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Options for disgruntled beneficiaries in the face of the rule in Howe v. Lord Dartmouth

Sometimes the cost of maintaining an asset is greater than the profit it generates, an oft-encountered example being an old, dilapidated rental building. The current state of the law in Canada is that, in spite of the even hand rule and unless specifically directed in the will, the estate trustee is not required to dispose of and invest the proceeds of a wasting real property. This article reviews the relevant court decisions and the possible options for those beneficiaries whose financial interests in an estate are dependent on wasting real property.

Application of the even hand rule as between income and capital beneficiaries

The even hand rule is a principle familiar to all estate and trust practitioners: In all their dealings with trust affairs, the trustees must act in such a way that, if there are multiple beneficiaries, each beneficiary receives exactly what the terms of the trust confers upon him and otherwise receives no advantage and suffers no burden which other beneficiaries do not share1. In the common event where the testator favours certain beneficiaries more than others, the trustee must still ensure that the manner in which she administers the estate does not favour or burden any beneficiary in a way not prescribed by the will.

Flowing from the even hand rule is the rule in Howe v. Lord Dartmouth2, which impose upon trustees a duty to convert wasting or unproductive personalty into authorized investments. The rule presumes that the testator had intended to treat the income and capital beneficiaries equitably3. Howe v. Lord Dartmouth was adopted with approval by the Supreme Court of Canada in Lottman v. Stanford4.

In Kemp v. Kemp, the court refers to Howe v. Lord Dartmouth and describes the even hand rule as it applies to income and capital beneficiaries:

The basic premise of the rule, in other words, is that both income and capital beneficiaries should enjoy so far as possible the same property so that assets which are rapidly diminishing in value or are likely to diminish must be concerted and failing that a portion of the income must be set aside as capital5.

The rule in Howe v. Lord Dartmouth and its non-applicability to wasting real trust property

It is important to recognize that currently the rule in Howe v. Lord Dartmouth applies only to personalty in Canada.

In Lottman v. Stanford6, the Supreme Court declined an opportunity to extend the rule in Howe v. Lord Dartmouth to realty. The facts of the case are as follows. The will of the testator directed his trustees to keep the residue invested and to pay the income derived therefrom to his wife until her death, at which point the residue would be divided equally among those of his four children then living. A power to encroach upon the capital of the residuary estate in favour of the wife was also conferred upon the trustees. A provision of the will directed conversion of the testator’s personal estate and a power to postpone such conversion. The bulk of the estate consisted of real property. The wife was dissatisfied with the income she was receiving from the trustees and brought proceedings in which she sought, inter alia, an order directing the trustees to sell the residuary realty and to invest the proceeds in authorized investments.

The trial court held that as the trustees were not under a duty to convert the realty. The Ontario Court of Appeal allowed the wife’s appeal and extended the rule in Howe v. Lord Dartmouth to realty. The trustees were thus ordered to sell the residuary realty and invest the proceeds. In the Court of Appeal’s view, unless the will showed a contrary intention, the parts of the estate that are of a wasting or reversionary or unproductive nature must be realized by the trustees and the proceeds invested in authorized investments7.

The Supreme Court disagreed with the Court of Appeal and held that unless the will imposed a duty upon the trustees to convert the residuary realty, there was no duty on the trustees to do so. The court held that the extension of the long-standing rule8 in Howe v. Lord Dartmouth, if it were to happen, should be done by the legislature. The court emphasized that it was dealing with an equitable rule relating to estate administration, as opposed to dependant’s relief legislation which enabled the court to alter testamentary provisions in order to do justice between the testator and members of his family9.

Since 1980, across Canada, the rule in Howe v. Lord Dartmouth and the Supreme Court’s decision in Lottman v. Stanford have been referred to in few cases. Two Ontario cases that apply Lottman v. Stanford are Kemp v. Kemp10 and Williams Estate, Re11. In both cases, the wills in question conveyed wide discretion on the defendant trustees to invest, realize, and dispose of real property, with no specific direction as to the sale of any real property.

The plaintiff in Kemp v. Kemp was the testator’s widow and the income beneficiary under his will. The executors in Kemp were given uncontrolled discretion to make investments for the estate and were declared by the will not to be liable for any losses from investments made in good faith. Between 1986 and 1989, the income from the estate properties went to maintaining them. The rental income and the property values rose. The market crashed in 1989 and the prices the properties generated were much lower than their 1980’s valuations. The court applied Lottman v. Stanford and further noted that there was no evidence of negligence or breach of trust by the executors. The court confirmed in Williams Estate, Re that where a testator gives his estate trustees discretion to convert the estate’s real property or to postpone conversion, then the estate trustees were under no duty to convert and may retain the real property at their discretion12.

Options for the disgruntled beneficiary13

  1. Dependant’s relief application

The Supreme Court appeared to suggest in Lottman v. Stanford that the widow could have brought a dependant’s relief application, rather than relying on the rule in Howe v. Lord Dartmouth, to obtain an order altering the testamentary provisions in the will. This is an avenue to consider for those beneficiaries suffering financially as a result of an executor’s handling of a wasting real property.

  1. Unlawful exercise of discretion

Even if the will gives the estate trustee absolute discretion to convert or postpone the conversion of realty, thereby ousting the rule in Howe v. Lord Dartmouth, the trustee must still act in good faith. If there is no evidence of mal feasons on the part of the estate trustee, then the trustee’s discretion is absolute and should not be interfered with by the court. This was the situation in Williams Estate, Re14.

What if the trustee’s decision to retain a wasting real property is motivated in part by a “good” reason and in part by mal feasons?

