IN THE SUPREME COURT OF JUDICATURE
19 April 2000
Michael Heywood (instructed by Coles Miller)
for the claimant.
Martin Rodger (instructed by Battens) for the first respondent.
The second respondent did not appear and was not represented.
This claim arises out of a family dispute. Like most family disputes it has a number of sad features. The Claimant and the Defendants are brother and sisters, who were tenants of a farm, which they ran in partnership. That partnership has been dissolved in the circumstances that I set out below.
The issues which I have to decide were stated in slightly different form in each of the Skeleton Arguments. There were substantially fewer of them than would often arise on the dissolution of a partnership, particularly when that partnership was a family partnership. For that, the parties and their legal advisers are to be congratulated. However, in the light of that slightly different formulation, I hope that it will not be considered discourteous if I formulate the issues as follows:
(a) Did Susan profit from her position as a fiduciary when, pursuant to the option granted to her in Norman’s Will, she acquired the freehold reversion of the farm at the tenanted value by reason of the partnership’s tenancy?
(b) Was the service by Susan of a notice to quit a breach of her fiduciary duty?
(c) Is Susan liable to account for the benefit derived by her as the landlord from the termination of the partnership’s tenancy?
(d) If the answer to Question (c) is “Yes”, what was the benefit, and how is it to be valued?
(e) Is the partnership entitled to compensation in respect of the “transferred [milk] quota”?
The Claimant, John Richard Ward (“John”), is the younger brother of Susan Mary Brunt (“Susan”) and of Helen Elizabeth Ward (“Helen”). The claim concerns a farm, North Manor Farm (“the farm”), which is situated at Broadwey in Dorset. The farm was owned by Norman John Ward ( “Norman”), who was the grandfather of John, Susan and Helen. Norman bought the farm in about 1926. He used to farm North Manor Farm alone. However, in the 1950s, Norman took into partnership his son, Richard John Ward (“Richard”). Richard was the father of John, Susan and Helen. Their mother is Renée: she was divorced from Richard in the late 1970s.
In 1970 Norman retired from the partnership with Richard. His partnership share was bought by Richard, who then fanned North Manor Farm as Norman’s tenant, but on his own account. Richard died on the 24 November 1980. He was survived by Renée and his three children. At the time of his death Richard was only 49 years old.
Richard’s estate comprised the freehold of some 6 acres of land, the tenancy of the farm and the live and dead stock of the farm. The estate was valued at about £105,000. By his Will Richard bequeathed £10,000 to Renée and left the residue of his estate to be divided equally between the three children. Renée was unhappy with the bequest to her, and made a claim against Richard’s estate under the Inheritance (Provision for Family and Dependants) Act 1975. Her claim was heard in May 1982, and it was ordered that she should receive £50,000 from the estate. That order meant that the money, and the cost of the proceedings, had to be raised by Richard’s estate by the sale of some stock and the taking of a bank loan.
Norman was determined that the farm should remain in and be farmed by the Ward family. At the time of Richard’s death, Susan, who was the eldest child, was 22 years old; Helen was 20 years old; and John was 19 years old. Susan had just qualified as a teacher, and was teaching at a convent in Weymouth; Helen was a bilingual secretary, and was living in France; and John was at Kingston Maurward Agricultural College, studying for his National Certificate in Agriculture. It is common ground that John was asked to take over the management of the farm, but declined to do so. Richard’s Executors told the three children that someone would have to take over the farm for about two years, while the estate was wound up. Susan agreed to give up teaching temporarily, and to run the farm. Her intention was to return to teaching at the end of that period.
However, she did not do so. Norman’s determination that the farm should remain in and be farmed by the Ward family, and John’s unwillingness to take on the responsibility of running the farm, led to the three children entering into a Deed of Partnership on the 10th November 1982. By the Deed of Partnership they agreed to carry on in partnership the business of farmers under the name of North Manor Farm. I shall refer to the Deed of Partnership in greater detail later in this judgment, as one of the issues which arises in these proceedings concerns the duties of the partners to each other.
Also on the 10th November 1982 the three children, as partners, entered into an agricultural tenancy agreement with Norman. Again, I shall refer to that agreement later in this judgment.
At the same time as entering into the Deed of Partnership and the agricultural tenancy agreement, the three children, as partners, opened a partnership bank account with the Midland Bank in Dorchester.
Unfortunately, the farm always traded at a loss. This fact, undoubtedly, contributed to the family tensions, although it is fair to say that John did not attempt to blame Susan for the losses. He was, however, unhappy by what he perceived to be his increasing personal exposure, and the fact that he did not receive any tangible benefit from Richard’s estate.
In April 1984 a milk quota system was introduced into the United Kingdom. The farm was allocated a quota of 464,424 litres. The milk quota gives rise to another of the issues in these proceedings. Again, it will be necessary to refer in more detail to the milk quota later in this judgment. After leaving Agricultural College, John decided to concentrate on agricultural engineering. He obtained a qualification as an agricultural engineer, and then went on to obtain a Higher National Diploma in Civil Engineering. During the period after Richard’s death, John took very little part in running the farm. In 1987 the farmhouse was sold to pay off some of the partnership debts. John discussed the future of the farm with Norman, who was insistent that the farm should remain in the family. It is common ground that, from that time on, there was a considerable rift between Norman and John. Shortly before the completion of the sale of the farmhouse, John moved away from the farm: he left no address at which he could be contacted. However, at some stage in 1987 John consulted solicitors. From then on, in addition to having strained relations with Norman, John’s relationship with Susan deteriorated. Between 1987 and 1991 communication between Norman, Susan and John was sporadic: John visited his grandparents from time to time, but usually communicated with Susan through his solicitors. He continued to have sporadic communication with Helen.
On the 3rd October 1991 John commenced proceedings against Susan and Helen for a declaration that the partnership had been dissolved as from the 31st October 1990, alternatively, for an order that the partnership be dissolved. The Writ, with the Statement of Claim indorsed on it, was served on the 10th October 1991. Susan’s Defence was served on the 12th December 1991: in it, Susan denied that the partnership had been dissolved, or that there were grounds upon which it ought to be dissolved. Helen’s Defence was served on the 20th January 1992: in it, Helen consented to the dissolution of the partnership, but denied that it had already been dissolved.
