But, co-owner bears the burden of skeletons in the closet.
Worrells are well-known for our appointment to insolvent companies/people. However, a lesser-known form of appointment that is very effective for creditors is a Statutory Trustee appointment over real property.
So, what is a Statutory Trustee appointment?
A creditor applies to court to appoint a statutory trustee over real property. Once appointed, the statutory trustee secures and sells the property and distributes the proceeds in a manner ordered by the court. Typically mortgagees are paid first and then the creditor that made the application. By doing so, the creditor effectively makes themselves a priority secured creditor over the property (i.e. second only to any pre-existing mortgagee).
How does such an appointment occur?
The creditor has a clause in the credit application signed by the debtor that says in the event of a default, they agree that the creditor has a charge over the debtor's interest in any real property they own. When the default occurs, the creditor will secure their interest by placing a caveat over the property. They then have a three-month window to commence proceedings to enforce their charge. Normally, an application is made whereby the creditor demonstrates to the court that they have the relevant charging clause and due to the default they request an independent party to be appointed as a statutory trustee. The more common orders made by the court will be as follows:
- Statutory trustee be appointed to the real property in question
- The statutory trustee secures and sells the property
- The property's sale proceeds be distributed in the following manner:
- All selling, conveyancing and statutory trustees court costs be paid.
- Any mortgages over the property be paid out in full.
- The applicant creditor's debt be paid in full.
- Any remaining funds be returned to the owner of the property.
Evidently, it is a very useful tool for creditors to gain a priority status and obtain some security over tangible assets. The debtor is given plenty of warning about the action and therefore should the statutory trustee be appointed it should come at no surprise to the owner(s) and therefore the appointment should be very straightforward... well that's not always the case.
Recently I was appointed as a statutory trustee to a property whereby the process outlined above had taken place. Although there was one major difference, the property was jointly owned by two people: Owner A and Owner B.
Owner A had no idea that Owner B had a charging clause over the property. In fact, the two owners had separated and were no longer in contact. This is where things got interesting. Upon our appointment we contacted both owners. Owner A was shocked to hear of our appointment and claimed to have had no knowledge of a court order requiring us to sell the property. Owner A disputes this position entirely and takes legal action in an attempt to terminate our appointment as statutory trustees. Through this process the following was revealed:
- Owner A and Owner B were in a defacto relationship and co-purchased the property.
- The two owners separate.
- The property is used as a rental property with an unrelated tenant occupying the premises for a period.
- Owner B operates their own business and as part of this process, signs a document whereby a charging clause is included for Owner B's interest in any property, allegedly without Owner A's knowledge.
- Owner B's business fails and as a result we are appointed as statutory trustee.
After significant time and correspondence between all parties involved, the legal action is dismissed and our appointment as statutory trustees is acknowledged. At this time (after many months) we are finally able to perform our duties and proceed to sell the property. Once the property was sold, the expenses and mortgage was paid out and the net proceeds were split equally to each owner. From Owner B's share the creditor and the application costs were paid resulting in Owner B receiving no return at all. Owner A was entitled to 50% interest in net proceeds.
Unfortunately for Owner A, as a result of their legal action there were significant delays and increased costs incurred by the statutory trustees, their solicitors as well as Owner A's own legal expenses all of which resulted in significantly less being available for their interest in the property.
What could Owner A have done differently?
Upon their separation, immediate action should have been taken to deal with the property; either by one owner buying out the other, or with an outright sale to an external party. If the property had been sold, or Owner A bought the property outright, Owner B would be removed from the legal title on the property, in which case, the creditor would be unable to lodge a caveat over the property and therefore no statutory trustee would have been appointed.
Some stamp duty would be likely to be payable on any purchase between the parties and possibly some capital gains tax issues, however, by ignoring the issue and allowing the property to remain in joint names, Owner A received significantly less. Not only through the statutory trustee's costs, but also through sharing any appreciation in the property's value with Owner B, which would be a sole benefit had the property been purchased outright by Owner A.