in New Zealand is now usually done through a subdivision with land covenants.

Land covenants broadly fall into two categories:

1. Positive covenants that impose an obligation on a property owner to do something, or
2. Restrictive covenants that prevent an owner from doing something.

Positive covenants usually include an obligation to make a financial contribution or assist with maintenance of something in common with neighbouring landowners, such as the repair and maintenance of a fence or driveway.

Restrictive covenants are the most common covenants in residential subdivisions. The restrictions could include:

  • The construction materials that can, or cannot, be used for building on the land (including a possible prohibition on the use of second-hand materials)
  • The height/design of your house, garage or even a fence
  • Restrictions on whether you can leave caravans, boats and trailers parked in the driveway
  • Ensuring clotheslines, heat pump infrastructure, solar panels or satellite dishes are not visible from the street
  • Limitation on the number of dwellings and/or outbuildings you can have on the property
  • Whether certain types of animals are not allowed on your property, and/or
  • A reverse sensitivity covenant, that prevents the owners of the land burdened by the covenant from complaining about noise, smell or substances produced by an activity (such as an airport, farm, etc) being conducted on the property having the benefit of the covenant.

What to look out for

This depends on your intended use of the property. If you are considering buying a section to build a home from scratch, you must ensure your builder and/or architect have a copy of the land covenants, and that the build complies with all restrictions.

If you are making any alterations to an existing property, or even installing a solar panel/heat pump, you should first read all land covenants and establish whether it is allowed and, if so, whether there are any restrictions.

When buying a property that is subject to land covenants, you should ensure that the current owner has adhered to the rules and restrictions of the covenant, obtained the necessary developer’s consents and not committed any breach to date by, for example, building a granny flat on the property where that is prohibited.

Once the subdivision is completed, developers will often wind up their development company. If the landowners have not obtained any necessary developer consent before the company is wound up, this can hinder or prevent a sale later. Prospective purchasers are likely to be advised by their lawyers to seek a copy of any developer’s consent and this can prove to be difficult where the development company no longer exists.

How long does a covenant last?

Many land covenants ‘run with the land’ which means they bind every new owner and run indefinitely.

A well-designed land covenant could have various provisions that expire – such as any requirement for obtaining consent from the developer to avoid the issue of a developer company being wound up. If this is the case, the expiry date will be stipulated in the land covenant.

Breaching a covenant?

The rules contained within the land covenant can be enforced by you and your neighbours (if they hold the benefit of the land covenant) against anyone who has breached the restrictions.

To enforce a breach, written notice should be given to the owner that specifies what the owner must do or pay to fix the breach. If the owner receiving this notice does not agree that there has been a breach, they should give notice in return stating this.

If there has been a breach, most land covenants provide for damages, often in the range of $100–$250 per day and per property owner who has been affected by the breach. These damages will normally accrue until the breach is remedied. Sometimes the covenant provides for payment of a lump sum when there is a breach.

Often it is an immediate neighbour who raises any potential breach of the land covenants as they are the most likely to be impacted.

We encourage compliance with land covenants to avoid any liability to pay damages or a breakdown in relationships between neighbours.

Can a land covenant be removed or varied?

Land covenants can be removed from the title or varied. The easiest and most common mechanism for a removal or variation is when all parties affected by the land covenants agree to the removal or variation, and sign the necessary documentation. Getting all affected parties to agree to a removal or variation can be a lengthy, expensive and difficult process. In some subdivisions, the sheer number of affected parties will make this option an unattractive proposition and the possibility of complete agreement unlikely.

If you cannot get all parties to agree, there are possible remedies available by an application to the courts. The courts are, however, often reluctant to vary or remove land covenants, even those which may seem no longer to be relevant.

Conclusion

With modern urban housing density in subdivisions, the prevalence of land covenants is likely to continue to increase. Land covenants usually impact land indefinitely. This makes it more important than ever to understand the land covenants registered against a property before you buy it.

If you are unsure whether any covenants apply, or their effect, please be in touch with us. You should not presume that the other owners, including previous owners, have complied with their obligations to date.

 

 

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Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650