A bare trustee is a nominee, who has no real powers or responsibilities, and can take no action without being instructed by the beneficiary. That entity’s function is, inter alia, to hold registered title to property, under the proviso that the beneficiary can compel the property to revert to it at any time.
In Canada, where real property is held by a bare trustee, the beneficiary is considered to be the owner of the property for all tax, economic and accounting purposes. There are various legitimate reasons why a bare trustees may be used to hold the property.
In the case of a lending transaction involving a bare trustee, it can be structured as a loan to the beneficial owner, or as a loan to the bare trustee.
Where the transaction is structured as a loan to the beneficial owner, the beneficial owner should not be the registered owner of the property, but rather the bare trustee, who will be instructed by the beneficial owner to facilitate, for example, the registration of the lender’s security against the property. It is a similarly complementary situation where the loan is made to the bare trustee.
It is my understanding that, under Canadian law, an undisclosed principal can be sued on a simple contract, entered into on his/her behalf by a bare trustee, but that this does not apply to contracts ‘under seal’. The effect is that an undisclosed principal can neither sue nor be sued on a contract executed by its bare trustee under seal. However, this non-disclosed situation is, in practice, difficult to maintain, since, due to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, almost all lenders are obligated under the rules about client identification requirements, etc. to establish the identity of beneficial owners.
Furthermore, in the case of transactions involving bare trustees, all similar credit, legal and due diligence enquires, which would normally be made about the registered owner, would also be made with respect to the beneficial owner.
Although it is very hard to convince lenders in most jurisdiction to proceed under a mortgage loan, structured using a corporation as a sole and single use vehicle, unless it is an independently set up offshoot of very substantial players, in Canada this is not uncommon. The usual goal is to insulate the loan and the lender, not to mention the borrower, from the interests of other creditors, for example in the case of a bankruptcy. The bare trustee arrangement goes a long way towards making that position secure. Sometimes this can be good for lenders, sometimes bad, but almost always good for a borrower.