The Law Commission

PART VII

PROPERTY AND TRUST LAW

TEAM MEMBERS^[1]

Government Legal Service

Matthew Jolley (Team Manager)

Christina Hughes

(Team Manager: Compulsory Purchase Project)

Hugh Boileau, Judith Cairns, Philippa Draper, Julia Jarzabkowski, Angela Mouton,
Melanie Smith, Jonathan Teasdale

Research Assistants

Rupert Allen, Katherine Bartlett,
Katherine McCormick

Stuart Bridge

(Commissioner)

Termination of Tenancies

7.1     In January 2004 we published a consultation paper^[2] on the termination of tenancies. The paper sets out provisional proposals for reform of the law governing the means by which a landlord can terminate a lease^[3] because the tenant has not complied with the terms of that lease. This is an issue of immense practical importance for many landlords and tenants of private and commercial properties. 
7.2     Our provisional proposals were based on earlier Law Commission work in this area and took account of the introduction of the Civil Procedure Rules, the Human Rights Act 1998 and recent developments in case law. The key elements of the proposed new scheme are as follows: 

(1) The principal means of termination of a tenancy for tenant default^[4] will be by means of an order of the court: a "termination order".

(2) The effect of a termination order will be to terminate the tenancy at a specified date and to extinguish all interests (such as sub-tenancies and mortgages) which derive from it. Unless and until such an order takes effect, the tenancy will remain in existence.

(3) In all cases, prior to commencing any proceedings, the landlord must serve a notice, in prescribed form, on the tenant and any sub-tenants or mortgagees (the "pre-action notice").

(4) The pre-action notice will inform the tenant of the details of the default. The tenant may refer the pre-action notice to the court. The court may then exercise its case management powers to safeguard the parties' interests and to ensure that the court's overriding objective (of dealing with cases justly) is complied with.

(5) The court will be able to make an absolute termination order terminating the tenancy from a stated future date (without giving the tenant any further chances) or a remedial order adjourning the application on terms that the tenant be allowed to continue as tenant (provided that certain conditions are satisfied).

(6) There will be four specific grounds on which an absolute termination order can be sought. The pre-action notice must state which of these is relied upon by the landlord.

(7) Greater protection will be given to sub-tenants and mortgagees and possibly others holding interests deriving out of the tenancy. They will be entitled to be served with the pre-action notice and may protect their interests by applying for relief from the court.

(8) Exceptionally, in tightly defined circumstances, a landlord may instigate the termination process by recovering possession unilaterally without the prior sanction of a court order. The landlord will only be able to do this where due warning has been given in the pre-action notice, and where the premises are not currently occupied as a residence. In every case, the tenant may refer the matter to court. If the landlord does recover possession unilaterally, the tenancy will terminate (in the absence of any application by the tenant) on the expiry of one month.

(9) Special provision is made concerning termination of tenancy for non-payment of service or administration charges.

(10) The inter-related doctrines of re-entry and waiver should both be abolished.

7.3     We expect to produce our final report and a draft Bill during 2005. 
7.4     We are grateful to the Property Litigation Association, the Council of Mortgage Lenders, the British Banking Association and the Office of the Deputy Prime Minister for their assistance in relation to this project. 

Easements and Analogous Rights and Land Obligations

7.5     The law of easements,^[5] analogous rights and land obligations is of great practical importance to large numbers of landowners. Despite this, the relevant law has never been subject to a comprehensive review, and many aspects are now outdated and a cause of difficulty. The latest edition of the leading practitioner's work in this area comments "…it cannot be denied that there is much that is unsatisfactory about the law of easements."^[6] 
7.6     We are continuing our review of the current law and exploring options for reform and rationalisation. We intend to tie this work in with a reconsideration of the Law Commission's earlier work on land obligations^[7] with a view to producing a coherent scheme of land obligations and easements that is compatible with the Land Registration Act 2002 and the commonhold system. 
7.7     We are grateful to the members of an Advisory Group - Professor David Clarke (Bristol University), Professor Elizabeth Cooke (Reading University), Michael Croker (HM Land Registry), Philip Freedman (Mishcon de Reya), Jonathan Gaunt QC and Paul Morgan QC (both of Falcon Chambers) and Emma Slessenger (Dechert) – for their assistance on this project. 
7.8     We hope to publish a consultation paper on this topic during 2005. 

