Alarm bells: Earl of Cardigan v Moore

In Brudenell-Bruce (Earl of Cardigan) v Moore Mr Justice Newey had to decide whether or not the trustees ?of a large family trust had the right ?to remove paintings from the home of ?a beneficiary of the trust, the Earl ?of Cardigan.

The most important legal point to arise out the case relates to the rule against self-dealing. In particular, it shows how a trustee can fall foul of the self-dealing rule even when they are themselves also significant beneficiaries of the trust and are advised to enter into the self-dealing transaction by their solicitor co-trustees.

Country estate

The facts of the case were as follows. The Savernake Forest estate near Marlborough is a great country estate. It has been owned by the family of the Earl of Cardigan for the best part of a thousand years.

Apart from Savernake Forest itself, Savernake Estate includes more than a dozen houses. The Earl moved into one of them, Savernake Lodge, with his wife, after his marriage in 1981.

The paintings in question largely comprise portraits depicting the Earl’s ancestors down the ages. Each generation would add to the collection and pass on to the next. The Earl hung them in the rooms of Savernake Lodge when he moved in.

The land of Savernake Estate, including Savernake Lodge, was held in a trust and had been since 1951. The beneficiaries of that trust were the Earl himself (as to 49 per cent) and the trustees of another trust (as to 51 per cent) set up in 1987 for the Earl’s two children. Historically there were always two trustees: normally a member of the family alongside a solicitor.

By the 1990s, the Earl had been appointed a trustee along with the then family solicitor. In 1999 the solicitor-trustee decided to regularise the Earl’s occupation of Savernake Lodge by demising to the Earl a 20-year lease at a peppercorn rent.

There were several houses on the estate and the practice had always been to let members of the family take up residence. As a co-trustee at the time, the Earl needed to co-sign the lease and duly did so.

Early in 2011 when the current Earl was away in the US, the latest trustees of the Savernake Estate went to Savernake Lodge and removed the paintings from its walls. They sent them for sale at auction at Sotheby’s. They did so because they argued the prevailing financial state of the trust required it.

The Earl heard about the first sale in February and returned to the UK in April. While he was too late to prevent one batch being sold, he managed to temporarily prevent the sale of some of the remaining paintings.

Property partnership

The Earl’s case had two parts to it:

1. All the paintings were property of a partnership which was set up in 1951 alongside the trust. As the Earl was a partner with a 49 per cent share of the partnership, the paintings ought not to have been disposed of without the Earl’s consent.

2. If the paintings did not belong to the partnership, but were part of the trust, then they were demised to the Earl on the grant to him of a 20-year lease of the property he was living in, Savernake Lodge.

The trustees then counter-claimed, alleging that the lease should be set aside as it was executed by the Earl at a time when he was himself a trustee and therefore was in breach of the self-dealing rule.

So there were three issues:

1. Did the paintings belong to the partnership or to the trust?

2. Did the Earl’s lease of Savernake Lodge include a lease of the paintings hanging there?

3. Were the trustees entitled to have the lease set aside?

We will deal with each question in turn.

1. Did the paintings belong to the partnership or to the trust?

In 2007 there was some unfortunate disagreement between the trustee who succeeded the old family solicitor and the Earl. The litigation was compromised by means of a Tomlin Order which provided for the winding up of the partnership and the transfer of the Earl’s share to the present trustees to hold as to 51 per cent for the trustees of the children’s trust and as to 49 per cent ?for the Earl himself. However, the partnership was never formally ?wound up.

The Earl’s case was that since the paintings were acknowledged in various deeds to be partnership property, and since the partnership had not been wound up, they still remained partnership property and should not be sold without his consent.

Mr Justice Newey disagreed. He held that the Tomlin Order intended that all the assets of the partnership should be vested in the trustees and a subsequent deed of retirement and appointment gave effect to that order. He went on to hold that, since the recitals stated that the “assets of the trusts are identified in the second schedule” (and the second schedule included the paintings) and since the Earl is to be taken to have agreed to admit the truth of the recitals, he was now estopped from arguing otherwise (Greer v Kettle [1938] AC 156 per Lord Russell at 167).

2. Did the lease include a lease of ?the paintings?

Clause 1 of the lease demised Savernake Lodge together with “the use of all the landlord’s furniture fixtures and fittings in or on the premises”.

The judge rejected the Earl’s argument that the paintings were ‘furniture’ and so were demised with the lease. He held that although paintings may furnish a room they are not furniture, but decorations.

The judge also considered whether they could be considered ‘fixtures’. The well-known legal test for whether a chattel is a fixture is, first, the degree to which the chattel becomes annexed to the land and, second, the purpose of such annexation.

The Earl’s argument was that there was quite a degree of annexation to the realty because the larger paintings were secured by means of large heavy-duty hooks drilled into the walls. The smaller paintings were hung from steel hooks hammered into the walls. There was an extensive burglar alarm system.

More importantly, the paintings ?were hung as a unified collection which had an intimate association with the Earl’s family. They were not merely incidental decoration or hung for their own enjoyment. They were matched, arranged and hung to give purpose and historic meaning to the rooms of Savernake Lodge.

Their connection with Savernake Lodge was exemplified by the way the house was decorated and furnished to match them. The curtains and sofas were all designed to echo the orange and light green colours of one of ?the paintings.

The judge however held that ?framed pictures do not usually constitute fixtures, and there is no good reason for the position to be different with ?the paintings, particularly since the paintings had only been moved in relatively recently.

3. Were the trustees entitled to have the lease set aside?

The Earl and his wife and children had been living in Savernake Lodge since 1981, first as informal licensees and then as tenants. The current trustees argued that the lease was granted by the Earl in 1999 to himself while still a trustee. It was therefore in breach of the rule against self-dealing and must be set aside.

Difficult position

The Earl argued that, first, he should not be penalised since it was not he that had placed himself in a position of conflict. It had been thrust upon him.

Second, he argued that the beneficiaries of the trusts of the estate had consented to the lease. Finally, he argued that it all happened such a long time ago that the court should refuse to set it aside.

Dealing with the first point, the judge said that the Earl put himself in ?a position of potential conflict when ?he accepted the position of trustee. ?It was neither imposed on him by the settlors of the trust nor an inevitable consequence of the arrangements ?they established.

Dealing with the second point, the judge reasoned that, where a trustee concurs in a transaction which gives rise to a conflict of interest between his duty and his interest, the concurrence can itself be treated as a breach of the ?self-dealing rule. Further, the judge ?held that it must have been incumbent on the Earl and the professional ?trustee to consider whether the lease ?was in the interests of the beneficiaries ?of that trust and that question was ?not in fact addressed in any meaningful way by either the Earl or the ?solicitor-trustee.

As to the final point, the judge ?held that the trustees were precluded ?by laches or acquiescence from ?invoking the self-dealing rule. So far as length of delay is concerned, the Earl was himself a trustee of both the ?estate and the 1987 trust until ?November 2008.

That being so, he did not consider that the Earl was entitled to rely on the trustees’ failure to challenge the lease up to that point. As a trustee, the Earl shares responsibility for the fact that nothing was done to impugn the lease. In any event, the Earl had not been prejudiced by the lapse of time.

The case is a warning for those who are both trustees and beneficiaries and who wish to execute transactions which constitute or may constitute self-dealing. While many modern trust deeds will contain specific provisions authorising self-dealing, older deeds may not. In those circumstances, it is usually sensible to obtain prior authorisation from the court or the other beneficiaries.

Malcolm Bishop is a barrister at Argent Chambers and Seth Cumming a barrister at 3 Stone Buildings. They appeared in the High Court for the claimant, the Earl of Cardigan