Keech v Sandford [1726] EWHC Ch J76

A trustee held a lease of market profits for an infant beneficiary. When the lessor refused to renew for the infant, the trustee obtained the lease himself. The court held he must assign it to the infant and account for profits, establishing the strict 'no profit' rule for fiduciaries.

Facts

A person possessed of a lease of the profits of a market devised his estate to a trustee in trust for an infant. Before the expiration of the term, the trustee applied to the lessor for a renewal for the benefit of the infant. The lessor refused to renew to the infant, reasoning that since it concerned only the profits of a market, there could be no distress and the remedy would rest solely in covenant, which an infant could not enforce. Following this refusal, the trustee obtained the lease in his own name.

Issues

The central legal issue was whether a trustee who obtains a renewal of a lease in his own name, after the lessor has refused to renew for the benefit of the beneficiary (cestui que use), must hold that renewed lease on trust for the beneficiary and account for the profits.

Judgment

The Lord Chancellor ruled in favour of the infant beneficiary. He decreed that the lease should be assigned to the infant, that the trustee should be indemnified from any covenants comprised in the lease, and that an account of the profits made since the renewal should be taken.

Key Reasoning

The Lord Chancellor stated:

I must consider this as a trust for the infant; for I very well see, if a trustee, on the refusal to renew, might have a lease to himself, few trust estates would be renewed to cestui que use; though I do not say there is a fraud in this case, yet he should rather have let it run out, than to have had the lease to himself.

He further observed:

This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to cestui que use.

Legal Principles

The case established the fundamental equitable principle that wherever a lease is renewed by a trustee or executor, it shall be for the benefit of the cestui que use (beneficiary). This applies even where the lessor has expressly refused to renew for the beneficiary’s benefit. The rule is applied strictly to prevent trustees from exploiting their position.

Implications

This case is foundational to the law of trusts and fiduciary duties. It establishes that fiduciaries cannot profit from their position, regardless of whether fraud is involved. The strict application of this rule serves as a prophylactic measure to prevent abuse and protect beneficiaries. The principle has been applied broadly to all fiduciary relationships and remains a cornerstone of equity jurisprudence, informing the modern ‘no-profit’ and ‘no-conflict’ rules governing trustees, directors, and other fiduciaries.

Verdict: The lease was decreed to be assigned to the infant beneficiary, the trustee was to be indemnified from any covenants in the lease, and an account of profits made since the renewal was ordered.

Source: Keech v Sandford [1726] EWHC Ch J76