On the 1st February 1992 Norman made a Will. John accepts that, before he made that Will, Norman knew that proceedings had been started by his grandson against his granddaughters for dissolution of the partnership, which had been formed to keep the farm in the Ward family. Again, it will be necessary to refer to the Will later in this judgment. Also on the 1st February 1992, Helen sold her interest in the partnership to Susan for £14,000. Since that date Helen has had no interest in these proceedings. Shortly after making the Will, on the 4th April 1992, Norman died. On the 15th October 1992 the freehold reversion of the farm was valued for probate purposes at £121,200 inclusive of 48,192 litres of 50 percent used milk quota. Then on the 19th November 1992 Norman’s Will was admitted to probate. On the 9th March 1993 Norman’s Executors offered Susan the option to purchase the freehold to the farm: that offer was made pursuant to the provisions of Norman’s Will. On the 1st June 1993, Susan served notice on Norman’s Executors of her wish to exercise the option.
During 1993 there were a number of transactions concerning the milk quota about which there was some evidence during the trial. That evidence is only relevant if Susan is not obliged, in the events that happened, to account for the freehold reversion of the property and the milk quota annexed to it.
On the 11th November 1994, by consent, a declaration was made that the partnership was dissolved as from that date. Accounts were ordered to be taken of all dealings and transactions from April 1986. Shortly before that declaration was made, the Statement of Claim was amended to abandon the claim that the partnership had been dissolved as from the 31st October 1990.
On the 29th March 1995 Susan offered to buy the farm, subject to the partnership tenancy, for £170,000. That offer was eventually accepted, and on the 22nd May 1996 Susan completed the purchase of the freehold of the farm. Then, on the 30th October 1996, Susan, as one of the joint tenants, served notice to quit the farm. That notice expired on the 10th November 1997. It is common ground that the service by Susan of the notice to quit had the effect of bringing to an end the partnership’s tenancy of the farm.
Although the notice to quit the farm was given just over five years after the commencement of these proceedings, its service, and the consequences of its service, give rise to the most important issue which has to be decided. However, before setting out the issues which I have to decide, it is necessary to give some more details of the Deed of Partnership, the agricultural tenancy agreement and Norman’s Will.
The Deed of Partnership was made on the 10th November 1982. Amongst other things, it recited that the agricultural tenancy agreement had been made, that since Richard’s death the Trustees of his estate had been carrying on the business of farming, and that Susan had been the Manager of the business. The partners were to carry on, in partnership, the business of farmers under the name of North Manor Farm in continuation of the business carried on by Richard and by the Trustees.
The profits and losses of the partnership were to be dealt with in the manner stipulated in Clause 5, and Susan, who (by Clause 11) was to devote the whole of her time and attention to the partnership business, except during any holidays to which she was entitled, or during incapacity due to illness, injury or other cause, was to be paid such annual salary as was from time to time agreed by the partners.
The partnership was to continue for the joint lives of the partners, and upon dissolution of the partnership (for whatever cause) each partner was to be entitled to receive the undrawn balance, if any, of his or her share of the partnership, and net profits to the date of dissolution. It is common ground that, although it was expressed to continue for the joint lives of the partners, the partnership could be dissolved in accordance with the provisions of the Partnership Act 1890. I should add, for the sake of completeness, that the Statement of Claim alleged a breach by Susan of the implied term of the partnership that each partner would at all times conduct himself or herself towards the others with good faith, or, in the alternative, that the partnership should be dissolved because of Susan’s breaches of the partnership agreement.
This agreement was also made on the 10th November 1982, and was between Norman, as landlord, and Susan, Helen and John, as tenants. By the agreement, the tenants were to hold the demised “Farm farmhouse outbuildings and land” from the 11th October 1982, for one year certain and thereafter from year to year until the tenancy was determined at the end of the second or some subsequent year by either party giving to the other not less than 12 months’ previous written notice.
Clause 2 (10) of the agreement provided that the tenants were “not to assign charge underlet or part with the possession of the premises or any part thereof without the previous licence in writing of the Landlord”. This provision plainly has an impact on the value of the tenancy, and I shall have to consider that impact further at a later stage of this judgment.
It was also a term of the agreement that the tenants would keep the farmhouse and buildings “in good and substantial repair order and condition throughout the tenancy using the best and most suitable materials for the same”. The rent, which started at £900 a year, was over £5,000 a year when the partnership was dissolved on the 11th November 1994.
It was in consequence of the provision for 12 months’ notice that Susan’s notice, dated the 30th October 1996, expired on the 10th November 1997. It should be added that, by letter dated the 22nd July 1996, Susan’s solicitors had given notice to John’s solicitors of Susan’s intention to give that notice. That notification was given two months after Susan completed the purchase of the freehold of the farm. So far as I am aware, that notification drew no protest either from John or from Helen.
It was suggested to Susan during her evidence that she had deliberately waited until after the completion of the purchase to serve the notice, so that she would be able to acquire the freehold at the tenanted value rather than at the open market value, which was the value that she would have had to pay, if she had served the notice to quit before exercising the option. Susan denied that she had done so. She said that she was not aware that if she had served the notice to quit before exercising the option, she would have had to pay more. She said that she was advised that the tenancy had a nil value, so that it made no difference when she served the notice.
I was impressed by Susan as a witness, and I have no hesitation in accepting her evidence on this point. She was throughout a manifestly honest and direct witness, who at all times did her best to give straightforward and honest answers to questions put to her. In saying that, I do not wish it to be thought that I found John to be a dishonest or unsatisfactory witness. It was inevitable that, because of the manner in which this unfortunate dispute developed, he would have less relevant evidence to give about many of the events.
By his Will, Norman bequeathed the sum of £5,000 to his daughter, Rachael. The remainder of his Estate was left to his Trustees upon trust “to sell call-in and convert the same into money with power to postpone the sale calling-in and conversion thereof for so long as they shall in their absolute discretion think fit and without being liable for loss”.
