The significance of the self-dealing rule in acquiring the freehold of a property. Confirmation that tenants who are also trustees can acquire the freehold of a property in certain circumstances.
A well-known principle of trust law is that trustees must not put themselves in a position where their personal interests conflict with their strict duty as a trustee.
In Newman and others v Clarke and another  EWCH 2959 (Ch),the High Court recently held that the self-dealing rule does not apply to a tenant seeking to acquire the freehold of a property where he became a trustee after the lease started.
This case is significant for tenants seeking to acquire the freehold of a property; it is a reminder of the distinction between the rights of tenants and trustees when acquiring the freehold of the property.
The Self-dealing rule
The self-dealing rule prohibits a trustee from buying trust property and creates a conflict of interest. Any sale to a trustee will be voidable as of right, regardless of how fair the transaction is. There are however exceptions to the self-dealing rule and the rule’s application may be mitigated in certain specific circumstances, as follows:
- The terms of the trust and action of the settlor – the trust may expressly authorise self-dealing in certain circumstances or it may be implied through the actions of the person who creates the trust.
- Agreement of the beneficiaries.
- Authorisation by the Court.
- Statutory authority in relation to pension schemes.
The Defendants (husband and wife), became tenants of the property under a lease dated 11 April 1997. The lease was capable of being enfranchised under the Leasehold Reform 1967. The tenants therefore sought to acquire the freehold of the property. The husband became a trustee under a settlement on 25 June 1997. The freehold was then transferred into the settlement on 12 September 1997.
Subsequently, some eighteen years later, the Defendants served a notice purporting to exercise their right to acquire the freehold interest in the property.
The Claimants (who were also close family members of the Defendants) argued that the Defendants were at risk of being in breach of the self-dealing rule. In contrast, the Defendants relying on authority contended that there could be no rational ground for applying the self-dealing rule to the autonomous exercise of a right granted before the trusteeship was created, therefore an exception to the self-dealing rule applied.
The Judge held that the Defendants were tenants under the lease before the husband became a trustee, because the lease was entered into before he was appointed a trustee. On this basis the self-dealing rule did not apply.
This decision is a welcome one for those who have capacity as both trustees and tenants in relation to property, confirming the requirement to establish which capacity arose first. The case also highlights the importance of ensuring a tenant is not in breach of its duties as a trustee, particularly where the trust was established prior to any lease.