WILLIAM JOHN AUCHNIE AND HENRY AUCHNIE AGAINST DUNCAN HENRY JAMES AUCHNIE
SHERIFFDOM OF GRAMPIAN, HIGHLAND and ISLANDS AT BANFF
2014SCABE45
A78/10
JUDGMENT
by
SHERIFF PRINCIPAL DEREK C W PYLE
in causa
WILLIAM JOHN AUCHNIE and HENRY AUCHNIE
Appellants
against
DUNCAN HENRY JAMES AUCHNIE
Respondents
Banff, 27 September 2013
The Sheriff Principal, having resumed consideration of the cause, Allows the appeal; Recalls the sheriff’s interlocutor of 7 February 2013; Sustains the third, fourth, fifth, sixth and seventh pleas-in-law for the appellants; Upholds the appellants’ objections numbered 3, 4, 5, and 6; Remits the cause to the sheriff to proceed as accords; Finds the respondents liable in the expenses of the appeal; Remits the account thereof to the Auditor of Court to tax and to report; Sanctions the employment of junior counsel for the appeal.
[1] This is an action of count, reckoning and payment in respect of the estate of the late William Duncan Auchnie who died on 23 July 2003. The parties are four of his five surviving children. The respondents are his trustees and executors appointed under his Trust Disposition and Settlement. The action was served upon the respondents in January 2011, but it was not until May 2012 that they produced an accounting in the form of a brief list of the estate as at the date of death with values which are said to have been adjusted “from disposals, etc”. There then follows a paper headed “Division of Assets” which purports to describe how the estate should be distributed in accordance with the deceased’s testamentary writing. The appellants lodged objections to the accounts and after sundry adjustment a final set of objections with the respondents’ answers thereto were lodged in November 2012.
[2] At the debate before the sheriff, the appellants advised that they were insisting upon only four of their objections. In respect of one further objection he was invited to sustain it of consent of the respondents. The sheriff repelled all four of the disputed objections. The appellants have appealed against that decision.
[3] The relevant part of the deceased’s Trust Disposition and Settlement is in the following terms:
“(SECOND) Subject to satisfaction of the foregoing provisions or such of them as come into operation I leave and bequeath the whole rest residue and remainder of my Estate to the following persons in the following shares videlicet:-
To my son Duncan H J Auchnie I leave fifteen per cent;
To my son William John Auchnie I leave fifteen per cent;
To my son George Auchnie residing at Little Mill, Rothienorman, in recognition of his long service on the farm I leave thirty per cent;
To my son Henry Auchnie residing at Corryhoul, Corgarff, I leave fifteen per cent;
To my daughter Mary Diane Jeannie Willox residing at Par View, Little Mill, Rothienorman, I leave twenty five per cent.
Where possible I direct my Trustees that the value of the share to be received by George, Duncan and William is to be made up of the dwelling house, steading and farmland on the farm on which they reside with the legatee either receiving monies or other assets to make up the value of the share or where the value of the farm to be taken is greater than the value of the legacy by the legatee paying money into my estate in respect of the difference between the value of the asset and the value of the legacy. In the event of a dispute as to the value of any particular farm the decision of a valuer from Aberdeen and Northern Marts is to be final. In valuing the properties at Upper Crannabog and East Logie Aulton regard is to be had to any alterations or improvements made to the dwelling houses or steadings by the occupant of the particular dwelling house such that the person who paid for the said alterations, extensions or improvements is not unfairly prejudiced. In particular, I accept that the new steading at Upper Crannabog was paid for by George and Duncan and that all improvements to the dwellinghouse at Upper Crannabog have been paid for by Duncan. If George and Mary elect to continue farming at Little Mill in partnership and wish to combine their legacies to do so and to form a viable unit George and Mary will have the first option of taking the farmland at East Logie Aulton up to the value of their combined legacies. On no account is William to be left with less than the dwelling house, the steading, farmyard and ten acres. In the event that the value of the aforementioned dwelling house, steading etc. acquired by William is less than the value of his legacy, then it is intended that he should receive a balancing payment from my estate.
It shall always be open to Duncan and George to decline to take the legacy as a dwelling house, steading and farmland with or without a balancing payment in which case the farm on which the individual resides is to be sold. For the avoidance of doubt no legatee shall be allowed to pick and choose a mixture of dwelling house, steading and farmland where the effect of that choice would be detrimental to the value of my overall estate.”
[4] The fundamental issue before the sheriff – and from which the objections flow – was the proper construction of the testamentary writing. It was not in dispute that the beneficiaries who had the right to do so had from the date of death and ever since then intended to take their respective shares of the residue of the estate by way of heritable property as set out by the deceased. Nor was it in dispute that the title in all the properties remains with the executors. The question before the sheriff and before me on appeal was whether in those circumstances the difference in value, whether positive or negative, of each of those assets and the fruits thereof since the date of death should be taken into account in calculating the value and nature of the residue of the estate and its division among the five residuary legatees.