The Trustees were directed to hold the whole of Norman’s residuary estate, as to both capital and income, upon trust to divide it into two equal shares, and to hold one share upon trust for Rachael and the other share upon trust to pay the sum of £10,000 to Helen and, subject to that payment, upon trust for Susan absolutely. The Trustees were further directed to give to Susan the option to purchase the freehold “of the farm land and buildings known as North Manor Farm”. The option was to be offered in writing within 12 months of the date of Norman’s death, or within 6 months of the Grant of Probate for Administration to Norman’s Estate, and had to be exercised by Susan within 3 months from the date upon which the offer was received by her. Susan’s right to exercise the option was to cease absolutely at the expiration of 2 years, less one day, from the date of Norman’s death. As has been set out above, the Trustees offered Susan the option on the 9th March 1993, 11 months after Norman’s death, and Susan exercised the option on the 1st June 1993, within the 3 month exercise period.
The Will further declared that the option was personal to Susan, and that if she notified the Trustees in writing of her wish to exercise the option, then she and the Trustees should attempt to reach agreement on the value of the freehold of the property in the open market (taking into account in such valuation any tenancy to which the property was at the time of the exercise of the option held subject). If Susan and the Trustees were not able to reach agreement on the value of the freehold within 2 months of the notice of the exercise of the option, then an independent surveyor was to be appointed to make a valuation binding on both parties and at their joint expense.
Once a valuation had been agreed, or had been made by a valuer, Susan was to have 6 months in which to decide whether she wanted to proceed with the intended purchase of the property at that valuation. If, within that period, she served written notice of her desire to proceed, then she would be entitled, on paying the amount of the valuation to the Trustees, to a conveyance of the property free from all encumbrances “(except for any tenancy agreement to which the property is subject ... )”. Finally, for the avoidance of doubt, it was declared that the proceeds of any sale to Susan were to form part of Norman’s residuary estate. Thus, any payment by Susan for the freehold would, as to one-half, be held on trust for herself.
I turn now to consider the issues which I have set out above. I shall consider them in the order in which I have set them out. There is, inevitably, some overlap between the first four issues: that overlap will enable me to deal with some of the issues quite shortly.
On any consideration of this issue, it is important to remember that Susan was granted the option to acquire the freehold reversion under the terms of Norman’s Will. There was implicit in Mr. Heywood’s Opening Skeleton Argument a suggestion that Susan was under some, unspecified, fiduciary duty to John and Helen when she exercised the option. However, as I understood Mr. Heywood’s closing submission, that suggestion was not pursued. That was manifestly a correct decision: in my judgment, it would have been an unsustainable argument.
At the trial, the case put against Susan by Mr. Heywood was that the giving of the notice to quit was a breach of fiduciary duty by Susan, as a partner; that it was a transaction which concerned the partnership; and that it amounted to a use by Susan of partnership property. It is contended that Susan was thereby able to derive a benefit for herself to which her partners had not consented. So, it is said, Susan profited from her position as a fiduciary.
Mr. Rodger submits that it is necessary to distinguish between acts by Susan as a beneficiary of Norman’s Will and acts by Susan as a partner. He submits that the exercise of the option granted to her by Norman’s Will cannot give rise to any fiduciary obligation to her partners. Thus, Mr. Rodger submits, once Susan had exercised the option, she was entitled to acquire the freehold reversion to the farm. No criticism can be made of her conduct in that regard. When she gave the notice to quit, she was acting as a partner, on behalf of the partnership, and was bringing to an end a tenancy which was of no value to, but was an ongoing liability of, the partnership. In giving that notice she was acting in the best interests of the partnership, and was not in breach of any fiduciary obligation. If she had not given that notice, the tenancy would have continued until such time as the partners agreed that it should be given, and the partnership’s liability to pay rent would have continued until the tenancy was determined. That would not have been in the interests of the partners. The Court had ordered the taking of dissolution accounts. It was necessary for notice to be given so that the accounts could be taken. The facts that (a) Susan benefited, as freeholder, from the termination of the tenancy and (b) she had obtained the freehold at the tenanted value, rather than the open market value, are irrelevant.
It will be seen, from the rival submissions, that at the heart of this issue there lies the question of whether a person, who in one capacity has fiduciary obligations in respect of property and who at the same time and in another capacity has an independent interest in that property, is fettered in the exercise of rights which are enjoyed in consequence of that independent interest by the fiduciary obligations which are owed in the former capacity.
It is trite law that a trustee may not, whether directly or indirectly, make a profit from his trust. That rule applies equally to other persons in a fiduciary position. But in order to decide whether a trustee has profited from his trust, it is necessary to define, with some precision, the ambit of that trust. It is only by doing so that it is possible to decide whether “by reason and in course of that fiduciary relationship” or “by reason, and only by reason ... and in the course of the execution of that office ...”, the trustee has profited from the trust: see Regal (Hastings) Ltd. v. Gulliver  2 AC 134 per Lord Russell of Killowen at pages 143E-F, 14413, 145F and at pages 147A and 149F respectively. In Cassels v. Stewart (1881) 6 App. Cas. 64, at page 73, Lord Selborne LC said:
A man obtaining his locus standi, and his opportunity for making such arrangements, by the position he occupies as a partner, is bound by his obligation to his co-partners in such dealings not to separate his interest from theirs, but, if he acquires any benefit, to communicate it to them.
Mr. Heywood relied upon a long line of authorities commencing with Keech v. Sandford (1726) Sel. Cas. t. King 61, 25 ER 223 and concluding with Popat v. Shonchhatra  1 MR 908 in support of his submission that Susan was bound to account for the profit which came to her as a result of the merger of the freehold and leasehold interests, when the notice to quit expired. That profit, he submitted, came to Susan because she had been able to acquire the freehold reversion of the farm at the tenanted value rather than at the open market value. The real issue, therefore, which has to be decided in this case is whether Susan obtained her opportunity to serve the notice to quit, and thereby to obtain the merger of the freehold and leasehold interests, by reason and in the course of her position as a partner. If she did, and profited thereby, she will have to account to her partners for that profit.
