Learning Outcomes
This article outlines the core fiduciary obligations that restrict trustees from purchasing trust property. It explains the 'no-conflict' and 'no-profit' rules foundational to the trustee-beneficiary relationship. For the SQE1 assessments, you need to understand the strict prohibition against self-dealing, the conditions for the fair-dealing rule exception, and the potential consequences of breach. Understanding these principles will enable you to identify and apply the relevant legal rules to SQE1-style single best answer MCQs concerning trustee duties and potential breaches related to trust property transactions.
SQE1 Syllabus
For SQE1, you are required to understand the nature of the fiduciary relationship and the specific obligations it imposes on trustees, particularly concerning conflicts of interest and personal profit. It is likely that assessment questions will require you to apply these principles to scenarios involving transactions between a trustee and the trust.
As you work through this article, remember to pay particular attention in your revision to:
- The core fiduciary duties of loyalty, no-conflict, and no-profit.
- The strict rule prohibiting trustees from purchasing trust property (the 'self-dealing' rule).
- The requirements and limitations of the exception allowing trustees to purchase a beneficiary's interest (the 'fair-dealing' rule).
- The consequences for a trustee who breaches these duties.
- Situations where a trustee might be authorised to purchase trust property (e.g., by the trust instrument, court order, or beneficiary consent).
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which rule primarily prevents a trustee from buying trust property directly from the trust?
- The fair-dealing rule
- The rule against perpetuities
- The self-dealing rule
- The trustee's duty to invest
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Under what circumstances might a trustee lawfully purchase the beneficial interest of a beneficiary?
- If the trustee pays a price slightly below market value.
- If the trustee makes full disclosure and pays a fair price, without abusing their position.
- If the trustee obtains consent from only one of the adult beneficiaries.
- If the trust instrument is silent on the matter.
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A trustee uses trust funds mixed with their own money to buy shares, which then increase in value. What remedy might the beneficiaries seek regarding the shares?
- Only compensation for the original amount of trust money used.
- An order setting aside the purchase entirely.
- A proportionate share of the shares, including the increase in value.
- An injunction preventing the trustee from selling the shares.
Introduction
The relationship between a trustee and the beneficiaries of a trust is fiduciary in nature. This imposes stringent duties on the trustee, designed to ensure they act solely in the beneficiaries' best interests. One of the most fundamental applications of these duties is the prohibition against trustees purchasing property belonging to the trust they administer. This rule stems from the core equitable principles preventing fiduciaries from allowing their personal interests to conflict with their duties and from profiting from their position. Understanding this prohibition, its rationale, and its exceptions is essential for advising on trust administration and potential breaches.
The Fiduciary Duty of Loyalty
Central to trusteeship lies the duty of loyalty. Trustees must administer the trust solely in the interest of the beneficiaries (Bristol and West Building Society v Mothew [1998] Ch 1). This overarching duty gives rise to two specific fundamental obligations often referred to as the 'no-conflict' rule and the 'no-profit' rule.
The No-Conflict Rule
A trustee must not put themselves in a position where their personal interests conflict, or may possibly conflict, with their duties to the beneficiaries. The law takes a strict approach; it is not necessary to show that a conflict actually resulted in harm to the beneficiaries, only that a conflict existed or could reasonably have been foreseen. The rationale is preventative: to avoid the temptation for trustees to prefer their own interests.
The No-Profit Rule
A trustee must not use their position to make a personal profit, unless expressly authorised (e.g., by the trust instrument, the beneficiaries, or the court). This rule prevents trustees from exploiting opportunities or information gained through their role for personal advantage.
Key Term: Fiduciary Duty An obligation to act solely in the best interests of another party (the principal or beneficiary), characterised by loyalty, good faith, and the avoidance of conflicts of interest or unauthorised profit.
Key Term: No-Conflict Rule The principle that a fiduciary must not place themselves in a position where their personal interests conflict or potentially conflict with their duty to the beneficiaries.
Key Term: No-Profit Rule The principle that a fiduciary must not obtain any unauthorised benefit or profit by reason of their fiduciary position.
These core fiduciary duties directly underpin the rules restricting trustees from purchasing trust property.
The Self-Dealing Rule: Prohibition on Purchasing Trust Property
The 'self-dealing' rule is a strict application of the no-conflict principle. It prohibits a trustee from purchasing trust property from themselves (or their co-trustees) in their capacity as trustee. The rationale is clear: a trustee acting as both seller (on behalf of the trust) and buyer (in their personal capacity) inevitably faces a conflict between their duty to secure the best price for the trust and their personal interest in buying at the lowest price.
Key Term: Self-Dealing Rule The rule that a trustee is strictly prohibited from purchasing trust property from the trust, due to the fundamental conflict of interest.
The rule applies regardless of whether the trustee acted honestly, paid a fair market price, or even if the sale benefited the trust. The transaction is voidable at the instance of any beneficiary. This means the beneficiaries can choose to set aside the sale and have the property returned to the trust (with the trustee receiving back their purchase money).
Worked Example 1.1
Ahmed and Ben are trustees of a family trust holding a small commercial property. The trust needs to raise funds. Ahmed suggests the trust sell the property to his wife, Chloe, for £150,000, which is confirmed by an independent valuation as the current market value. Ben agrees, and the sale proceeds. A beneficiary later discovers the sale.
Is the transaction valid?
