Hello everybody.  Although I have written on this topic before, a great many landlords, and even some judges, continue to believe that title to real estate can be held by a living trust.  (I am sure they didn’t read my prior articles, but judges should know the law without having read anything that I have written!)

So let me just say at the outset, in case you choose not to read this article further, Trusts cannot hold title to real property.  Only the trustees of the trust can hold title.  As such, the landlord under a lease or other rental agreement needs to be the trustee(s) of the trust, not the trust itself.

This point, namely that a trust cannot be the owner of property, was once again made clear by the California Court of Appeal on March 12, 2021 in Boshernitsan v. Bach.  

In that case, San Francisco Superior Court Judge Charles Haines erroneously dismissed an eviction case when he mistakenly ruled that even though the plaintiffs filed the Unlawful Detainer action as trustees of their trust, saying: “The property is owned by a trust.”  Wrong!!

Let me break this down because it was a mammoth error by a trial judge.

The plaintiffs in the U.D. case were two individual people.  They were also the trustees of their living trust as well as the creators and initial beneficiaries (as is the case with most living and family trusts).  Title to the property was vested in the name of the two individuals “as Trustees of [their] Living Trust.”  

The plaintiffs filed the U.D. action as trustees of their living trust to evict the tenants so as to move their mother into the tenants’ unit.

Under San Francisco’s rent control ordinance, only a human being, not a trust, could evict a tenant to move in a relative.  (That makes sense as a trust cannot have a mother.)

The tenants filed a motion to dismiss the case on the basis that the trust owned the property and the trust was not a human being.

First, the trial judge correctly ruled that a trust is not a human being. But then he made the fundamental error when ruling that the trust owned the property.  In fact, the owners of the property were the two humans in their capacity as trustees of the trust.

The Court of Appeal rejected the trial judge’s finding that the trust owned the property.  The appellate court succinctly said: “Only trustees—not trusts—can hold legal title to property.”

Leases Must be in the Name of the Trustee(s) of a 

Trust, not in the Name of the Trust Itself

A family trust is not a legal entity, nor does it have standing to sue in its own name.  Only the trustee of the trust in his or her capacity as a trustee should be the landlord under a lease or the litigant in a lawsuit (including unlawful detainer actions). 

Failure to enter into a lease or other rental agreements in the name of the trustee of a trust or file suit in the trustee’s name rather than in the name of the trust itself, can have adverse legal consequences, and in the case of litigation, can be fatal.

Specifically, the lessor under a rental agreement or the plaintiff in an unlawful detainer should be identified as:  “John Smith, as Trustee of The John Smith Family Trust,” and not as “The John Smith Family Trust.”  In other words, the proper party to a lease and the proper party to a lawsuit is not the trust, but rather the trustee of the trust.                        

That point was well illustrated in another California Court of Appeal case, entitled Portico Management v. Alan J. Harrison.  There, the court held that an arbitration award of $1,600,000 was not judicially enforceable because the award was rendered only against the trust, rather than against the trustees of the trust.

The court also held that arbitrations and judicial actions must be pursued in the name of the trustees of a family trust in their representative capacities, not by the trust itself.

The court explained that the reason the trust itself cannot be a party is because it is not a legal “person” under California law.  Only trustees of the trust are “persons.”

Understanding a Family Trust

A family living trust is primarily a probate avoidance device, though it may also have important tax benefits for the heirs.

But a trust is not a legal entity.  Nor is it deemed to be a legal “person,” unlike a corporation or LLC, each of which is a “person” for purposes of being a landlord, a tenant, or a litigant in court.  A trust cannot sue or be sued, nor does it hold title to property.

Title is technically held by the trustee, even though real property is often, and loosely, said to be owned by the trust.  A trust is simply a collection of assets and liabilities, but is not the holder of title.