It is clear that the opportunity to serve the notice to quit was available to Susan, as it was to John and Helen, by reason of her position as a partner. It is equally clear that Susan obtained the freehold reversion by reason of her position as a beneficiary under Norman’s Will. Mr. Heywood submits, however, that the fact that Susan’s opportunity to serve the notice to quit and to acquire the freehold reversion came to her in different capacities, does not assist her, and that she is bound to account to her partners for the profit which she made on the merger of the freehold and leasehold interests. In Protheroe v. Protheroe  1 MR 519, the leasehold of the matrimonial home was purchased in the husband’s name, but the wife had a beneficial interest in the property. In October 1964, after the husband and wife had separated, the husband purchased the freehold of the property for £200 by borrowing money on mortgage from a building society. The Court of Appeal held that the husband was the trustee for both his wife’s and his own beneficial interest in the matrimonial home. Lord Denning MR said, at page 52 1 C-D:
It was a family asset which the husband and wife owned in equal shares. Being a trustee, he had an especial advantage in getting the freehold. There is a long established rule of equity from Keech v. Sandford downwards that if a trustee, who owns the leasehold, gets in the freehold, that freehold belongs to the trust and he cannot take the property for himself.
In that case, however, there was no doubt that the leasehold interest was held in trust, and the opportunity to acquire the freehold came to the husband only as trustee.
In Thompson’s Trustee in Bankruptcy v. Heaton  1 MR 605, the facts were that Thompson and Heaton acquired a leasehold interest in a farm as partners. The partnership was dissolved by mutual consent, and Heaton remained in sole occupation of the farm. After Heaton’s death, his executors were served by Thompson’s solicitors with notice to quit the farm. They refused to comply, and acquired the freehold reversion of the farm on behalf of a company, which had been formed after the dissolution of the partnership. Thompson began proceedings against the executors and the company for the delivery up of possession of the farm to him. The company then resold the farm at a large profit, and Thompson’s trustee in bankruptcy claimed that the freehold reversion and net proceeds of sale of the farm were held on trust for Thompson and Heaton’s executors. A crucial factor in that case was that, although the partnership had been dissolved, there had been no winding up of the partnership and no distribution of assets. Indeed, the evidence indicated that both Thompson and Heaton continued to regard the farm as an asset of the dissolved partnership. It is not surprising, therefore, that the Vice-Chancellor held that Heaton’s executors, or the company, were accountable for one-half of the net proceeds of the sale of the freehold. At page 612B-D the Vice-Chancellor said:
It is well established that where someone holding a leasehold interest in a fiduciary capacity acquires a renewal of the leasehold interest, he must hold the renewed interest as part of the trust estate. This principle is known as the rule in Keech v. Sandford (1726) Sel. Cas. t. King 6 1: Snell’s Principles of Equity, 27th ed. (1973), p. 23 6. It is also, I think, well established that where someone holding a leasehold interest in a fiduciary capacity acquires the freehold reversion, he must hold that reversion as part of the trust estate: see Protheroe v. Protheroe  1 WLR 519 ...
The Vice-Chancellor continued:
That decision is cited, with some implied criticism, in Snell’s Principles of Equity, p. 238. It seems to me, however, that, apart from the fact that it binds me, this decision, like the rule in Keech v. Sandford ... is really in modern terms an application of the broad principle that a trustee must not make a profit out of the trust estate. This principle applies to all kinds of collateral advantages, for instance directors’ remuneration received by a trustee acting as a director for a company controlled through the shares of the trust. In Phillips v. Phillips (1885) 29 Ch. D. 673 the Court of Appeal applied the principle to the purchase of a reversion by a tenant for life. I ought to make one observation in this connection. Obviously the beneficiary under the trust in such circumstances cannot be compelled to accept and pay for the reversion. If he refuses to do so, either before or after the acquisition by the trustee, no doubt the latter is entitled to acquire and retain the reversion for his own use, but if the beneficiary does require that the reversion be brought into the trust estate, then the trustee must deal with it accordingly, subject of course to recoupment out of the trust estate.
There can, I think, be no doubt that so long as a partnership subsists each partner is under a corresponding obligation to his co-partners.
After a citation from the 13th edition of Lindley on Partnership, the Vice-Chancellor continued, at page 613C:
The fiduciary relation here arises not from a trust of property but from the duty of good faith which each partner owes to the other. It is immaterial for this purpose in which partner the legal estate in the leasehold interest concerned is vested.
In that case there was no doubt that the farm had been, and remained, a partnership asset, and that the partnership had never been wound up. In my judgment, the facts of that case are very different from the facts in the present case. Heaton’s executors had acquired the freehold reversion of the farm after service by Thompson’s solicitors of a notice to quit the farm, and did so when it was known that the partnership had not been wound up. In the present case, Susan obtained the opportunity to acquire the freehold by Norman’s Will, and did so as a beneficiary of, and in accordance with the machinery laid down by, that Will.
In Popat v. Shonchhatra  1 MR 908, the plaintiff and defendant had entered into a partnership agreement to carry on a newsagency business and acquired leasehold premises from which to carry on that business. After a short time, the plaintiff voluntarily left, and the partnership, which was determinable at will, came to an end. However, no dissolution accounts were prepared, and the partnership was never formally wound up. The defendant carried on the business on his own. He then acquired the freehold of the premises, which was conveyed into his sole name, from the freeholder for £80,000. Some two and a half years after the termination of the partnership, the defendant’s sold the premises and the other partnership assets at a profit. David Neuberger QC, sitting as a deputy High. Court judge, concluded that the defendant held the proceeds of sale of the freehold on trust for himself and the plaintiff in the same proportions as the partnership assets generally. He held that he could not “sensibly” distinguish the decision in Thompson’s case. Again, it should be noted that in Popat the capacity in which the defendant acquired the freehold interest in the premises was identical with that in which he held, as a partner, the leasehold interest. Indeed, there was no other capacity in which he could have acquired the freehold interest. In relation to this case, I should add that the Court of Appeal varied the order made by the judge. It was held in the Court of Appeal that the judge should have held that the freehold was held in trust for the partners in equal shares rather than in shares which corresponded to their respective shares of capital: see  1 MR 1367 at page 1375D. The Court of Appeal judgment does not, however, alter the conclusion which I have expressed as to the ratio of the judge’s decision. The effect of the Court of Appeal judgment was simply to vary the proportions in which the trust property was held.