Ontario courts have steadfastly refused to interfere with a trustee’s discretion except in limited circumstances.

The Fox v. Fox Estate15 case involved an executor who exercised her power to encroach on the residue primarily as a result of her disapproval of her son’s decision to marry outside the family’s faith. The appeal came before a panel of three judges at the Court of Appeal. While all of the learned justices allowed the appeal, the reasons were not the same.

Galligan J.A. determined that the executor’s exercise of discretion to the prejudice of her son was based on a reason extraneous to the duty which the will imposed on her. This extraneous consideration demonstrated sufficient mala fides to bring her conduct within the scope of judicial supervision. Her exercise of discretion was set aside as her reason, being her disapproval of her son’s marriage outside the family’s faith, was abhorrent to contemporary community standards and contrary to public policy. McKinlay J.A. found it obvious that the executor did not consider the terms of the will at all when she made the encroachments. She had no understanding of her duties as an executor and acted in the firm belief that she was dealing with her own property. Accordingly, the learned justice determined that the encroachments were breaches of trust and were set aside. Catzman J.A. agreed with McKinlay J.A. that the executor dealt with the property as though it was her own but that she was at least in part motivated by her concern for the financial welfare of her grandchildren. In Catzman J.A.’s view, the preferred approach is that if an executor exercises her discretion to encroach for a “good” reason that is clearly within the scope of the power conferred upon her by the will, the court should be reluctant to interfere on the ground that she was, additionally, motivated by a “bad” reason that the court is unprepared on public policy grounds to support.

In Edell v. Sitzer16, the Ontario Superior Court of Justice considered and refused to interfere with the discretionary power of a trustee to vary the terms of a trust.

Fox and Edell stand for the proposition that the court should not interfere in with good faith exercise of a discretion by a trustee unless:

(a) the trustee has achieved an outcome unauthorized by the power conferred upon him or

(b) it is clear that the trustee would not have acted as he did

(i) had he not taken into account considerations which he should not have taken into account, or

(ii) had he not failed to take into account considerations which he ought to have taken into account.17

To summarize, the beneficiary should have an appreciation for the court’s reluctance to interfere in such exercise of discretion and carefully consider the trustee’s reasons for not converting wasting real property before resorting to court.

  1. Devastavit – Maybe?

A devastavit is the mismanagement of the estate by the executor, in squandering or misapplying the assets contrary to the duty imposed upon him or her18. The term appears in case law when a creditor of an insolvent estate seeks to impose personal liability upon an executor for the estate’s debts. If the plaintiff can prove there are insufficient assets in the estate to satisfy its debts as a result of mismanagement of assets by the executor, the executor may be held to be personally liable.

Can the creditor charge the estate trustee, who is given absolute discretion over the realty in the estate under the will, with a devastavit if the realty is of a wasting nature? How does devastavit interact with the rule in Howe and Dartmouth? This has not yet been addressed in case law.

Summary

The Supreme Court’s decision in Lottman v. Stanford continues to be the law in Canada: where a testator gives his estate trustees discretion to convert the estate’s realty or to postpone conversion, the estate trustees are under no duty to convert and may retain the realty at their discretion even if it is of a wasting nature. The position seems clear and unambiguous, though, luckily for beneficiaries, there are other ways of attacking the testamentary dispositions in the will by way of a dependant’s relief application or by showing that the trustees have failed to act in good faith. It is not clear, from the creditor’s point of view, whether they can seek to impose personal liability for the estate’s debts, to the extent that the estate has insufficient assets to pay its liabilities, for holding onto a wasting real property.

1. Waters, Donovan, Waters Law of Trusts in Canada, 4th ed. 2012 Thomson Reuters Canada Limited, p. 1023.

2. (1802), 7 Ves. Jun. 137, 32 E.R. 56 (Ch.).

3. Jenkins, Jennifer and H. Mark Scott, Compensation & Duties of Estates Trustees, Guardians and Attorneys, Chapter 12, General Duties of Trustees, May 2010, p. 12-20.1.

4. 1980 CarswellOnt 521.

5. 1996 CarswellOnt 1178 (ONSC (Gen. Div.)), para. 47.

6. Lottman v. Stanford, 1980 CarswellOnt 521.

7. Lottman et al v. Stanford et al., 1978 CanLII 69 (ONCA), at para. 10.

8. The Supreme Court of Canada noted in Lottman v. Stanford that all of the authorities and writers it had been able to discover emanating from common law jurisdictions, excepting the United States of America, confined the operation of the rule in Howe v. Lord Dartmouth to personalty. See para. 11.

9. Lottman v. Stanford, 1980 CarswellOnt 521, at para. 13

10. 1996 CarswellOnt 1178 (OCJ (Gen. Div.)).

11. 2005 CarswellOnt 1345 (ONSC).

12. Williams Estate, Re, at para. 11; see also Hopkins, Re (1982), 39 O.R. (2d) 673 (Ont. C.A.).

13. Arieh Bloom’s article, “Fish in a Barrel: Protecting Beneficiaries’ Interests in Real Property”, 34 E.T.P.J. 361 provides a detailed review of the options available to residuary beneficiaries in protecting their interest in the real property of an estate.

14. Supra, paras. 8, 11.

15. 1996 CanLII 779 (ONCA).

16. 2001 CanLII 27989 (ON SC).

17. Forbes v. Canadian Tire Corporation Limited, 2013 ONSC 132 (CanLII) at para. 45.

18. Archie Rabinowitz, “Plene Administravit: Obscure But Not Obsolete” (2009) 28 T.E.P.J. 110.

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