[5] The sheriff considered that as the writing “speaks from the moment of death” the deceased must have intended that the beneficiaries be entitled to the assets from that moment. It followed that the calculation of the value of the assets and any compensating payments to or by the executors should be as at the date of death. In his opinion, because the testamentary writing assigned, disponed and conveyed the deceased’s estate to his trustees and executors “in trust only for the following purposes” (as set out in the preamble) and as Clause (SECOND) was one of those purposes, it followed that if beneficiaries had made the election to which they were entitled the executors hold the elected assets in trust not for the estate in general but for those beneficiaries in particular. The transfer of title to those assets was a purely administrative function. There would inevitably be a delay in such transfers, given the necessity for the executors to expede confirmation. During that period the fruits of the properties would rest with the beneficiaries who have made the election. The sheriff went on to describe the position of such beneficiaries as having “beneficial ownership” of the respective properties as at the date of death and until the eventual transfer of title.
[6] In my opinion, there are a number of difficulties with the sheriff’s preferred construction of the testamentary writing:
- He appears to have proceeded upon the basis in fact that the beneficiaries have made the elections to which they were entitled. Nowhere on record is that averred – indeed before me the solicitor for the respondents conceded that in doing so the sheriff had erred. In fact, what appears to have happened on the basis of the appellants’ averments which are admitted by the respondents and their own averments in answer is that the respondents and the fifth beneficiary, Mary Willox, have merely continued the status quo as existed as at the date of death by continuing to occupy and work the farms in question. There are no averments that any of the beneficiaries intimated formally to the executors, whether being to themselves or otherwise, that they intended to elect to take certain assets in part satisfaction of their respective shares of the residue;
- The sheriff considered that the executors held the relevant properties in trust for the particular beneficiaries. But that is not the true position. The point can be best explained by considering what would have happened in the event that the deceased had failed to declare his annual taxable profits from the farms during a number of years prior to his death. (I am of course not suggesting that he did in fact do so – indeed I do not know the commercial nature upon which the farms were worked by the deceased, if at all.) It would be normal practice for the executors to obtain a certificate from HMRC confirming that all tax liabilities of the deceased had been settled. The same would apply to any other debts which the deceased had as at his death, as well as deathbed and funeral expenses: all require to be paid in terms of Clause (FIRST) before the residue of the estate can be established. If, ex hypothesi, the outstanding tax was a substantial sum the executors might have required to realise some of the estate to pay it. If, as the sheriff maintains, the executors are holding the elected assets in trust from the date of death, it would follow that there would be insufficient funds available to settle the debts of the deceased. Indeed, the testator himself has envisaged the requirement to settle his debts before granting any rights to the beneficiaries by the qualification at the beginning of the clause: “[s]ubject to satisfaction of the foregoing provisions or such of them as come into operation”;
- Counsel for the appellants gave another practical example to explain the weakness of the sheriff’s construction: if the value of assets chosen to be taken by a beneficiary is in excess of the value of his or her share of the residue, how and when can the executors demand and receive payment of the compensating payment? In fact, the decision by such a beneficiary as to whether or not to take the property in part share of his or her share will inevitably depend upon the professional valuation which the executors will be bound to have obtained.
- In any event, the concept of “beneficial ownership” as the sheriff describes it is unknown in the Scots law of testate succession. Nowhere is the phrase mentioned in the testamentary writing. It conflicts with the express words of the deceased whereby he assigned, disponed and conveyed his estate to his trustees and executors.
[7] In my opinion, the sheriff’s construction puts the cart before the horse with inevitable consequences. Counsel for the appellants submitted that Clause (SECOND) should be considered in two discrete parts: the first part, which he described as the “operative part”, provides for a bequest of the residue of the estate in percentage shares to the deceased’s five children; the second part governs the make-up of the value of those shares, but only “where possible”. The first part is the dominant one, the second part being subservient to it. I do not find it necessary to divide up the clause in that way. It seems to me that the better way to look at the clause is simply to consider its whole terms as one scheme which sets out the deceased’s intentions. The issue then becomes one of practicality and timing and a construction which properly reflects what the deceased had in mind. Looked at in this way, the deceased’s intentions become clear: he envisaged that his executors would act in the following order: first, identify his estate; secondly, obtain title to it: thirdly, determine the nature and value of the residue of the estate; and fourthly, establish which beneficiaries wish to take their share, or part thereof, by way of specific assets, rather than in monetary form after realisation. While those steps are being taken, the estate belongs to the executors who are bound to preserve and manage it, for which purposes they are granted express powers (in terms of the second last (unnumbered) paragraph of the testamentary writing) for “investment, realisation, administration, management and division” of the estate. It follows that the final division and disposal of the residue is not merely an administrative act, as the sheriff maintains, but is the formal step which the executors must take upon establishing whether any of the beneficiaries wish to take advantage of the options which the executors have offered them in accordance with the wishes of the deceased. And, as the deceased himself allowed, such options will arise only where it is possible. That possibility can by definition only be determined once the final calculation of the nature and value of the residue has been made. The use by the deceased of the term “where possible” accurately reflects the fact that the deceased simply did not know what would be the final nature and value of the residue. It was therefore impossible for him to make specific legacies of certain anticipated assets owned by him on his death; the best he could do was to anticipate what the residue might be and express his wishes about how it should be distributed. It is easy to see that he was well aware of the steps which his executors would have to take before distributing his estate in the way he wished.
