July 10, 2022
A bare trustee is not a legal representative given property for the benefit of Yogi or even Boo Boo.
A bare trustee is an important but often overlooked role in trusts law.
THE TERM DEFINED
A “bare trust” is described in the leading Ontario Court of Appeal case, Trident Holdings Ltd. v. Danand Investments Ltd., in this way:
The distinguishing characteristic of the bare trust is that the trustee has no independent powers, discretions or responsibilities. His only responsibility is to carry out the instructions of his principals — the beneficiaries. If he does not have to accept instructions, if he has any significant independent powers or responsibilities, he is not a bare trustee.
HOW BARE TRUSTEES ARE USED
Probably the most common situation in which a bare trustee is used is in real estate joint ventures where the true owners will incorporate a shell company to hold title to the property. The true owners, who often consider themselves partners, are the beneficiaries of the trust.
WHY USE A BARE TRUSTEE
Using a corporation as a bare trustee may have significant advantages in simplifying dealing with lenders, municipalities, and contractors. The nominal owner is a corporation, a common business form with officers or directors to speak on its behalf and sign documents. This avoids having to have all of the investors or partners sign all those documents. The identities of the investors are less public.
In addition, if it CRA determines that the trustee is a bare trustee, then the trustee can flow through certain tax responsibilities and corresponding advantages to the beneficial or true owners.
THE DOWNSIDE OF A BARE TRUSTEE
Of course, the determination that a property owner holds the property as a bare trustee can create some less desirable legal consequences. Issues may arise as to whether the trustee or the true owners are responsible for debts and obligations related to the property.
For example, in Johwel Investments Inc. v. Welton a dispute arose between two investors, who happened to be brothers, over real estate commissions payable to one brother’s wife. She eventually obtained a judgment against the corporate owner of the real estate development and sought to collect out of the proceeds of sale of the property. This was opposed on the basis that the corporation was simply a bare trustee, and since it had no true ownership of the proceeds of sale, those monies should not be made available to pay the judgment. Under the Execution Act in Ontario a judgment may lead to a writ of execution which allows the seizure and sale of the lands of the debtor. Under trusts law, although the bare trustee has legal title, it is not a true owner and therefore if the bare trustee is a debtor, the lands are not lands of the debtor under the Execution Act, which attaches against true ownership.
When the corporation had registered with the CRA, the description of its business was “bare trustee for a contenancy [sic] building and selling also unit high rise”. However, there was no evidence that a declaration of trust had ever been signed. An unsigned copy of a declaration of trust was attached as a schedule to a draft co-tenancy agreement which was also unsigned. The investors had entered into a beneficial ownership agreement with the lender which defined the registered owner as a bare trustee on behalf of the investors.
The judge was satisfied that the investors intended to create a bare trust. However, the creditor relied upon the active role of the corporation in developing and selling the condominiums to claim that it might be a trustee, but it was not a bare trustee.
The investors relied upon a Manitoba decision in which the bare trustee remained a bare trustee even though it took on certain administrative tasks. This makes sense because once the bare trustee holds the title to the real property, it is necessary that the bare trustee enter into agreements, such as agreements of purchase and sale, because no one else could convey legal title.
The judge also considered and applied the Trident case, which, as noted above, states that the distinction is whether or not the bare trustee exercises those functions independently, that is with discretion, or simply carries out the instructions of the true owners.
In the Johwel case, the co-tenancy agreement made it clear that the corporation had no independent authority. There was no evidence that the corporation had any discretion to decline to carry out the instructions of the true owners. The judge was satisfied that the corporation was a bare trustee.
What does this mean to the creditor and the collection of the real estate commissions?
Since the realtor had not sued the investors directly, her writ of execution did not attach to their interests in the property. If she had, she could have asked the court to apply the principles set out in the Trident case. If the court determined that the corporation acted simply as an agent of the investors, then, as happened in Trident, the liability would flow through to the investors under agency law.
Understanding whether a joint venture corporation holds the title to property as a trustee is important. It is equally or more important to understand whether or not that trust interest is that of a bare trustee or otherwise. Because of the agency principles upheld in the Trident case, this can have significant impact upon the liability of investors, and on the ability of creditors to collect.
This is a subtle and sophisticated example of the importance of knowing who you are doing business with. Legalities matter. Even sophisticated businesspeople often lose sight of this. Cases such as Johwel are useful reminders of this reality.
HOW WEILERS LLP CAN HELP YOU
If you are setting up a new real estate joint venture, the commercial real estate lawyers at Weilers LLP can making sure that all of your documentation is consistent, complete, and properly reflects your intentions. That may help you avoid unpleasant surprises with creditors, or the expense of litigation.
If your joint venture does end up in a lawsuit, the litigation team at Weilers LLP may be able to help you to protect your assets.
If you are a creditor, the litigation team at Weilers LLP may be able to help you sort out the situation and seek judgment against the true owners. It is always important not only to sue people against whom you can obtain a judgment, but also the people with the money. Although Yogi may have been smarter than the average bear, all Yogi ever ended up with was Ranger Smith’s peanut butter sandwich. Which is fine if you a bear, but not so great if you are a creditor.
Cartoons may be fun, but law is serious and at Weilers LLP, we love serious cases. Whichever side of a sophisticated transaction you may be on, Weilers LLP maybe the right lawyers for you.