In the past, articles in Rural eSpeaking have covered the issue of personal liability for trustees, and the dangers facing independent or professional trustees who have little day-to-day involvement in the running of their trust.
We have pointed out that the argument that liability shouldn’t attach to them, as they are only there as an independent trustee, does not wash with the courts: liability under the health and safety and tax legislation, or the Resource Management Act 1991 is an issue.
Increased levels of responsibility
The Health and Safety at Work Act 2015 came into force on 1 April 2016. The courts can now impose significantly increased penalties (fines and/or imprisonment) on individuals. This is something that all those in the rural sector who operate using trusts (whether they are independent trustees or not) to own part or all of their farming business need to consider.
In terms of trust law, it’s generally seen as important for a trust to have an independent trustee. That role, however, comes with significant responsibilities (and therefore liability) and trustees need to look carefully at how farming operations are now structured.
This isn’t to say that trustees should try to avoid responsibility. Rather, it’s a practical issue that trustees who are not involved on a day-to-day basis with the farming operation will have greater difficulty in complying with their obligations under the health and safety legislation. Unless trustees can properly carry out these responsibilities, they should not be in the position of primary responsibility.
Sorting out ownership of farm assets
Sometimes the trust owns the farmland as well as the farming business. In this situation, unless an independent trustee can show a high level of personal involvement in the farming operation then they should either not be there or they should restructure the farming operations so that those who are practically able to carry out those functions are the ones that do so.
For example, a trustee who is an accountant practising 50 or 100km from the farm will have difficulty, or probably won’t want to participate in monthly health and safety meetings, personally inspect farm buildings and machinery, and to monitor day-to-day activity on the farm to ensure that policies and procedures are being carried out. Certainly some of those roles can be delegated, but as an independent trustee you are not relieved from the responsibility of ensuring that the delegatee is carrying out their responsibilities properly.
A more common situation is where the trust owns the farmland and buildings, and another entity such as a company or partnership carries out the day-to-day farming, owns the stock and farm chattels and equipment. Often there’s a lease between the trust farming entity and the farm owner, but in many instances (possibly on the grounds of cost) these leases tend to be pro forma affairs with little thought given to the precise terms.
Have a formal lease
In the new health and safety environment the lease needs to be a proper formal lease clearly putting responsibility of repairs and maintenance, etc on the appropriate parties. There also must be an obligation on the lessee to not only comply with health and safety legislation, but also to provide the lessor with copies of their procedures and manuals and be prepared to comply with any lessors’ requirements in terms of health and safety. The ‘quiet enjoyment’ provision, which is usually in leases, will be some protection for the lessor as by conferring exclusive possession on the lessee, the lessor cannot legally come onto the property on a day-to-day basis.
A better structure is to have the trust holding a shareholding in a company that then owns the land or farming business. This structure would allow the trustees greater protection: under company law the shareholders have little or no control over the day-to-day company activity. They can appoint directors, approve major transactions and so on; but the Companies Act 1993 specifically vests the day-to-day running of the company in the directors’ hands. This means they are primarily responsible for the running of the company’s operations and they are the ones that Worksafe will look at to ensure that the company is complying with its health and safety obligations.
The directors of the company will usually be the people personally involved in running the farm on a day-to-day basis. Therefore, in practical terms, the directors can exercise that basic obligation of the health and safety legislation which is to ‘use all practical steps’ to ensure that the workplace is safe.
For a number of reasons the need for an independent trustee will remain, and the trust will continue to be a useful vehicle to hold farming land and other assets. Some of the traditional structures are, however, now not suitable given the changes in health and safety law. For that reason, trustees should be consulting their advisors to put in place structures that better reflect this changed environment. We’re happy to help.