This article is an abridged version of the published paper titled “Conceptualising the Singapore Real Estate Investment Trust” (2010) 24(3) Tru. L.I. 155-175 and considers briefly the validity of the Singapore Real Estate Investment Trust.
The Singapore Real Estate Investment Trust
Introduction
The Real Estate Investment Trust (“REIT”) has become increasingly popular as a form of investment in Singapore. This is evident from the fact that the recent public offer of the Mapletree Industrial Trust and Sabana REIT were 27.7 times1 and 12.3 times2 subscribed respectively. In the near future, the Mapletree Commercial Trust may also make its debut on the Singapore Exchange.3 While such a development bodes well for Singapore as a financial hub, a technicality inherent in the structure of the REIT has become the subject of a legal controversy, which if unresolved, may render the S-REIT as being an invalid trust.
The Singapore REIT (“S-REIT”) is a trust established to hold, trade and manage real property or property mortgages for the benefit of investors known as unitholders. A peculiar feature of the S-REIT is that unitholders are precluded by virtue of the trust deed from owning any equitable interest therein. Two leading commentators, Professor Hans Tjio and Mrs Lee Suet Fern, have thus taken the view that the S-REIT is prima facie an invalid trust because the beneficiary principle – a rule that determines the validity of a trust – is transgressed when equitable interest does not vest in the beneficiaries.4 Their view rests on analysing the trust as requiring two owners over the same trust property: common law and equitable owners.5 Since the equitable interest in the S-REIT appears to be in suspense, this renders the S-REIT as being equitably ownerless. In the view of Tjio and Lee, this is offensive to the beneficiary principle and has led them to consider the S-REIT as being a non-charitable purpose trust, which is prima facie, an invalid trust. However, Tjio and Lee did suggest that the S-REIT could be valid on the basis that it is a Re Denley6non-charitable purpose trust.
This article shall demonstrate that it is inaccurate to conclude that the beneficiary principle is offended when equitable interest does not vest in the beneficiaries. Further, contrary to the view of Tjio and Lee, it will be shown that Re Denley is not a valid non-charitable purpose trust but a trust for human beneficiaries. Accordingly, the S-REIT is a trust for human beneficiaries and does not offend the beneficiary principle. Finally, should the S-REIT be conceptualised as a non-charitable purpose trust, making it invalid, it is suggested that the beneficiary principle be reconceived as being based on the enforcer principle. In that way, the S-REIT can still be considered a valid trust.
Structure of a Typical S-REIT
The diagram on page 24 summarises the typical structure of an S-REIT.
The S-REIT is first instituted by a trust deed, which sets out the governing terms and condition of the trust. Unitholders will purchase units, each of which represents an interest under the S-REIT. The purchase monies will in turn be used to invest in properties identified by the manager. The trustee will then hold the bought properties and any income generated thereof on trust and will, at the same time, ensure that all laws are complied with.7 Further, a property manager is usually involved by being responsible for the upkeep of the properties.
The unique features of the S-REIT are manifold. The more prominent ones are that: (i) equitable interest is excluded from vesting in the beneficiaries with an express consequence that the S-REIT assets cannot be transferred to the beneficiaries’ joint names as permitted under the rule in Saunders v Vautier;8 (ii) unitholders are entitled only to sue and claim damages;9 and (iii) the liability of unitholders is limited to the amount of money paid to subscribe to the S-REIT units.10
Does Equitable Interest Need to Vest in the Beneficiaries?
Upon closer examination of the rationale behind the vesting of equitable interest, one will discover that the vesting of the interest is a procedural technicality that has unfortunately been construed as being intrinsically synonymous with the beneficiary principle. This is due to the contiguous link that the vesting of equitable interest has with the beneficiary principle.
The beneficiary principle was developed to address one pressing concern which plagues even the modern trust: that a trust has no person “in whose favour the court can decree performance”.11 This worry is an acute one because when property has been conveyed to a trustee, the trustee becomes the common law owner of the property. It is not open to anyone – including the settlor or beneficiary – to demand at common law that the trustee keep his or her promise to hold the property for a specified purpose, especially if the promise is not supported by consideration. The trustee is bound only in equity to honour the obligations undertaken by him or her in respect of the trust property.
However, in order to effectively ensure that the trustee keeps to the obligations undertaken, a person has to petition the Court should the trustee perform defectively. Thus, it is unsurprising for a trust to advance purposes to be void,12 for Courts would be more inclined to find that no trust has been created if there is no one who can bring to the Courts’ attention any breach of trust. This explains why a non-charitable purpose trust is usually invalid and that a beneficiary who is empowered to complain of any breach of trust is usually required to validate a trust.
Logically, it is convenient for a settlor to state simply who the beneficiaries in a trust are so as to enable them to enforce the trust. However, it is contrary to good procedural order if a beneficiary simply barges into Court and asserts that he or she wants to enforce the trust by frantically waving the trust deed in front of the judge. Does the trust deed itself give the beneficiary locus standi to enforce the trust or is it something else?13 Moreover, should trust property be misapplied and be still traceable, how would one trace the property in a principled and logical manner?14 Equity provided an ingenious solution to these issues by vesting what is known as the “equitable interest” in the beneficiary to facilitate procedurally the beneficiary’s enforcement of the trust.