The decisions in those cases can be contrasted with the judgment of the Court of Appeal in In re Biss  2 Ch. 40. That case concerned the renewal of a lease, and not the acquisition of the reversion, but the Court of Appeal held that the principle applicable in that case was that the person renewing would only be a constructive trustee of the new lease if, in respect of the old lease, he occupied a special position by virtue of which he owed a duty towards the other persons interested in the estate. In his judgment Collins MR analysed the rule in Keech v. Sandford. At page 56 he said:
There are, no doubt, many cases in which the presumption of personal incapacity to retain the benefit is one of law and cannot be rebutted. The simplest instance is that of a trustee, as in Keech v. Sandford. But the principle has been extended to cover other persons who are not primarily trustees at all; as, for instance, tenants for life towards those in remainder. The foundation of the presumption in their case is that they can take only what the will or settlement under which they make title gives them, and that a renewal must be looked on as an accretion to or graft upon the original term arising out of the goodwill or quasi-tenant right annexed thereto, and that their rights to such accretion are those which they have in the term, and no greater, and terminate with their own life ...
But there is another class of cases in which, as it seems to me, there is no presumption of law, but at most a rebuttable presumption of fact.
In that latter class of cases Collins MR specifically mentioned partners, who “cannot treat privately, and behind the backs of [their] co-partners ... if [they do] so treat, and obtain a lease in [their] own name, it is a trust for the partnership”.
Romer LJ. agreed with the judgment of Collins MR. He also drew the distinction between “The cases where the person has clearly occupied a fiduciary position in the matter, including an executor, administrator, trustee, or agent ...” and “The cases ... where the person renewing the lease does not really occupy a fiduciary position.” He continued, at page 61:
Take next the case of a partner obtaining a renewal of a partnership lease: here, apart from the fact that in ordinary cases concerning the carrying on of the partnership business he is an agent for the partners, he clearly owes a duty to his co-partners not to acquire any special advantage over them by reason of his position. And, therefore, as a rule, even if a partnership lease has come to an end, yet if that partner, by virtue of his position, obtained a renewed lease, he will be held to have acquired it on behalf of all the partners. (emphasis added)
Mr. Rodger referred me to a number of other authorities in support of his proposition that it is necessary to distinguish between activities of a partner by reason and by virtue of his position as a partner and activities unconnected with his position as a partner. Although I have considered all of them, I will refer briefly to only three of them. In Brenner v. Rose  1 WLR 443 Brightman J. held that the partner’s fiduciary capacity as a member of the partnership, which included the benefit and burden of the underlease, did not raise any sort of equity which could prevent him from exercising the rights of a landlord which he would have had as a stranger to the partnership. It is to be noted that the partner in that case acquired the leasehold reversion expectant on the underlease after a writ had been issued for the dissolution of the partnership, and at about the time that a receiver was appointed. One of the submissions in that case was that the defendant, who was the partner who had acquired the leasehold reversion, was “in some way inhibited from exercising his rights as landlord by reason of the fact that the underlease is partnership property and that he, the defendant, is a trustee of that property”. Brightman J. concluded, at page 447C-D:
In my judgment the right of the landlord in such circumstances either to have possession or to recover the rent is not to be whittled away by the mere fact that he is one of the partners and is a purchaser of the reversion expectant on the underlease. I do not see that the defendant’s fiduciary capacity as a member of a partnership which includes the benefit and burden of the underlease raises any sort of equity which should be allowed to prevent him from exercising the rights as landlord which he would have had if he were a stranger to the partnership. I need only refer to Bevan v. Webb.
In Bevan v. Webb 1 Ch. 620 the person who was a partner as to one-half of the property, and a trustee as to the other half, acquired the reversion of the property. There was no right of renewal of the lease. At page 625, Warrington J. said:
This is beyond dispute, and has not been disputed by the defendant, that if a trustee or a person in the position of a trustee, holding as part of his trust property a lease, takes the renewal of the lease, that renewed lease is treated as a graft or addition to the trust property and itself forms part of the trust property. As to that I think there can be no doubt. And I think also there is no doubt that the principle is applicable to the relations between partners; and if part of the assets of the firm consists of leasehold premises, one partner cannot take a new lease of those premises and then insist on keeping that for his own benefit.
But it is sought to extend that further by saying in equally general terms that no such trustee or partner is capable of taking to himself the reversion expectant on a lease of which the trust estate or the partnership, as the case may be, is possessed. Now, is that proposition sound? In my opinion, in the wide terms in which I have expressed it, and in which alone it must be expressed, if the plaintiffs are to succeed, it is not sound.
And at page 630, Warrington J. concluded:
It seems to me, therefore, both on principle and on authority, that the purchase of the reversion in this case did not in the least enure for the benefit of the partnership firm, either on any doctrine based on the consideration of the relations of trustee and cestui que trust, or by regarding William Webb or the purchasers of the other moeity as trustees for the Bevan family.
Finally, I should refer to Sergeant v. National Westminster Bank (1988) 59 P & CR 182. In that case, a father who owned three farms granted a yearly agricultural tenancy of the farms to his two sons and his daughter, who were to find them in partnership. The father died. Subsequently, on the death of one of partners, the surviving partners exercised an option under the partnership deed to buy his share, and continued to farm the land. The executors of the deceased partner claimed that the remaining partners, in their capacity as executors and trustees of the father’s estate, had a duty to realise the assets of the estate to their best advantage, and must, in furtherance of that duty, obtain vacant possession of the farms. At first instance, Hoffman J. held that the continuing partners were not under such a duty even though they occupied concurrently the role of executors and trustees of the father’s estate (in which capacity they were landlords of the farms) and tenants of the farms in partnership with each other. At page 183, Hoffman J. said:
Now the defendants want to realise the capital value of their third interest in the farms and it is accepted that they will have to be sold., But there is a dispute over whether or not they have to be sold subject to the tenancies in favour of the plaintiffs. The defendants say that the plaintiffs, as executors and trustees of their father’s estate, have a duty to try to realise its assets to the best advantage. It would plainly be more advantageous to sell the farms with vacant possession than subject to an agricultural tenancy. Therefore, the defendants say, the plaintiffs have a duty as trustees to try to obtain vacant possession so that the land can be sold for the best possible price.