Compulsory Purchase

7.9     To lose a home or a business to compulsory purchase is a devastating experience. Those who suffer such a loss have the right to fair compensation, expeditiously paid. 
7.10     Where land is compulsorily acquired by the state, or by other statutory bodies, it is essential for all those affected that there are clear, up-to-date, and readily accessible principles for the assessment of compensation. The current law is a patchwork of diverse and sometimes conflicting rules contained in a variety of statutes and cases spanning 150 years. The complexity and inaccessibility of the current principles governing assessment of compensation for that loss are wholly unacceptable and make effective compromise of claims much more difficult than it should be. 
7.11     A report by the Compulsory Purchase Policy Review Advisory Group, established by the Department of the Environment, Transport and the Regions (now the Office of the Deputy Prime Minister) proposed a direct role for the Law Commission in preparing new legislation "consolidating, codifying, and simplifying the law". The Lord Chancellor asked the Commission: 

to review the law (legislation, case law and common law rules) relating to compulsory purchase of land and compensation, with particular regard to

(i) the implementation of compulsory purchase orders

(ii) the principles for the assessment of compensation on the acquisition of land

(iii) compensation where compulsory purchase orders are not proceeded with

(iv) compensation for injurious affection

and to make proposals for simplifying, consolidating and codifying the law.

7.12     In December 2003 the Commission published its final report on Compensation for Compulsory Purchase.^[8] This Report recommends the replacement of the patchwork of rules by legislation to simplify, consolidate and codify the legal principles and to remove unfairness or anomalies. It contains the framework for a Compensation Code. Legislative adoption by government of the Commission's Compensation Code would reduce the time spent on legislative interpretation and facilitate and expedite the negotiation of settlements. 
7.13     The Report builds on the consultative report on Compensation published in July 2002.^[9] Later in 2004 the Commission will publish its second final report on Compulsory Purchase, which will address procedural issues, as outlined in our consultative report on Procedure, published in December 2002.^[10] 
7.14     Contrary to normal Law Commission practice in a final report, neither of our final reports has or will have a draft Bill to accompany our recommendations. This is for two connected reasons. First, this is not a self-contained study. It has been designed to contribute to a project initiated by the government involving the fundamental review of the law in this area. We are grateful to the ODPM for the close collaboration we have been able to enjoy. The Commission's work has proceeded in parallel with the preparation by the ODPM, and presentation to Parliament, of a Bill relating to the same subject-matter. Further legislation will need to take account of the progress and final form of that Bill. Secondly, our primary task within the overall project has been to sort out the existing law, and to make recommendations for the general content and shape of the new Code, and for repeals of existing legislation. Until those issues have been considered by government, in the light of our recommendations, it would not have been a sensible use of our limited drafting resources, to embark on the preparation of a detailed Bill. 
7.15     The Commission has benefited greatly from the informal help freely given to it by organisations and individuals who have specialist and practical knowledge in the field. The former Chairman, Lord Justice Carnwath, has acted as consultant on this project and his help has been invaluable. 

Trustee Exemption Clauses

7.16     A trustee exemption clause is a clause in a trust instrument which excludes or restricts a trustee's liability for breach of trust.^[11] Such clauses are able to relieve a trustee from liability for anything except dishonest conduct. As a result, beneficiaries can in many cases find themselves with no remedy against a trustee who has caused loss to the trust fund by his or her actions or omissions.^[12] 
7.17     Our 2003 consultation paper^[13] made the following key provisional proposals for the reform of trustee exemption clauses, all of which would require legislation: 

(1) All trustees should be given power to make payments out of the trust fund to purchase indemnity insurance to cover their liability for breach of trust;

(2) Professional trustees should not be able to rely on clauses which exclude their liability for breach of trust arising from negligence;

(3) In so far as professional trustees may not exclude liability for breach of trust they should not be permitted to claim indemnity from the trust fund; and

(4) In determining whether professional trustees have been negligent, the court should have power to disapply duty exclusion clauses or extended powers clauses where reliance on such clauses would be inconsistent with the overall purposes of the trust and it would be unreasonable in the circumstances for the trustees to be exempted from liability.

