Keech v Sandford (1726)

This is a short English trust case from 1726, and it is the root of the strictest rule in the law of fiduciaries: a person who holds property for another may not take for himself an advantage that comes to him because of that position — even where the beneficiary could not have obtained the advantage at all, and even where there is no fraud.

Company law borrows the rule directly. Directors stand in a fiduciary position towards the company, and when a director takes for himself an opportunity that came to him as director, the courts apply the Keech reasoning. That is why you meet this case in the directors' duties unit: it explains why the rule is so severe, and why honesty is no defence.

A man held a lease of the profits of a market. By his will he left his estate to a trustee in trust for an infant.

Before the lease expired, the trustee asked the lessor to renew it for the benefit of the infant. The lessor refused. His reason was that the lease was only of the profits of a market, so there could be no distress for rent; the lessor's only remedy would lie in covenant, and an infant could not be bound that way. The report says there was "clear proof of the refusal to renew for the benefit of the infant".

The trustee then took a new lease for himself. A bill was brought on behalf of the infant to have the lease assigned to him and for an account of the profits.

The principle on which the bill was brought — that when a trustee or executor renews a lease, the renewal is for the beneficiary (cestui que use) — was accepted by the other side. The trustee tried to distinguish the case on the ground that the lessor had expressly refused to renew to the infant.

1. Where a lessor refuses to renew a trust lease for the beneficiary, may the trustee take the renewed lease for himself?
2. Does it matter that the trustee acted without fraud and that the beneficiary could not himself have obtained the lease?

The trustee held the new lease on trust for the infant. The Lord Chancellor said: "I must consider this as a trust for the infant".

The reason — the danger of allowing it. If trustees could take the lease whenever the lessor refused to renew to the beneficiary, trust estates would rarely be renewed for beneficiaries: "if a trustee, on the refusal to renew, might have a lease to himself, few trust estates would be renewed to cestui que use".

No fraud is required. The court expressly did not find fraud: "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." The trustee's proper course was to let the lease lapse, not to take it.

The rule is strict, even if it seems hard. "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".

The decree. It was "decreed, that the lease should be assigned to the infant, and that the trustee should be indemnified from any covenants comprised in the lease, and an account of the profits made since the renewal."

A trustee who obtains for himself a renewal of a lease which he held on trust holds the renewed lease for the beneficiary, and must account for the profits. It makes no difference that the lessor refused to renew for the beneficiary, or that the trustee acted without fraud. The rule is applied strictly, because relaxing it would tempt trustees to secure trust property for themselves.

• Directors' duties: Discuss the rule that a director must not make a secret profit from his office. Begin with Keech v Sandford as the source of the rule: a fiduciary may not keep an advantage gained through his position, even if the principal could not have obtained it and even without fraud. Then apply it to directors through Regal (Hastings) Ltd v Gulliver.
• Problem question: a director takes for himself a contract the company was unable to obtain. Use Keech: the company's inability is no answer, and good faith is no answer.
• One-line summary to remember: the trustee "should rather have let it run out, than to have had the lease to himself."