Hoffman J. continued, also on page 183:
Now the position in this case is that the plaintiffs are farmers; they want to go on farming and one of them lives on the farm. They do not want to give up their tenancy with a view to a sale with vacant possession. It therefore seems to me pointless for the court to insist that they should somehow enter into a negotiation with themselves in order to persuade themselves on suitable advantageous terms to give up the farm. As tenants, they are under no duty to move out, whatever they may be offered and whether that would be reasonable or not. As landlord and trustees they can only sell what they have, which is the freehold interest subject to the tenancies. Consequently, the plaintiffs are, in my judgment, entitled to sell the freehold subject to the agricultural tenancy, and are under no duty because they happen themselves to be the tenants to cooperate in its sale in any other way.
Hoffman J’s decision was upheld in the Court of Appeal: see (1990) 61 P & CR 518. Nourse LJ. gave a judgment with which Bingham LJ. and Sir George Waller agreed. In the course of his judgment, he said, at page 523:
It cannot be doubted that the trustees have ever since been in a position where their interests as tenants may conflict with their duties as trustees to the estate of Charles. But the conclusive objection to the application of the absolute rule on which Mr. Romer relies is that it is not they who have put themselves in that position. They had been put there mainly by the testator’s grant of the tenancies and by the provisions of his will and partly by contractual arrangements to which Charles himself was a party and of which his representatives cannot complain. The administrators cannot therefore complain of the trustees’ continued assertion of their rights as tenants.
The judgments in Sergeant seem to me to provide considerable support for Mr. Rodger’s submissions that it is important to identify precisely the capacity in which the activity of which complaint is made was carried out, and that it is not necessarily every conflict of interest, whether actual or potential, which will inevitably lead to a finding that there has been a breach of fiduciary obligation.
In my judgment, therefore, in deciding this issue, it is necessary to consider, in the light of the authorities, the rights and obligations of the partners as partners, and Susan’s rights and obligations as a beneficiary under Norman’s Will. It will be remembered that on the 11th November 1994, by consent, it had been declared that the partnership was dissolved as from that date, and it was ordered that an account should be taken of the assets and liabilities of the partnership. One of the assets was the tenancy of the farm. However, that asset could not be assigned, charged or underlet without the previous licence in writing of the landlord: nor could the partners part with the possession of that asset without such licence., It was inevitable that, on the taking of the account, the tenancy would have to be terminated so that the asset could be realised ( if it had a value) and so that ( in any event) the liability to pay rent could be terminated. Under the agricultural tenancy agreement, notice to terminate could have been given either by the landlords, who at the date of the Order were Norman’s Executors, if they had grounds upon which to do so, or by the partners, or, as they were joint tenants, by any of the partners. Until such notice was given, and had expired, the tenancy was an asset of the partnership, and the rent was a liability of the partnership. As one year’s notice to terminate the tenancy had to be given, it was clearly in the interests of the partnership to give that notice sooner rather than later, unless the surrender value of the tenancy to the landlord was greater than the rent that was payable. If the tenancy was an asset of the partnership but had no value, it was in the interests of the partners to bring to an end the liability to pay rent at the earliest possible time, and to co-operate with each other in doing so.
I heard evidence of value from Mr. Stephen Jenkins FRICS FAAV and from Mr. Alastair Cowen FRICS FAAV. There was a considerable divergence of opinion as to value between them. Mr. Jenkins was of the opinion that, notwithstanding the partners’ inability to assign the tenancy agreement, the tenancy had a value. His opinion was that the value was what the Executors would have paid for the surrender of the lease on the 11th November 1994. He pointed out that on that date the price at which Susan was to purchase the freehold reversion had not yet been agreed, but that the valuation date had been fixed under the option. He said that if the Executors had then approached him, he would have said that valuations would have to be made of the full open market value and of the tenanted value of the freehold, and that a proportion of the difference would have to be paid to the tenants to entice them to surrender the tenancy. The parties agreed that the freehold open market value of the farm with vacant possession as at the 11th November 1994, and excluding milk quota, was £369,900.
In his Report, dated the 29th July 1996, Mr. Jenkins set out his calculations of the value of the tenancy on two different bases: first, on the basis that the landlord’s intention to bring the tenancy to an end was taken into account, and, secondly, that that intention was ignored. On the first basis Mr. Jenkins valued the tenancy at £124,585, and on the second basis at £32,250. It is necessary to make two points about Mr. Jenkins’ valuations. First, as is obvious, although the valuation was to be at the 11th November 1994, Mr. Jenkins took into account the fact that after that date Susan acquired the freehold reversion. Thus, the valuation took into account events which occurred after the valuation date. Secondly, Mr. Jenkins accepted that his alternative basis of valuation had proceeded on an incorrect basis, because in his calculations, he had assumed the rent payable to be one-half of the rent actually being paid. In the circumstances, I do not propose to consider further Mr. Jenkins’ second basis of valuation.
Mr. Cowen expressed the opinion that the value of the tenancy on the 11th November 1994 was nil. His view was that there was no reason for the landlord to pay for the surrender of the tenancy. In his view, the circumstances in which a landlord might want pay for the surrender were twofold: first, if he wanted the farm for himself, and, secondly, if he wanted to sell the farm with vacant possession. He took into account the fact that the tenancy was not assignable, but said that the fact that it was agreed that the freehold could be purchased by Susan, subject to the tenancy, for £170,000 did not mean that the tenancy itself had a value.
I have no hesitation in preferring the opinion of Mr. Cowen to that of Mr. Jenkins. Approaching the matter of value without the benefit of expert evidence, it would seem to me that there would be little incentive for a landlord to make a financial offer for the surrender of an agricultural tenancy which was not assignable, and which carried on from year to year, but which was inevitably going to be terminated sooner rather than later so that the partnership, which held the tenancy, could be wound up. Mr. Cowen’s approach seemed to me to accord with commonsense and practicality, while Mr. Jenkins’ approach seemed to me to be theoretical and unrealistic. I, therefore, approach the matter on the basis that the surrender value of the tenancy was nil.