However, good procedural order must give way to substantive fairness. It is an affront to common sense to insist on vesting equitable interest at all times to give locus standi to the beneficiaries to enforce the trust. Equity is not a rigid institution since it was created to temper with the unfair rigour which the common law brings.15 Accordingly, there are instances where beneficiaries of non-charitable trusts are entitled to enforce the trusts even when equitable interest is not vested in them.16 These trusts are namely the discretionary and Re Denleytrust.
In the discretionary trust, the trustee has a duty to allocate the equitable interest in the property therein to a class of beneficiaries.17 Prior to the fixing of the equitable interest,18 members of the class of beneficiaries are entitled to enforce the trust despite the equitable interest not vesting in them.19
In Re Denley, Goff J held that a trust over “land [to be] used as and for the purpose of a recreation or sports ground primarily for the benefit of the employees of the company and secondarily for the benefit of such other person or persons (if any) as the trustees may allow to use” was valid even though the trust was worded as a purpose.20 Goff J reached his decision on the basis that the employees were the factual beneficiaries who could enforce the trust. This strongly suggests that a trust could be valid even when equitable interest does not vest in the beneficiaries at all.
Relationship Between Re Denley and the S-REIT
Since equitable interest need not always vest for a trust to be valid, the Re Denley trust is arguably a trust for human beneficiaries and not an exceptional non-charitable purpose trust. The human beneficiaries were the employees whom Goff J found to be the factual beneficiaries. Thus, Re Denley creates the possibility of satisfying the beneficiary principle when beneficiaries are expressly identified to a trust or when a Court is able to make a finding of fact and identify beneficiaries who could enforce the trust.
Similarly, in the case of the S-REIT, since the unitholders are specified to be the beneficiaries under the trust deed, the beneficiary principle is complied with, and unitholders should be entitled to enforce the trust. Accordingly, the S-REIT is a Re Denley trust for human beneficiaries and not an exceptional Re Denley non-charitable purpose trust.
Re-conceiving the Beneficiary Principle As Being Based on the Enforcer Principle
Assuming the view that the S-REIT is an invalid non-charitable purpose trust is staunchly taken, it is suggested that to validate the S-REIT, the beneficiary principle should be re-conceptualised as being premised on the enforcer principle. This means that when an enforcer has been identified to a trust, the trust is considered to be valid.21
The enforcer principle should be adopted for two reasons: first, that a beneficiary’s right against the trustee are in personam in nature; and second, that the enforcer principle is not in opposition to the beneficiary principle.
Much has been written about how the beneficiary’s right is in rem in nature.22 However, it is submitted that it is a misguided view, for a beneficiary’s right against the trustee being in personam in nature has a firm grounding in trust law. As Professor Frederick Maitland has pertinently clarified, a beneficiary cannot have an in rem right when the common law already recognises the trustee as being the owner of the trust property.23 Furthermore, it is an inherent feature of equity that the remedies equity provides are in personam in nature and not in rem.24 Therefore, it is sufficient that a trust is valid when there is someone to enforce the trust by simply petitioning a Court, which will in turn act in personam against the trustee to ensure that he or she performs according to the obligations undertaken.
In addition, the enforcer principle should be acceptable as an instrument to validate a trust because it does not conflict with the beneficiary principle. Since the basis of the beneficiary principle (as discussed above) is for the beneficiaries to notify the Court of any trustee misconduct, the enforcer principle accomplishes the same task, the only difference being that the enforcer may be anyone including the beneficiaries. In this regard, it is noteworthy to highlight that a pure enforcer principle may be detrimental to the trust if the enforcer is a disinterested third-party. The reason is that disinterested third-parties may not carry out their duties well, for their interests are unlikely to be prejudiced should they perform their role defectively. In any case, the S-REIT is not susceptible to this debility because the unitholders’ interests (especially their financial interest) will be affected if the unitholders do not actively police the S-REIT.
Since the unitholders assume the role of enforcer in the S-REIT as provided for by the trust deed, the S-REIT satisfies the enforcer principle. Thus, if the S-REIT is regarded as a non-charitable purpose trust, it should nevertheless be valid on the basis of the enforcer principle.
Conclusion
The S-REIT is a Re Denleytrust for human beneficiaries and not an exceptional non-charitable purpose trust. As the discretionary trust and Re Denleyshow, equitable interest need not vest in anyone for a trust to be valid. The beneficiary principle was established to ensure that the beneficiaries could beseech a Court to administer the trust, while the vesting of equitable interest in the beneficiaries is simply a figment created by equity to facilitate the enforcement of trusts. Therefore, the beneficiary principle is satisfied if there are identifiable beneficiaries who can complain to a Court of any breach of trust. Accordingly, the S-REIT satisfies the beneficiary principle because it has beneficiaries similar to that found in Re Denley, the only difference being that the unitholders are expressly recognised by the trust deed as being the beneficiaries.
