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Issues to consider where a trust is a participant in a finance transaction

Andrew Evans


United Kingdom

There are a number of ways in which a typical finance transaction for a private banking matter involves a trust structure; we set out common features of such transactions & the key issues for lenders

There are a number of ways in which a typical finance transaction for a private banking matter may involve a trust structure: for example the asset over which the lender is taking security may be held in a trust, or the lender itself may be holding the security as a trustee on behalf of itself and other lenders. In this article we set out the common features of such transactions and the key issues which a lender should take into account when entering into a transaction involving a trust.

What is a trust? 

A trust is a legal structure by which assets are held, generally under the control of a trustee, for the benefit of a beneficiary or for a specified purpose. Trusts can arise through express creation by a settlor or by operation of law, such as where one party provides the monies for the purchase of a property by another party. A trust has no separate legal personality and is not a legal person. Assets of the trust are always held in the name of trustees. When trusts are expressly created this is generally for reasons of estate planning, asset protection and tax efficiency.

A number of key jurisdictions recognise trusts (generally common law systems including England, the United States, Ireland and most off shore jurisdictions) but others do not (generally civil law systems including Russia and Spain). An increasing number of civil law countries recognise foreign trusts, including France and Switzerland.

Best practice: practical points for lenders to consider when there is a trust in the borrower group structure

In finance transactions involving a trust, we would recommend that the counterparty lender considers the following:

1. Review of trust documents: At an early stage the lender should ascertain the identity of the trustees by reviewing copies of the trust document and any deeds of retirement, removal or appointment of trustees.

2. Review of trustees' powers: The terms of the trust deed should also be checked carefully to ensure that the trustees have the power to enter into the finance documents and that (so far as it is possible to ascertain) they are exercising such powers for bona fide purposes. The trust document may authorise the trustees to deal with trust property in a way which would otherwise be a breach of trust.

3. Bare trusts: When taking security over assets held on a bare trust (i.e. a trust where the beneficiary's beneficial ownership is absolute and the trustee must act on the beneficiary's instructions rather than having active duties) it is essential that such security is granted by both the legal owner (i.e. the trustee) and the beneficial owner. This means that both the legal and beneficial owner should be party to the security document, and the lender should carry out due diligence in respect of each of them.

4. Trust of land: An important consideration in real estate finance transactions involving trusts is that, under English law, a sole trustee cannot give a valid receipt for capital monies arising under a trust of land (a trust of property that includes land) unless it is a trust corporation. This is the case even where the trust was originally established with a sole trustee. It follows that a lender dealing with individual trustees will insist on having two trustees as parties to any financing documents.

5. Foreign law trust: Where a trust is governed by foreign law, local counsel should be instructed in the applicable jurisdiction to review the trust documents and opine on the trust's entry into the relevant finance documents. 

6. Foreign law security document: In countries where the English law trust is not recognised there can be issues regarding the validity of a security document entered into by a trustee, particularly where the security documents are governed by the law of that country. Again, local counsel should be instructed in the relevant jurisdiction.

Considerations for the trustees in entering into finance documents

When working on a transaction involving a trust structure in the borrower group, a lender will often be asked to take into account and accommodate certain concerns from the perspective of the trust and trustees. The trustees have an obligation to consider their fiduciary duties towards the beneficiaries of the trust when deciding whether to take any action in respect of trust property, including for example granting a guarantee or security on behalf of the trust. The trustees will also wish to ensure that they are not exposed to personal liability to the beneficiaries or any third parties. To achieve this an exclusion of liability provision will usually be requested to be included in the finance documents which states that the trustees are entering into the documents solely in their capacity as trustees and that the counterparty shall only have recourse to the assets of the trust (save in the case of wilful misconduct, bad faith or fraud on the part of the trustees).

Lender acting as security trustee

In syndicated finance transactions governed by English law it is common for security to be held by a bank acting as trustee (a "security trustee") for the benefit of the obligors. This structure offers administrative advantages, but risks the security trustee being liable if deemed to have acted in breach of trust. For this reason a security trust deed will generally exempt the security trustee from certain liabilities and exclude the statutory duty of care imposed on trustees by the Trustee Act 2000. In jurisdictions where a trust arrangement is not possible, an agency structure is commonly used instead.

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