It will be recalled that Susan’s evidence was that she was advised that the tenancy had a nil value when she served the notice to quit. It will also be recalled that Susan’s solicitors had given notice to John’s solicitors of the intention to give notice some three months before notice was given, and that during that period there was no protest from John solicitors. Indeed, in his evidence, John said that he did not object to the termination of the tenancy at that time. He was not concerned about the termination of liabilities: his aim was dissolution, and it did not cross his mind that termination of the joint tenancy terminated his obligations.
Before leaving this issue, I should refer to a further submission made by Mr. Heywood. That submission was that the rule that a trustee may not a profit from his trust depends not on fraud or bad faith, but on the mere fact of a profit made. That is true, but it provides no answer to this issue in this case. The rule is stated very clearly in the speech of Lord Russell of Killowen in Regal (Hastings) Ltd. v. Gulliver at pages 144G- 145k
The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.
Even taking such considerations into account, however, it is nonetheless clear that liability still depends upon the person in a fiduciary position obtaining a profit by dealing with the trust property “ by reason, and only by reason” of the fact that he was in such a position and “in the course of the execution” of his fiduciary duties. If he does so, then such considerations as “fraud, or absence of bona fides” are irrelevant, and he will be liable. But if he does not do so, no liability arises.
For the reasons given above, I have no hesitation in concluding that Susan did not profit from her position as a fiduciary when she acquired the freehold reversion of the farm. She did so as a beneficiary under Norman’s Will, and not as a partner. She owed no duty to her partners when acquiring the freehold. I see no reason why, on the facts of this case, equity should impose a trust on Susan’s conscience in respect of her acquisition of the freehold.
Mr. Heywood submitted forcefully that the service of a unilateral notice to quit by one partner was a breach of fiduciary duty. I have no hesitation in accepting that in many cases service of such notice would amount to such a breach. However, one cannot simply and blindly apply bald legal propositions to every factual situation. Each case, and each legal proposition must be applied to a particular set of facts.
In the present case if, as I have held, the tenancy agreement was a partnership asset which had no value to the partnership, but which remained a liability of the partnership, it does not seem to me that the service of a unilateral notice to quit by one partner, which had the effect of bringing to an end the liability, amounts to a breach of fiduciary duty. Even if I were wrong in that conclusion, it would be necessary to consider what damage was caused to the partnership by that breach. Again, if the tenancy agreement had no value to the partnership and the partnership remained liable to pay the rent, it seems to me that, rather than causing damage, the breach mitigated the damage which the partnership was sustaining by reason of the fact that no such notice had been served, by bringing forward the date upon which the liability to pay rent determined. In making that point I do not wish to be thought to be attributing a breach of duty to any particular partner by the failure to serve a notice, so that the partnership’s liability to pay rent was brought to an end at the earliest possible moment and so as to enable the dissolution account to be taken. The duty of the partners was to co-operate with each other in the service of the notice. If there was no such co-operation, the unilateral action by one partner does not, in my judgment, and on the facts of this case, amount to a breach of fiduciary duty.
On the facts of the present case, therefore, I hold that the service by Susan of a notice to quit was not a breach of her fiduciary duty.
As I have held that Susan did not profit from her position as a fiduciary, and was not in breach of fiduciary duty in serving the notice to quit, it follows that she is not liable to account for the benefit derived by her as landlord of the partnership’s tenancy.
In the light of my decision on the preceding questions, it is not necessary for me to decide this question. However, in case this action should go further, I shall answer the question on the assumption that I had found that Susan did profit from her position as a fiduciary when she acquired the freehold reversion of the farm, pursuant to the option granted to her in Norman’s Will, at the tenanted value by reason of the partnership’s tenancy, and was in breach of fiduciary duty when she served the notice to quit. It is implicit in this question that I must further assume that Susan was acting in a fiduciary capacity when she exercised the option.
On those assumptions, Susan acquired the farm, which it is agreed had a freehold open market value with vacant possession as at the 11th November 1994, excluding the milk quota, of £369,900, for the sum of £170,000.
However, I have also held that the tenancy had no value. Thus, although Susan paid only £170,000 for an asset worth £369,900, it would not, in my judgment, be correct to hold that the benefit that she obtained by the breach of duty was the difference between those two figures, and value that benefit in the sum of £199,900. In my judgment, the benefit that Susan derived was £369,900, to which she was entitled to one-third, but for which she paid £170,000, for which was only liable for one-third. The reason that Susan was only entitled to one-third of the benefit is that on this hypothesis the freehold reversion became a partnership asset, to which each of the partners was equally entitled, but for which each of the partners was equally liable. It follows, therefore, that the benefit which Susan derived was her one-third share of the freehold reversion, but for which she must be credited with the whole of the sum she paid until, on the taking of the account, the other partners make their contribution. On the present figures, each partner’s entitlement would be £123,300 and each partner’s liability would be £56,666.66. If, as I am told, Helen has sold her interest in the partnership to Susan, Susan would be entitled to two-thirds and be liable in the same proportion.
I have stated earlier in this judgment that in April 1984, when the milk quota system was introduced into the United Kingdom, the farm was allocated a quota of 464,424 litres. It is common ground that, as at the 11th November 1994, the quota allocated to the farm was 421,844 litres. Originally, the claim advanced on behalf of John was that, as only 48,192 litres had been taken into account as “Landlord’s quota”, when the farm was valued for probate following Norman’s death, the balance of the allocated quota was the “tenant’s quota”, and was part of the assets of the partnership. Mr. Jenkins conceded that this claim was unsustainable, and it was duly abandoned.
In order to explain the alternative basis upon which this part of the claim is put, it is necessary to state some additional facts. In February and March 1993 there were a number of transfers by and to the farm of milk quota. Those transfers were effected when Norman’s Executors were responsible for the farm, and save in respect of the last transfer, were made before Susan had been offered the option to purchase the freehold of the farm. On the 17th February 1993, but effective on the 27th January 1993, the farm (a description which I use as shorthand for Norman’s Executors, although Susan was responsible for the detail of the transactions, subject to the Executors’ approval) sold to A.W. & A.J. Barnard (Farms) Ltd. 50,000 litres of quota milk, of which the farm had used 110.52%. On the same day, but effective on the 28th January 1993, the farm sold to Mrs. LA. Law 100,000 litres of milk quota, of which the farm had used 111.09%. That same day, but effective on the 29th January 1993, the farm bought from Somerset County Council 40,000 litres of quota milk, of which none had been used. On the 17th March 1993, 8 days after the Executors had offered Susan the option to acquire the freehold of the farm, 120,000 litres of quota milk were bought from Ms. C.M. & M. Harris, of which 26.14% had been used.