7.18     Following a number of seminars across the country we received a total of 118 responses to the consultation paper. We have been awaiting (and shortly before publication of this Annual Report have received) detailed comments from a Working Group of the Financial Markets Law Committee on the impact of our provisional proposals on trusts in financial markets. 
7.19     We intend to publish our report and a draft Bill in early 2005. 

Capital and Income in Trusts: Classification and Apportionment

7.20     The treatment of a receipt by trustees will usually depend on whether that receipt constitutes income or capital for trust law purposes. For example, private trusts will often provide that income goes initially to certain beneficiaries and that capital is held for others. 
7.21     The law on the classification of trust receipts as income or capital is complex and can give rise to surprising results (and so perceived injustice). Trust law has also developed complicated rules which oblige trustees to apportion between income and capital in order to keep a fair balance between different beneficiaries. It is widely acknowledged^[14] that the current rules are unsatisfactory, often causing more difficulties in practice than they solve. As a result, the application of the rules is often expressly excluded in modern trust instruments. 
7.22     The distinction between trust income and capital receipts is also an important issue for charities. Many charitable trusts have permanent capital endowments which cannot be expended to further the charity's objects; only the income generated can be used and there is generally no power to convert capital into income. This may inhibit performance of the charity's objects and provoke investment practices which concentrate on the form of return rather than on maximising overall return. 
7.23     We plan to publish a consultation paper on these issues in late 2004. 

The Rights of Creditors against Trustees and Trust Funds

7.24     Under the current law, whenever trustees enter into a contract they do so personally, incurring personal contractual obligations and (subject to any express contractual provision limiting liability) personal liability to the other contracting party. A trustee will only have a right to be indemnified from the trust fund for obligations properly incurred.^[15] If obligations were not properly incurred, the trustee will have to make good any liability out of his or her own wealth. 
7.25     We will be reviewing the current law and assessing whether it is possible to better balance the interests of creditors, trustees and beneficiaries. 
7.26     We are grateful to the Charity Commission and to the Trust Law Committee for their continuing assistance in relation to the Law Commission's trust law projects. 
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Note 1    Including lawyers who were at the Commission for part of the period.     [Back]

Note 2    Termination of Tenancies for Tenant Default (2004) Law Com No 174.    [Back]

Note 3    The provisional proposals apply to all leases except residential tenancies for a term of less than 21 years. Shorter residential tenancies were considered in the Report on Renting Homes (2003) Law Com No 284.    [Back]

Note 4    “Tenant default” will comprise breaches of covenant or obligation, including certain “disguised” breaches ie where the tenancy provides that it will determine on the occurrence of a specified event.    [Back]

Note 5    An easement is the right enjoyed by one landowner over the land of another. Common examples are rights of way and rights to light.     [Back]

Note 6    Gale on Easements (17th ed 2002) p vi.     [Back]

Note 7    See Transfer of Land: The Law of Positive and Restrictive Covenants (1984) Law Com No 127.    [Back]

Note 8    Towards a Compulsory Purchase Code (1) Compensation (2003) Law Com 286.    [Back]

Note 9    Towards a Compulsory Purchase Code: (1) Compensation (2002) Consultation Paper No 165.    [Back]

Note 10    Towards a Compulsory Purchase Code: (2) Procedure (2002) Consultation Paper No 169.    [Back]

Note 11    Either by expressly excluding liability or by restricting or otherwise modifying the trustee’s duties.    [Back]

Note 12    A state of affairs that has been widely criticised, for example by Lord Goodhart during the Second Reading of the Trustee Bill in 2000.    [Back]

Note 13    Trustee Exemption Clauses (2003) Law Com No 171.     [Back]

Note 14    See, for example, the Law Reform Committee’s Twenty-Third Report, “The Powers and Duties of Trustees” (1982) Cmd 8733 and the Trust Law Committee’s consultation paper “Capital and Income of Trusts” (1999).     [Back]

Note 15    There are various reasons why a trustee may lose the right to be indemnified out of the trust fund; for example, because entry into the contract was in breach of the trustee’s equitable duties.    [Back]