Holding title to property in the name of a bare trustee has important legal implications that ought to be considered when deciding on an ownership structure. This article provides a broad overview of bare trusts, why they are used in the real estate context and some issues to consider when using a bare trustee to hold title to property.
What is a bare trustee?
A bare trustee, also commonly referred to as a nominee, holds registered title (ownership) to property, for someone else and often this property is land. The duty of a bare trustee is to convey legal title to the beneficial owner upon request. A bare trustee cannot deal with the trust property in any other way, except as directed by the beneficial owner. Often, a bare trustee is a corporation with no other assets.
What is a Bare Trustee/Nominee Agreement?
The relationship between bare trustee and beneficial owner should be set out in a written agreement, which is often called a “bare trustee agreement” or a “nominee agreement”. A written agreement will facilitate financing transactions and the transfer of real property involving land transfer tax deferrals or exemptions.
Why use a bare trustee to hold registered title to land?
It is relatively easy to find out who is listed as the legal owner of land in Ontario. This is because information about registered ownership is a matter of public record. These records can be accessed almost immediately online by those with electronic access to land registration records and the public by attending at the relevant land registry office. Certain individuals and corporations may not want the public to know they own a property for privacy, security and/or strategic reasons. Using a bare trustee to hold registered title to land is an effective way to maintain the anonymity of the true owner.
Certain entities are not capable of holding registered title to land. Partnerships and real estate investment trusts (REITs) are two examples. If these entities choose to own land, they must appoint a trustee to hold registered title.
Holding registered title in the name of a trustee can reduce the number of parties that have to sign documents to complete a transaction. Doing so is particularly useful in the case of joint ventures with multiple participants.
Beneficial owners may have other assets that they want to shield from the liabilities of the trust property. In some cases, holding registered title in a bare trust can achieve this goal.
Should insurers be made aware of a bare trustee holding registered title?
It is prudent to advise insurers of a bare trust arrangement and to have each of the trustee and the true owner noted as a named insured to avoid the prospect of insurers denying a claim on the basis that a bare trustee does not have an “insurable interest” in the lands covered by a policy.
Which party should record the land on financial statements?
Land that is subject to a bare trust arrangement should be recorded as an asset in the books and records of the beneficial owner, not the bare trustee. Financial obligations associated with the land should be satisfied by the beneficial owner.
Which entity registers and files for HST?
In such circumstances where HST registration is required, the beneficial owner should register for HST, not the bare trustee. Canada Revenue Agency considers the beneficial owner to be engaged in the commercial activities relating to land held in trust by a bare trustee. It is the beneficial owner that is required to account for HST, to file HST returns, and to generally comply with the obligations placed on registrants under the Excise Tax Act.
Should lenders concern themselves with whether registered title to land is held by a bare trustee?
Lenders should ascertain whether title to land that is security for a loan is registered in the name of a bare trustee. A beneficial owner can sue or be sued for breach of a contract entered into by an agent acting on its behalf. There is an important exception to this principle. The “sealed contract rule” prevents an undisclosed principal (beneficial owner) from suing or being sued under a sealed contract entered into by an agent (bare trustee). The Land Registration Reform Act deems a mortgage to be a sealed contract, regardless of whether it is signed under seal.
Lenders would be well advised to require a “tri-party” beneficial owner agreement between the bare trustee, beneficial owner and lender. Absent such an agreement, the lender will have no recourse against the beneficial owner in the event of default. The lender’s sole recourse will be against the land and any other security given by the bare trustee, which is not ideal in a falling market or where there is a high loan to value ratio.
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This article provides a very broad overview of the nature of bare trusts and why they are sometimes employed in the context of property ownership. If you are considering buying or lending money secured by real estate, please feel free to reach out to a member of Houser Henry & Syron LLP’s team to discuss how best to structure your transaction.