It was explained to me that the reason for carrying out such transactions was to obviate the risk of the farm having to pay a substantial levy for production in excess of quota. So the farm sold quota in respect of which it had overproduced, and acquired quota in respect of which there had been little or no production. The net effect of the transactions was that the farm sold 140,000 litres of quota milk, of which it had produced substantially in excess of the quota, and acquired 160,000 litres of quota milk, of which only a small percentage had been used. The purchases cost a total of £60,000, and the sales produced a total of £46,400.75. In order to complete the transactions Susan opened a “Bridging Loan Account” at the Midland Bank. That account was opened in the name of “Mrs. S.M. Brunt trading as North Manor Farm”, although it is common ground that the account was a partnership account. By the time that the account was closed, after repayment of the difference between the cost of the purchases and the value of the sales, the account had been debited with a further £1,525.64 by way of interest. The total outlay, therefore, was £61,525.41 against receipts of £46,400.75.
Mr. Heywood submits that the partnership should be credited with transferred quota in proportion to the extent that the purchase of the 160,000 litres of new quota milk was funded by it. He calculates that the cost of the quota purchased was an average of 38.45 pence per litre. He submits that the Executors contributed £46,400.75, so that the partnership only paid the difference between that figure and £61,525.41 of £15,124.66. He, therefore, submits that the Executors paid for 120,678 litres of new quota milk, and the partnership for 39,322, those figures being the product of the sums respectively contributed, divided by the average price per litre. Thus, Mr. Heywood submits, the transferred quota is 39,322 litres, and as the parties have agreed the price per litre for the purposes of valuation as 52.65 pence per litre, John is entitled to £20,703.03.
Mr. Rodger submits that Mr. Heywood’s methodology is flawed. His submission is that the partnership sold 150,000 litres of quota milk and purchased 160,000 litres of quota milk so that the transferred quota which must be brought into account is 10,000 litres of quota milk. He submits that the position is very simple: the partnership paid for 10,000 additional litres of quota milk, and that to embark upon complicated calculations is wholly artificial. But Mr. Rodger has a further submission. He submits that the partnership’s entitlement to compensation in respect of the “transferred quota” is dependent upon paragraph 5(3) of Schedule 1 of the Agriculture Act 1986. The tenant’s right to compensation arises on the termination of the tenancy, and is in respect of milk quota registered as the tenant’s in relation to his holding. By paragraph 1(1) of Schedule 1, on quitting the land, the tenant is entitled to obtain from his landlord a payment in respect of so much of the quota as consists of transferred quota, which was transferred to him by virtue of a transaction the cost of which was borne wholly or partly by him. By paragraph 11 of Schedule 1 of the Act, any claim for compensation under paragraph 1 is to be determined by arbitration, and no claim is enforceable, unless before the expiry of two months from the date of termination of the tenancy, the tenant serves notice in writing of the intention to make the claim. So, submits Mr. Rodger, a claim had to be made by the 11th January 1998. No such claim was made, and there is, therefore, no claim for compensation that can now be enforced by the partnership.
Mr. Heywood responds by submitting that the Court is simply being asked to decide a “valuation exercise”, and that it is not being asked to decide whether any claim for compensation could be made under the Act. Alternatively, he submits that as Susan gave the notice to quit, she had a fiduciary duty to give the requisite statutory notice. I do not find Mr. Heywood’s first response either attractive or compelling. The Court ordered an account of the assets and liabilities of the partnership. At that time the right to compensation from the landlord for the transferred quota had not arisen, and did not arise until the 11th November 1997. It would only have arisen then if notification of the claim had been made within the two month period stipulated by the Act. As no claim was notified within that period, the partners have no right to compensation from the landlord in respect of the transferred quota.
I find Mr. Heywood’s second response no more attractive or compelling. Each partner owed fiduciary duties to the other partners. It was just as much John’s duty to give the statutory notice as it was Susan’s duty. In this context, it should be remembered that by November 1997 John had been advised by solicitors for some 10 years in relation to the partnership.
In my judgment, the partnership lost its right to compensation from the landlord for the transferred quota when it failed to give notice of a claim within the period stipulated by the Act. It has not been contended that anyone else might be liable to pay such compensation.
In those circumstances, I would answer this question in the negative. For the sake of completeness, however, I should add that Susan only resists bringing into account the transferred quota insofar as John’s claim in respect of that quota is for 160,000 litres. She is content, notwithstanding the fact that, as I have found, the partnership lost the right to claim compensation, to bring into account compensation in respect of the 10,000 litres of quota, which represents the difference between the quota sold and the quota purchased. In my judgment, despite Mr. Heywood’s ingenious submissions, the correct analysis of the transactions in February and March 1993 is that the partnership gained a net increase of 10,000 litres of milk quota. It follows that I do not agree that it is necessary to embark on a complicated calculation of apportionment between the freehold of the tenanted land and the tenanted land itself. I would attribute the whole of the 10,000 litres to the partnership. Accordingly, in the light of Susan’s expressed willingness to bring that quantity into account and at the agreed rate of 52.65 pence per litre that produces a sum of £5,265, of which John is entitled to one-third.
As I have stated above. I would have answered this question in the negative. However, for the reasons stated above, if the parties so wish, I will declare that the partnership is entitled to compensation in respect of 10,000 litres of transferred milk quota.
I am very grateful to both Mr. Heywood and Mr. Rodger for the assistance that they have given to me in this case. It is clear that they and their instructing solicitors have made considerable efforts on behalf of their respective clients to reduce the number of disputed issues so that the trial was manageable. For this their clients should also be grateful.
I cannot finish this judgment, however, without expressing the hope that this trial will have brought to an end this sad family dispute, and that damaged relationships can now be re-built.
I will hear submissions from Counsel on the form of Order that I should make as a result of this judgment.