Tracey Stock Articles

Trust Agreements and Trust Declarations - July 19th, 2011

Categories: Agreements, Business Practises, Land A&D, Legal Counsel, Oil & Gas
Author: Tracey Stock

Trust agreements and trust declarations are some of the most common business tools being used in the Canadian oil and gas industry. However, many people drafting, executing, and administering these tools are not aware of their importance and the best practices for their use. This article will shed a bit of light on key issues about trusts from the land perspective.

Trust law developed in England during the Crusades. When knights went charging off to the Middle East they had to leave a friend in charge of any land that they held in order to pay and receive feudal dues. Before the development of trust law, the only way this could be done was for the crusading knight to convey ownership of their land to a friend on the understanding that it would be conveyed back when the knight returned. Of course, all too often the friend was rather surprised that the knight didn’t die on the journey or the battlefield and actually came home. Many trusted friends weren’t pleased by this turn of events and refused to give the land back. The knight had no recourse except to appeal to the king. The king would set things right if he felt like it, but sometimes he was just as happy to let the knight rust in the rain alone and landless. Eventually, this kind of case was became so frequent that the king didn’t have time for it anymore and he delegated the job to the Lord Chancellor by empowering him to do what was just and equitable on a case-by-case basis. Eventually, it became common for the Lord Chancellor to recognize the claims of all returning crusaders. This gave rise to the law of equity as the concept developed that the legal owner, the friend, would hold the land for the benefit of the original owner, the crusading knight, and would be compelled to convey it back when requested. The crusading knight was the beneficiary and the friend the trustee. The term use of land was coined, and in time developed into what we now know as a trust.

From this history we can see that land interests are made up of two components: the legal interest and beneficial, or equitable, interest. When the legal owner is also using and occupying the land, or benefiting from it, these two interests are bundled together. But, they can be taken apart and held separately. For example, in the oil and gas industry, one company can hold the legal interest and another company, or group of companies, can hold the beneficial interest. When this separation occurs a trust exists. It doesn’t even need to be documented. It can come into existence merely through the conduct of the parties. These are known as implied trusts. However, for certainty and to have the best evidence possible about the nature of the trust it’s best to have a contract known as a trust agreement. This is as an express trust. It sets out how the holder of the legal interest, the trustee, will manage the legal interest on behalf of the holder(s) of the beneficial interest, the beneficiaries. The trustee owes a fiduciary duty to the beneficiaries of the very highest order. A court will view a breach of trust as the most grievous kind of contractual breach and the trustee usually faces significant liability.

Curiously, in the oil and gas industry, original trust agreements are often found on mineral files and are not setup in the land system as contracts. This is a risky policy. Like any other contract, trust agreements need to be setup in the system and given their own files to make them trackable and to ensure they are administered properly. Some companies may find it convenient to place a photocopy of a trust agreement on the related mineral file(s), but the original should have its own contract file.

Trust agreements are assignable. Application of the 1993 CAPL Assignment Procedure follows the same rules as for any other kind of contract. When land is being conveyed it can save a lot of time and resources. Unfortunately, the terms of many trust agreements don’t include the assignment procedure. However, companies that want to minimize administrative costs are careful to draft them so they do include the assignment procedure. If all parties agree, it’s also possible to amend existing trust agreements to include the assignment procedure.

Leaving trust agreements out of the contract system creates a nasty administrative challenge for conveyancing because trust agreements that are buried on mineral files are often overlooked. The resulting tangle of express and implied trusts is a legal swamp with major liability risks. So, whenever a trust agreement is found on a mineral file an administrator can add value by pulling it out and setting it up in the land system as a separate contract that is related to the mineral. Of course, analysis is needed to decide whether or not the trust is active. Active trust agreements should be added to the land system as soon as possible. Inactive ones may not have the same urgency, but it can still be helpful for them to be trackable in the land system to support any research or query that needs to find it.

There is also another kind of trust instrument on industry land files—the trust declaration, also known as the declaration of trust. This instrument is a document that is only signed by the trustee. It acknowledges that land interests are being held on behalf of a beneficiary, or beneficiaries, but is not signed by the beneficiary. As an easy rule-of-thumb, no matter what the title on the instrument—whether it’s called a Trust Agreement, Trust Declaration, or Declaration of Trust—if the instrument is only signed by one party, it’s a trust declaration or declaration of trust. In contrast, a trust agreement is signed by both the trustee and the beneficiary.

Companies often execute a declaration just to have it on related mineral files as a physical flag warning administrators that a trust exists. This may serve to document an implied trust that is created by a participation, farmout, pooling, or other kind of contract. Again, best practice is to set up declarations as contracts. It makes them trackable. However, the big difference between a declaration and a trust agreement is that the declaration is not assignable. The 1993 CAPL Assignment Procedure cannot be used. Instead, when conveying land that is subject to a declaration, the assignee that is the new trustee needs to execute its own declaration. Again, if this is overlooked, the trustee company is doing a swan dive into a legal swamp.

Trusts are a complex type of agreement and this article has only highlighted a few key points. It’s recommended that the preparation of a trust agreement or declaration of trust be referred to legal counsel.