Should I be nervous when dealing with a trust?

“I was recently made an offer to sell my business. I was not really planning on selling but the offer sounded interesting. However, when I received the proposed offer I noticed the purchaser was a trust. I don’t know much about trusts and it made me nervous that a trust was involved as I’ve heard stories about having to be careful when dealing with a trust. Is this true, or am I being overly cautious?”

A trust is a valid business form, and the mere presence of a trust should not invalidate a fair transaction. However the words “this case yet again demonstrates the need to be careful when dealing with a trust” are words that have frequently been uttered by our courts in recent times when warning about some of the legal perils people encounter when transacting with trusts. The reality is that trusts are a common occurrence in everyday life. But dangers in contracting with a trust do exist, making it imperative to analyse beforehand whether a trust has the necessary authority to enter into a transaction.

When establishing whether a trust has the necessary authority to enter into a specific transaction, it is advisable to first obtain –

1)  a copy of the trust deed; 
2)   copies of the letters of authority authorising trustees to act as such on behalf of the trust;
3)  a resolution of the trustees should not all of the trustees sign the agreement authorising one or more trustees to sign the agreement on behalf of the trust;  and 
4) ID documents to ensure that the trustee(s) is who he/they purports to be. 

A trust is governed in South Africa by the Trust Property Control Act, our common law as well as the relevant provisions of the trust deed. This means that a trustee can only act in accordance with the powers afforded to him by law and specifically also the trust deed. Unless the trust deed makes another arrangement, all trustees must act jointly if the trust is to be bound by the trustees’ acts. So if a trust deed prescribes that there must at all times be a certain number of trustees in office, decisions taken by fewer trustees will be null and void. 

Should a trust deed not authorise a certain transaction, then the trustee does not have the authority to conclude such a transaction and the trust will not be held liable. So if the trust deed does not contain an express or implied provision which allows trustees to pursue a purchase of your business, the trustees will not be allowed to do so and the trust will not be bound to the purchase agreement. 

When a trust deed is received, it must therefore be carefully scrutinised, not only to see that it has been properly constituted, but also to establish the identity of the trustees, formalities they have to comply with, whether there are restrictions on certain type of transactions and the scope of their powers. 

Obtaining a copy of the latest letters of authority issued by the Master of the High Court will show you which trustees have been given the necessary authorisation to act on behalf of the trust. If any trustee claims to act on behalf of the trust he must be authorised by the other trustees to act on their behalf by way of a written resolution passed by all the trustees in accordance with the trust deed. One should also ensure that the resolution is dated prior to the date that the contract is entered into.

Your concerns regarding dealing with a trust are fair and one should be careful when dealing with a trust. However, this should not stop a good business transaction. Do your homework well and if necessary obtain legal assistance to help you review the relevant information regarding the trust to make sure that everything is in order. And remember the golden rule when dealing with trusts – don’t assume the necessary authority is in place, make sure it is.

August 6, 2015
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