Garrett v Yiasemides [2004] NSWSC 828

This was an application which arose concerning the trusts of the late Irene Garrett. The plaintiff sought to have the trustees removed and replaced with other trustees, and for those new trustees to be empowered to mortgage a particular item of trust property.

Mrs Garrett died on 15 March 1999. Garrett’s maiden name was Confos. She had been married twice. Her first marriage, to Yiasemides, was one which produced three children, George, Marion and Peter, who are now adults. Her second marriage, to Mr Garrett, produced one daughter, Grace. Grace is now aged five or six.

Garrett’s last will was made on 12 March 1999. She appointed her elder son George Yiasemides, and her cousin Michael Confos as trustees and executors of the will. She gave her husband, Mr Garrett, a right of residence in her home, for a period of time which has now expired. Upon the expiry of that right of residence, the home was to go into residue. There were some small specific legacies. The residue of the estate was to be divided into five parts. Three of those parts were for the children of her first marriage, one of them was for Grace, and the fifth of them was for her husband Mr Garrett. The gifts to the children were ones which were conditional upon them surviving her and on attaining the age of 21 years.

Peter Yiasemides was not yet 21 and the trustees of the estate were holding money in a bank account on trust for him until he reaches 21 years of age. As well, the gift of residue made to Grace will not vest for many years.

There was a specific clause in the will, which allowed Mr Garrett and Grace to use Graces entitlement (a little over $100K) to purchase property and live in it.

Construction of the Bangalow House

Mr Garrett decided that the best course for him to adopt with his young daughter was to arrange for her interest in her mother’s estate to be used in purchasing a half interest in a block of land, and in the erection of a house upon it.

Mr Garrett was the owner of a half share as tenants in common in the land, and Mr Michael Confos and Mr George Yiasemides (between them as joint tenants) as holder of the other half share as tenants in common in the land.

At the time that Mr Garrett embarked on the construction of the house he was aware that the sum which was available from Grace’s funds, and the amount of own money that he had available, was not sufficient to complete the building work. He believed, however, that he would have no difficulty in obtaining a mortgage to complete the work. His belief was mistaken. Lenders are unprepared to lend against his half interest in the property. The house was incomplete, and there were further essential works which need to be carried out before the Council would grant a certificate to enable occupation of the house. Mr Garrett had been advised that certain particular items of work were needed to get the house to the stage where a certificate of occupancy could issue.

Mr Garrett’s Attempts to Raise Money Secured by the Land

Mr Garrett came to realise that he would not be able to obtain a loan secured by a mortgage over his half interest in the house. He wrote various letters to Mr George Yiasemides, asking, first, whether he would be prepared to resign as trustee and then requested he agree to the signing of a mortgage over the property. Mr Michael Confos, the other trustee, was by that stage prepared to agree to the granting of a mortgage. Alternatively, he asked that Mr George Yiasemides might retire as trustee if he was not willing to enable a mortgage to be granted. There has been a succession of correspondence which has produced no response, despite George Yiasemides being aware of the requests and these proceedings.

Procedural Steps in this Litigation

Mr Michael Confos became bankrupt on 22 September 2002. He has filed an affidavit in the proceedings, where he agreed that George Yiasemides should be removed as trustee and himself replaced.

Trustee’s Power to Invest in Partial Interest in House

The powers of the trustees of the estate include the powers of investment arising under s14DA Trustee Act 1925. In broad and excessively simple terms, a trustee may, since the commencement of that Act, invest trust funds in any form of investment, provided that the trustee is prudent in so doing, and observes any specific restrictions or obligations in the trust instrument.

It is wide enough to authorise the trustees investing trust moneys in the purchase of a fractional interest in the land, and in advancing the money towards the erection of a house on it, to secure for a beneficiary a right to use the house as a residence, provided always that in so doing the trustees observed their obligations of prudence.

Trustee’s Power to Mortgage

Section 82 of the Trustee Act 1925 authorises the court to authorise a trustee to effect improvements on land, up to an amount nominated in the Court order, and to raise that amount by mortgage of the land.

In the present case, the proposal was that it will be Mr Garrett who borrowed the money which was needed to complete the building, and that the interest of the trust in the land would only be used as security, without a personal covenant. Because the trustees would not be spending money which is raised on mortgage, this proposal was not one which the trustees would have power to effect without Court approval under section 82A. For the same reason, the Court’s power under section 82 did not apply to it. However section 81 Trustee Act 1925 is comfortably wide enough to authorise the proposal if the Court finds it expedient.

Held it was in the interests of Grace, for the money to be raised on mortgage in the fashion proposed. The enactment of section 14DA Trustee Act 1925 shows that it is now proper for the Court to take into account, in exercising power under section 81 Trustee Act 1925, considerations concerning whether the beneficiary of a trust has a secure right to use a dwelling house (in the expanded sense of section 14DA Trustee Act 1925) as a residence.

Removal of Trustee

If the Court did not find that the mortgaging of the land should be carried out, in Grace’s interests, there would not be any ground for removing George Yiasemides. Section 70 Trustee Act 1925 accordingly was considered. A trustee is not to be removed for every mistake or neglect of duty or inaccuracy of conduct – that he or she is to be removed only when the acts or omissions are such as to endanger the trust property or to show a want of honesty or a want of proper capacity to execute the duties, or a want of a reasonable fidelity. Mr George Yiasemides, by declining to agree to the mortgage for a period of well over a year, engaged in conduct that endangered the trust property and also demonstrated a want of proper capacity to execute the duties of the trust. He was removed as trustee of the Bangalow land.
Mr Confos, being bankrupt, was also not a proper person to continue as a trustee of the Bangalow land.

Two new trustees were appointed.

Costs

The case law shows various examples of situations where a trustee is removed from the trust, and is not allowed his costs out of the trusts estate, and may be ordered to pay the costs involved in the action:
The circumstances in which a trustee who is so removed can be ordered to pay costs depend upon whether the litigation in which his removal is sought is in substance adversarial litigation, or whether it is litigation raising a question as a matter of administration of the trust. In the present case, it seems to me that the litigation falls on the adversarial litigation side of the line.

For those reasons, the Court ordered Mr George Yiasemides pay the costs of the proceedings.

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