Facts
A man held the lease of Romford market on trust for a child. Before the lease ran out, the trustee asked the landlord to renew it for the child's benefit. The landlord refused. Because the beneficiary was a minor, the landlord couldn't enforce the usual covenants in the lease against the child.
The trustee then took a renewed lease of the market for himself. The child, through a representative, claimed that the trustee should hold the new lease on trust for him.
Issue
Could a trustee take for himself a renewal of a trust lease, when the landlord had refused to renew it for the beneficiary?
Decision
Lord King LC held that the trustee must assign the renewed lease to the child and account for the profits he had made from it.
Reasoning
Lord King accepted that it might seem hard on the trustee, who had first tried to renew the lease for the child, and who only took it himself once the landlord refused. But he said the rule must be strictly applied.
If a trustee could take a renewal for himself whenever the landlord refused to renew for the beneficiary, there would be an obvious temptation to make sure the landlord refused. Few trust leases would ever be renewed for beneficiaries. The trustee was the only person who should not have taken the lease.
Why it matters
Keech v Sandford is the origin of the strict no-profit and no-conflict rules that apply to trustees and other fiduciaries. A fiduciary must not:
- make a profit out of their position, unless authorised; or
- put themselves in a position where their duty and their personal interest may conflict.
The rule is applied strictly, regardless of honesty or whether the beneficiary suffered loss:
- In Regal (Hastings) Ltd v Gulliver [1942] UKHL 1, [1967] 2 AC 134n, directors who bought shares in a subsidiary had to account for their profit, even though the company couldn't afford to buy them.
- In Boardman v Phipps [1967] 2 AC 46, a solicitor to a trust who used information obtained in that role to make a profit, which also benefited the trust, had to account for it. He was allowed generous remuneration for his work and skill.
- In FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, the Supreme Court held that a bribe or secret commission received by an agent is held on constructive trust for the principal, giving a proprietary remedy.
Fiduciaries can be protected by the fully informed consent of the beneficiaries, by authority in the trust instrument, or by the court. For company directors, the duties are now codified in ss 175 to 177 of the Companies Act 2006.
How it comes up in exams
For breach of fiduciary duty:
- Is the defendant a fiduciary (trustee, director, solicitor, agent)?
- Did they make an unauthorised profit or act in a conflict of duty and interest?
- Is there a defence: fully informed consent, authorisation in the trust instrument or by the court?
- What remedy: an account of profits, a constructive trust over the property (Keech; FHR), or equitable compensation? Could the court make an allowance for work and skill (Boardman v Phipps)?
Frequently asked questions
What was decided in Keech v Sandford?
Lord King LC held that a trustee who had renewed a lease for himself, after the landlord refused to renew it for the child beneficiary, had to hold the new lease on trust for the child and account for the profits.
Why was the trustee liable even though the landlord wouldn't renew the lease for the child?
Because the rule is meant to be strict. If trustees could take renewals for themselves when the landlord refused the beneficiary, few trust leases would ever be renewed for beneficiaries.
Does the no-profit rule apply to people other than trustees?
Yes. It applies to all fiduciaries, including company directors (Regal (Hastings) Ltd v Gulliver [1942] UKHL 1) and agents and solicitors (Boardman v Phipps [1967] 2 AC 46).
How can a fiduciary avoid liability for a profit?
By getting the fully informed consent of the beneficiaries (or of the company, for directors), or if the trust instrument or the court authorises it.