Unlawful detainer proceedings are common instances where the distinction between trustees and trusts is critical.  If the owner of an apartment building transfers his property into his family living trust, rental agreements should thereafter be executed in the name of the trustee of the trust, not in the name of the trust itself.  Any eviction action must then be brought in the name of the landlord, as the trustee of the trust, rather than in the trust’s name.  In other words, the proper designation of the landlord in a lease and the plaintiff in an eviction lawsuit would be “John Smith, as Trustee of The John Smith Family Trust.”  The plaintiff cannot be the “The John Smith Family Trust.”

Another example would be the case where a buyer of an apartment building sues the seller after the latter had previously transferred his property into his living trust.  Thus, Bob Buyer, who is suing for breach of contract or to compel the seller to convey title to him, must sue the seller defendant as “Sam Seller, as Trustee of The Sam Seller Family Trust.”  Bob Buyer could not properly sue “The Sam Seller Family Trust.”  “The Sam Seller Family Trust” is not a legal person or entity.

Returning to the Portico case, the arbitration proceeding was brought by Portico Management Group, LLC, against “The Harrison Trust,” rather than against “Alan Harrison, as Trustee of The Harrison Trust.”  Portico prevailed, whereupon an arbitration award was entered in Portico’s favor for $1.6 million.  But the arbitration award was only against the trust, and not the individual trustee, because only the trust was named as a defendant in the proceeding.

Procedurally speaking, once an arbitration award is rendered, the prevailing party will petition the Superior Court to confirm the award by adopting it as a judgment.  But confirming an award (which courts routinely do) is different from a later enforcement of it.

In Portico, because the award (and subsequent judgment) was against the trust rather than the trustee, the court had no power to enforce an arbitration award even if it wanted to.  Ouch!

The first lesson to be learned from the Portico case is that if you intend to sue a trust (whether in court or in an arbitration), be certain that the named defendant is the trustee of the trust, in his/her representative capacity, rather than the trust itself.  

As an aside, the fundamental mistake in the Portico arbitration was not made by Portico itself.  The error was by its attorney.  Portico’s counsel failed to understand that a trust is not a legal entity and that only a trustee of the trust may be sued as a defendant.

The second lesson to be learned from Portico concerns the legal effect of an arbitration award.  Portico illustrates the finality of an arbitrator’s award, but also exposes the pitfall that it might not be judicially enforceable.

Here is What AOA Members Need to Know 

  1. Landlords in leases and other rental agreements should not be identified as a family or living trust.  Instead, leases and rental agreements should identify the landlord as the trustee of the trust (if that is the case), rather than the trust itself.
  2. Family and living trusts are not legal entities.  They cannot sue or be sued. 
  3. All arbitrations and lawsuits, including unlawful detainers, should be prosecuted in the name of the trustee of the trust in his/her representative capacity, rather than by the trust itself.  
  4. A judgment against a trust itself will be unenforceable and ineffective to reach the assets held in trust because a trust cannot be a judgment debtor.  It is not a “person” under law.  Instead, the judgment must be against the trustee, which means that the trustee should be named from the inception of the case as a party.   

Next month, I will provide my semi-annual update on Resident Manager Laws because many of them change on July 1, 2021. Have a healthy and virus-free remainder of the year!

 

Dale Alberstone is a prominent real estate attorney who has specialized in real property and resident manager law for the past 40+ years.  He is also a former arbitrator for the American Arbitration Association.  

Mr. Alberstone has been awarded a 5-Star AV rating from Martindale-Hubbell, the 125-year-old national rating service of attorneys.  A 5-Star AV rating is the highest possible rating bestowed and reflects an attorney who has reached the heights of professional excellence and who is recognized for the highest levels of skill and ethical standards.

The foregoing article was authored on May 1, 2021.  It is intended as a general overview of California law only and may not apply to the reader’s particular case.  Readers are cautioned to consult a lawyer of their own selection with respect to any particular situation.

Questions of a general nature are warmly invited.  Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 269 S. Beverly Drive, Suite 1670; Beverly Hills, California 90212, or phone: (310) 277-7300.