[8] If my construction is correct, it inevitably follows that the executors require to account for their administration and management of the assets of the estate from the date of death until the date when the residue is finally distributed, a date which has yet to be reached. It therefore follows that the executors must account for the value of the assets as at today’s date or at the date of distribution, if there is a difference. Ground 4 of the Objections should be upheld. The executors must also account for any benefits which have already accrued to any of the assets which form part of the residue. Accordingly, they require to account for any financial benefit which accrues in law as a result of the option agreement for the erection of a wind turbine development at Upper Crannabog farm. Ground 5 of the Objections should be upheld, although I emphasise that the extent of the obligation is to account; whether or not any financial benefit accrues to the estate will depend upon the nature and form of the agreement. The executors are also bound to account for the fruits of the working of the farms since the date of death. Accordingly, Ground 6 should also be upheld.
[9] In Ground 3 the respondents aver that the executors have received a total sum of £166, 720.89 from the Scottish Executive in respect of Single Farm Payments and other farming subsidies. They go on to aver that of that sum £137,628.59 has been paid to Mary Willox and George Auchnie, the second respondent, and that a further sum of £2,479.97 is on deposit but is due also to be paid to them. This is because they have farmed Littlemill farm on their own account since 5 April 2005 and are entitled to the payments as “farmers”. There was much discussion before the sheriff about the nature of the Single Farm Payment scheme under reference to Council Regulation (EC) 1782/2003. Reference was made to authorities which consider various circumstances in which the Regulation applied. I do not find it necessary to consider these authorities which are not directly in point. The conclusion which the sheriff reached was premised upon his construction of the testamentary writing and the nature of the beneficial ownership he considered was vested in the recipients of the major part of the payments. Read short, the Regulation provided that a “farmer” should receive “a payment entitlement per hectare which is calculated by dividing the reference amount by the three year average number of all hectares which in the reference period gave right to direct payments”. (Art 43(1)) Counsel for the appellants submitted that the payments were tied to the land and therefore belonged to the heritable proprietor. The sheriff rejected that view. In my opinion he was right to do so. The proper question which should be posed is “who was the farmer?” for the purposes of the Regulation. The answer is contained in Art 2 which provided:
“(a) ‘farmer’ means a natural or legal person, or a group of natural or legal persons, whatever legal status is granted to the group and its members by national law, whose holding [my italics] is situated within Community territory, as referred to in Article 299 of the Treaty, and who exercises an agricultural activity.”
“Holding” was defined as,
“all the production units managed [my italics] by a farmer situated within the territory of the same Member State.” (Art 2)
“Agricultural activity” was defined as,
“the production, rearing or growing of agricultural products including the harvesting, milking, breeding animals and keeping animals for farming purposes, or maintaining the land in good agricultural and environmental condition as established under Article 5.” (Art 2)
Counsel for the appellants relied upon the first words in italics: it was the owner of the farm who was entitled to the payments. The solicitor for the respondents relied upon the second word in italics: it was the two beneficiaries who had managed the production unit.
[10] It is not, I think, in dispute that the actual farming which was done on Littlemill farm was by Mary Willox and the second respondent or by others on their instruction. They might well have had little regard to, or even interest in, upon what basis in law they did so. But that, in my opinion, cannot mean that the legal basis should be ignored. On my construction of the testamentary writing, the only parties who had any right or title to occupy the farm were the executors. That they acquiesced in allowing the farm to be occupied and worked by others is of no moment in establishing a right to the payments, especially so when one of the recipients is an executor and is under a duty not to act in his own interests where they conflict with his fiduciary duties. All that they have is a prospective right to require receipt of their respective shares of the residue in the form of a farm in the event that it is possible for that to be done. They do not have and never have had since the date of death a right to own or occupy the farm when the payments were made. The one right they did have and continue to have is to demand that the executors proceed with all reasonable dispatch to wind up the estate, which for the second respondent would in effect be a complaint against himself. In my opinion, the payments under the scheme form part of the estate. Ground 3 of the Objections should be upheld.