Answer: The transaction is voidable at the instance of the beneficiaries. Although the price was fair market value, this is a clear case of self-dealing. Ahmed, as trustee, has effectively sold trust property to himself (indirectly through his wife). The beneficiaries can apply to have the sale set aside. Ahmed's honesty or the fairness of the price is irrelevant.
The self-dealing rule applies equally if the purchase is made indirectly, for example, through an agent, a company controlled by the trustee, or a close relative like a spouse.
The Fair-Dealing Rule: Purchasing a Beneficiary's Interest
A separate, but related, rule applies where a trustee purchases the beneficial interest of a beneficiary, rather than the trust property itself. This is known as the 'fair-dealing' rule. Unlike the self-dealing rule, such a transaction is not automatically voidable.
Key Term: Fair-Dealing Rule The rule permitting a trustee to purchase the beneficial interest from a beneficiary, provided the trustee acts fairly, makes full disclosure, and does not abuse their position.
A purchase under the fair-dealing rule will be upheld only if the trustee can demonstrate that:
- They did not take advantage of their position as trustee.
- They made full disclosure of all material facts relevant to the transaction to the beneficiary.
- The transaction was fair and honest, including paying a fair price for the beneficial interest.
The burden of proof rests heavily on the trustee to satisfy these conditions. If the trustee cannot discharge this burden, a beneficiary can have the transaction set aside.
Worked Example 1.2
Fatima is the trustee of a trust fund held for Leo (aged 25) absolutely. The fund consists mainly of shares in a private company, difficult to value accurately. Fatima offers to buy Leo's beneficial interest for £50,000. She provides Leo with the trust accounts but does not mention that she recently received an informal approach from a competitor suggesting a potential takeover of the company, which could significantly increase the share value. Leo, needing funds, agrees to the sale.
Is the sale likely to be set aside?
Answer: Yes, the sale is likely voidable. Fatima has failed to make full disclosure of a material fact (the takeover approach) that could affect the value of Leo's interest. This constitutes a breach of the fair-dealing rule, as she took advantage of information gained as trustee without disclosing it to the beneficiary. Leo can apply to have the sale set aside.
Authorisation for Trustee Purchases
Despite the strict rules, there are circumstances where a trustee purchase may be permitted:
- Provision in the Trust Instrument: The settlor may expressly authorise trustees (or a specific trustee) to purchase trust property, often subject to conditions (e.g., obtaining an independent valuation).
- Court Approval: The court has implicit jurisdiction to approve a sale to a trustee if satisfied it is in the beneficiaries' best interests (Holder v Holder [1968] Ch 353 is an exceptional example). This is often sought before the transaction.
- Consent of Beneficiaries: If all beneficiaries are sui juris (adult and mentally capable) and, after full disclosure of all relevant facts, they unanimously consent to the purchase, the transaction will be valid. Obtaining consent from all beneficiaries can be difficult in practice, especially with large or complex trusts.
Exam Warning
Be cautious with scenarios suggesting beneficiary consent. Ensure all beneficiaries are adults, have capacity, have received full disclosure of all material facts, and all agree. Partial consent is insufficient to validate a transaction under the self-dealing or fair-dealing rules against non-consenting beneficiaries.
Consequences of Breach
If a trustee breaches the self-dealing or fair-dealing rules, the primary remedy is for the beneficiaries to seek rescission of the transaction, meaning the property is returned to the trust and the purchase money is returned to the trustee.
If the trustee has resold the property to a bona fide purchaser for value without notice, rescission against the third party is not possible. In this situation, the beneficiaries can require the trustee to account for the profit made on the resale.
Key Term: Account of Profits An equitable remedy requiring a fiduciary who has profited from a breach of duty to pay over those profits to the principal or beneficiary.
Key Term: Rescission An equitable remedy that sets aside a transaction, aiming to restore the parties to their pre-transaction positions.
If the property has decreased in value since the wrongful purchase, the beneficiaries can still rescind the transaction (restoring the property to the trust and returning the purchase price) or choose to affirm the sale and sue the trustee personally for the loss caused to the trust fund by the breach.
Revision Tip
Remember the strictness of the self-dealing rule. Unlike the fair-dealing rule, the trustee's honesty or the fairness of the price is irrelevant. If a trustee buys trust property from the trust, the transaction is voidable by the beneficiaries without needing to prove unfairness.
Key Point Checklist
This article has covered the following key knowledge points:
- Trustees owe fiduciary duties of loyalty, requiring them to avoid conflicts of interest (no-conflict rule) and unauthorised personal profit (no-profit rule).
- The self-dealing rule strictly prohibits trustees from purchasing trust property due to the fundamental conflict of interest. Such transactions are voidable by beneficiaries, irrespective of fairness or price.
- The fair-dealing rule permits trustees to purchase a beneficiary's equitable interest, but only if the trustee makes full disclosure, pays a fair price, and does not abuse their position. The burden of proof is on the trustee.
- Purchases may be authorised by the trust instrument, the court, or the fully informed consent of all sui juris beneficiaries.
- Breach of these rules can lead to remedies such as rescission of the sale or an account of profits made by the trustee.
Key Terms and Concepts
- Fiduciary Duty
- No-Conflict Rule
- No-Profit Rule
- Self-Dealing Rule
- Fair-Dealing Rule
- Account of Profits
- Rescission
