Don’t rush to get outside! how preparing for a financing can save trustees time and money

My seven year old was recently told not to rush his schoolwork, which he explained happens because he gets to go and play football when he’s finished. I explained (in vain) that if he took more time preparing his first attempt, he would get outside sooner because he wouldn’t have to spend as much time correcting it.

Similarly, whilst no lawyer will ever begrudge additional fees, when trustees are borrowing money (especially where assets are spread over multiple trusts), a little preparation before instructing lawyers and entering into documentation can save time, money and frustration.

Trust Documentation

As it is the trustees of a trust who borrow a loan rather than the trust itself (which has no legal personality), it is important before seeking finance and rushing to draft documents, to identify clearly the current trustees of the relevant trust.  These trustees must then approve, enter into and sign the finance documents and will form part of the basis of the bank’s “know your customer” (KYC) checks. 

A lender will need to verify the identity and appointment of current trustees. They will require copies of the fully signed and dated trust deed establishing the trust and appointing the initial trustees, together with all deeds of amendment, appointment or retirement of trustees and letters of direction.

Trustees should therefore ensure that they are familiar with the trust documents, not just to confirm that they are properly appointed as current trustees, but also because not all trusts will contain the required express power to borrow. This is especially important to check as the bank will require this confirmation (the power to borrow would typically be included in the administrative powers – some older trusts, or where the trust terms have been through a number of iterations, may be unclear as to the express power so it is essential that this is checked in advance), and also because a trustee acting in breach of trust will not be entitled to indemnification from trust assets, thus risking their own personal assets. By also holding and minuting a quorate and properly convened trustee meeting to approve the finance documents, trustees can demonstrate that they have considered their authority and duties and are acting within their powers.

Ownership of assets offered as security

Lenders will often also require security over assets of the borrower or other related trusts or individuals. Thoughtful preparation here can be invaluable, and before identifying assets to offer as security trustees should check and confirm the actual and documented ownership of such assets, particularly any tangible assets without ownership registers. A valuable painting may have been in a family for decades, but will only be acceptable security when accompanied by evidence of its ownership and provenance. Further if that asset is actually owned by a different trust (as art often is), the trustees of that other trust will need to enter into a separate security document with the lender.  These third party trustees will need to ensure that they too have the power and authority to provide trust assets as unencumbered security for a loan to someone else.

Nominee arrangements should also be carefully recorded. Recently for example, after voluminous documentation had been drafted and agreed, it became apparent that a private jet being financed was held subject to a long-forgotten nominee agreement. Aside from re-drafting documents, this raised questions around tax, ownership of other assets, required further KYC checks and caused significant cost and delay, all of which was ultimately borne by the borrowing trustees and which could have been avoided with better record keeping.    

Continuing compliance and changes to trustees

Whilst trustees must be fully familiar with the terms of finance documents before entering into them, it can be harder (especially for corporate trustees managing several different trusts) to ensure continuing compliance once the lending is in place. Trustees are therefore advised to record the key restrictions and consent, notification and information requirements in the documentation in order to avoid inadvertent breaches, which would allowing the lender to demand immediate repayment of the loan.

Trustees can also often fall foul of the common requirement to notify or obtain the consent of the lender prior to a change of trustee. They should also be aware that often, any change of trustee will be a mandatory prepayment event or event of default under the loan, allowing the lender to call in the loan or redocument (and renegotiate) its arrangements.

As the legal owners of the trust assets, any new appointments or retirements of trustees must be accompanied by a transfer of title of those assets to or from the new or retiring trustees. Whilst the security created by existing trustees usually survives any transfer, the lender will not have a contractual relationship with the new trustee under which, for example, the trustee agrees to maintain or insure the relevant assets. Upon a change of trustee, lenders will therefore often require entry into replacement finance documents with the new trustees, which can be costly and time consuming.

Alternatively, where changes to trustees are more frequent (or are anticipated at the outset), accession and retirement mechanics may be built into the documents, allowing any new trustee to sign a short accession deed rather than an entire new suite of documents. For trustees, it is favourable to cater for changes in trustees at the outset because, without a mechanism to change the counterparties to the contract, those trustees who originally entered into the agreement (and their estates, if they have died) will remain liable under it.

So, whilst it may be natural for a trustee to try and document any borrowing that has been agreed between trustees and a lender as soon as possible after commercial terms are agreed, taking a moment to check that all the documentation, ownership and records of the trust and its assets are up to date and complete may ultimately save trustees time and money, leaving more time outside… 

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2024