Section 21 Agreements and Trusts

Are they a good mix in organising relationship property in the rural sector? Marriage, in the eyes of the law, is a largely – although not entirely – outdated institution; it’s now ‘relationships’ that are important. When a relationship comes to an end, dividing up the assets can be a challenging task. For rural families, in particular, it pays to plan well ahead to protect the assets you own outright, as well as those in which you have an interest.

In organising your affairs to protect your property against unintended consequences if your relationship ends, what is known as the ‘s21’ Agreement is an important tool. Section 21 Agreements (made under the Property (Relationships) Act 1976 (known as the PRA)) are what used to be called ‘Matrimonial Property Agreements’ or ‘pre-Nups’. The s21 Agreement is the main method where parties to a relationship can agree which of their property is their separate property and which is relationship property that is to be shared.

Dealing with the family farm

Whilst the s21 Agreement is made between the parties to the relationship, the Agreement is commonly used when trying to deal with succession issues, particularly in the farming context. Therefore the Agreement is often trying to address the concerns of others as well as the two parties to the relationship. If the farm has been in the family for some time, there’s often a desire by the wider family for it to stay that way. We should also remember that relationships don’t only end when couples split up – accidental death can also end a relationship.

How do s21 Agreements work in the rural sector when farming families use a trust as an entity to own the main property? Can a s21 Agreement deal with property that is owned by a trust?

The short answer is ‘No’. The PRA applies only to property actually owned by the parties. It does not apply to property held in a discretionary trust, where all beneficiaries have is a ‘hope’ or ‘expectation’.

Dealing with property owned by a trust

Trust property is legally owned by the trustees. One or other of the parties to a s21 Agreement may be a beneficiary of the trust, but that does not automatically give them the right to direct trustees to deal with trust property as they want. There may well be other beneficiaries who have an expectation of sharing in the family capital at some point. One of the parties to the s21 Agreement may not even be a beneficiary, so in that event, they would have no right to trust property.

This means the ability to deal with trust property in a s21 Agreement is limited simply because the property is not owned by either party and, therefore, they have no legal right to control its disposition. As a result of this, we are now seeing the growth of the ‘hybrid’ Agreement which effectively means two agreements are made simultaneously. These are:

1. A s21 Agreement which deals with property actually owned by the parties personally, and
2. An agreement made with the trustees of the trust where the trustees agree to deal with trust property in a certain way.

Whether the proposed agreement is at the beginning of a relationship, or during a relationship, or at the end of the relationship, the trustees of the trust may well have to take into account different considerations than the couple trying to order their affairs. Trustees have a duty to act fairly between all the beneficiaries of a trust and simply may not be able to agree to what a couple wants.

Therefore, whilst the s21 Agreement is a useful tool in ordering a couple’s affairs, it’s only one of a number of agreements that may need to be entered into (which could well involve other, third parties) to ensure that the parties to it (and often the wider family) achieve the desired result.