Independent Trustees – limiting liability

by | Mar 29, 2010 | Sale and Purchase

Independent trustees are no doubt very aware that contracts they enter into with third parties expose them to personal liability, unless there is a clause in the contract limiting their liability.

Trustees who regularly use the standard (ADLS/REINZ) form of agreement for sale and purchase of real estate would also be aware that the current edition includes in clause 14 a limitation of the independent trustee’s liability to an amount equal to the value of the assets of the trust. A recent case in the High Court at Auckland (Foundation Custodians Limited v Lea Thornton and the trustees of the Mabago Family Trust) clarifies what that limitation of liability means.

Foundation Custodians had loaned $653,054.40 to Lea Thornton and the trustees of the Mabago Family Trust. The loan contract included a limitation of liability for the independent trustee in terms similar to the limitation of liability in the standard form agreement for sale and purchase of real estate.

The borrower defaulted under the loan and Foundation Custodians sought to enforce. The property owned by the trust was taken to mortgagee sale and only $124,000.00 was recovered. Foundation Custodians therefore sought summary judgement against both Ms Thornton and the trustees of the Mabago Family Trust.

One of the trustees of the Mabago Family Trust was a company incorporated by a firm of accountants as a professional and independent trustee, ITL Trustees 2006 Limited (“ITL”). At issue was to what extent the limitation of liability protected the professional trustee company. This same question would be relevant to independent and/or professional trustees of a property trust.

The Court held that the wording of the limitation of liability clause made clear that the professional trustee had no personal liability. Therefore Foundation Custodians was only entitled to recover to the extent of the trust assets from ITL. Further, as Foundation Custodians had already received all of the trust assets (through the mortgagee sale) there could be no further liability imposed on the professional trustee.

The limitation of liability clause limited the professional trustee’s liability to $124,000.00, which was the value of the trust assets at the time of enforcement. This latter point is critical as the value of the trust assets might vary significantly for a professional or independent trustee of a property trust, as the market value of the property investments change.

We expect that the agreement for sale and purchase of real estate would offer similar protection to an independent trustee, as it uses similar wording to the clause in Foundation Custodian’s loan contract.

Independent and/or professional trustees should:

1. When signing any contract with a third party ensure that there is a limitation of liability clause. If there was not one in this case ITL would have been liable for $550,000.

2. Check the actual wording of the limitation clause. Independent trustees should not rely on this case as meaning that provided there is a clause limiting their liability they will be protected in the same way described above, it depends on the words used.