In the event that the S-REIT is still regarded as a non-charitable purpose trust (which under present law is invalid), the beneficiary principle should be reconceived as being founded on the enforcer principle. The S-REIT thereby becomes valid if enforcers are identified to it. In this case, the S-REIT is valid because the unitholders take on the role of enforcers to regulate the S-REIT.
Aaron Seah*
*The author is currently a practice trainee at a law firm in Singapore.
The original version of this article was written under the supervision of Associate Professor Tang Hang Wu, National University of Singapore.
Notes
1. MIT Final Balloting Announcement(20 October 2010). Available at http://www.mapletree.com.sg/Data/Files/File/MIT_FinalBallotingAnnouncement_20Oct2010%20%282%29.pdf [Accessed December 7, 2010].
2 Sabana Final Balloting Announcement(25 November 2010). Available at http://www.finanznachrichten.de/pdf/20101125_224759_M1GU_FC69393CDD94E001482577E6004B960D.1.pdf [Accessed December 7, 2010].
3 Chen, Want a Piece of Vivocity?(13 October 2010); http://www.straitstimes.com/BreakingNews/Singapore/Story/STIStory_589776.html [Accessed December 7, 2010].
4 Tjio and Lee, “Developments in Securities Law and Practice” in Teo Keang Sood (gen ed), Developments in Singapore Law between 2001 and 2005 (2006), p 50.
5 See Lee Chuen Li v Singapore Island Country Club[1992] 2 SLR(R) 266 at [48].
6 [1969] 1 Ch 373.
7 Eg the Securities and Futures Act (Cap 289, 2006 Rev Ed Sing); Trustees Act (Cap 337, 2005 Rev Ed Sing) and MAS, Code of Collective Investment Schemes(23 May 2002, 1st Ed), available at http://www.mas.gov.sg/resource/news_room/press_releases/2005/CIS_Code_20_Oct_2005.pdf[Accessed June 1, 2010]. See further, Tjio, Principles and Practice of Securities Regulation in Singapore(2004), paras 3.16 –3.21.
8 (1841) 4 Beav 115. See also, Matthews, “The Comparative Importance of the Rule in Saunders v Vautier” (2006) 122 LQR266.
9 Trust deed provided by Saizen REIT [on file with author].
10 See also, Lee and Foo, “Real Estate Investment Trusts in Singapore Recent Legal and Regulatory Developments and the Case for Corporatisation” (2010) 22 SAcLJ36, 61–64.
11 Morice v Bishop of Durham(1805) 10 Ves Jr 522 perSir Grant MR.
12 See Re Astor’s Settlement Trusts [1952] 1 All ER 1067; Re Shaw[1957] 1 WLR 729; Re Endacott[1960] Ch 232.
13 See Re Astor’s Settlement Trusts[1952] 1 All ER 1067,where Roxburgh J remarked that “a trustee would not be expected to be subject to an equitable obligation unless there was somebody who could enforce a correlative equitable right.”
14 See Re Diplock[1948] Ch 465; Foskett v McKeown[2001] 1 AC 102.
15 Pearce and Stevens, The Law of Trusts and Equitable Obligations(4th edition, 2006), p 5.
16 See Parkinson, “Reconceptualising the Express Trust” (2002) 61(3) CLJ657. See also, Commissioner of Stamp Duties (Qld) v Livingston[1965] AC 694 at 712 per Lord Radcliffe; Gray, “Equitable Property” [1994] CLP157, 163.
17 Mettoy Pension Trustees Ltd v Evans[1991] 2 All ER 513 perWarner J.
18 Gartside v IRC[1968] AC 553; Vestey v IRC[1980] AC 1148 (HL); Re Brookes’ Settlement Trusts[1939] Ch. 993 at 997–998 perFarwell J.
19 Schmidt v Rosewood Trust Ltd[2003] 3 All ER 76 (PC) at para 51. See also, Re the Trusts of the Abbott Fund [1900] 2 Ch 326;Gartside v IRC[1968] AC 553; and Hartigan Nominees Pty Ltd v Rydge(1992) 29 NSWLR 405; AG for Ontario v Stavro(1994) 119 DLR 750.
20 Mowbray et el, Lewin on Trusts, (18th edn, 2008), para 4-39.
21 See also, Hayton, “Developing the Obligation Characteristic of the Trust” (2001) 117 LQR96. Tjio and Lee seemed to take a similar view though they preferred to use legislation to regulate the S-REIT. See Tjio and Lee, “Developments in Securities Law and Practice” in Teo Keang Sood (gen ed) Developments in Singapore Law between 2001 and 2005 (2006), pp 55 and 57.
22 See Scott, “Nature of Rights of the Cestui Que Trust” (1917) 17 Col LR269. See also, Martin, Hanbury and Martin: Modern Equity, (18th edn, 2009), p 19.
23 Maitland, Equity; A Course of Lectures (Chaytor and Whittaker eds) (1936), p 17.
24 Penn v Lord Baltimore(1750) 1 Ves Sen 447 at 1134–1135 perLord Hardwicke. See also, Maitland, Equity, also the Forms of Action at Common Law, Two Courses of Lectures(Chaytor and Whittaker eds) (1984), p 258.