Notices to Quit in Breach of Trust

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NOTICES TO QUIT IN BREACH OF TRUST

Case: Procter v Procter [2022] EWHC 1202 (Ch)

1. The latest development in the Procter litigation is a Judgment handed down in the High Court on 25 May. My article on our website concerning the last round, the Court of Appeal decision in 2021, described that Judgment as one of the most noteworthy contributions to jurisprudence in property law that has been provided by the Courts in the last two decades. In that regard, the latest Judgment does not disappoint.

1. The 92 page Judgment covers a range of matters which will be of interest to property lawyers and advisers, including:

- - The nature of a trust, where a tenancy is held on trust for a partnership
  - The financial entitlement of a partner on retirement from a partnership
  - The operation of estoppel by deed and estoppel by grant in relation to the assignment of freehold titles
  - The law relating to concurrent leases
  - The law of merger
  - The deemed vesting provisions contained in section 40(1) of the Trustee Act 1925

1. The most important aspect of the High Court decision, from the point of view of rural practitioners, is in relation to what happens where a notice to quit has been served by a joint tenant in breach of fiduciary duty. That is what happened in this case.

1. Attached to this article is an excellent Note produced by Mr Edward Peters of Falcon Chambers, briefed by me, on behalf of two brothers in respect of a claim brought by their sister. As a summary of the legal analysis, I cannot improve on that. As to what happened, on the day that the Court of Appeal handed down its Judgment in February 2021, the Claimant’s solicitors personally served a notice to quit given on behalf of the Claimant where she continued to be a joint tenant of a tenancy which was an asset of a partnership from which she had retired in July 2010.

1. It is well known that a notice to quit given by one or more of joint tenants to their landlord, with or without the concurrence of all of the joint tenants, is effective to terminate a tenancy. The authority for the proposition is a House of Lords case: Hammersmith LBC v Monk.

1. In 2021 the Court of Appeal had held that the family’s farming partnership held as an asset a tenancy protected under the Agricultural Holdings Act 1986. Although she had resigned from the partnership, the Claimant continued to be a joint tenant of the tenancy, as an asset of the partnership.

1. In order to try to destroy the tenancy (with its security of tenure), the Claimant served her notice to quit. The High Court has determined that the notice to quit was served in breach of her continuing fiduciary duties as a partner and that, importantly, the Court should intervene to rescind the notice to quit, applying the well known equitable remedy of rescission for breach of trust or fiduciary duty.

1. When I was contributing to the 7^th Edition of Scammell Densham & Williams Law of Agricultural Holdings (as it has now become), although there was at that stage no case authority governing what would happen if a notice to quit was given by a landlord to joint tenants and one of the joint tenants refused to join in the giving of a counternotice, I suggested that the Court would have power to intervene. The Court did so in a case called Cork v Cork. Albeit relying upon a different legal remedy, rescission, the High Court’s decision in Procter is entirely consistent with that approach, protecting partners against breaches of fiduciary duty and protecting assets of partnerships.

1. This is a hugely important decision for all those advising in connection with farming partnerships when there is a tenancy held as asset of the partnership.

26 May 2022

P R Williams, Ebery Williams – Author of Scammell, Densham & Williams Law of Agricultural Holdings

Order for rescission of notice to quit served by joint tenant in breach of trust

In Procter v Procter [2022] EWHC 1202 (Ch), in a judgment handed down on May 25, 2022, following a six day trial, the High Court held that, where A, B & C were joint tenants of a periodic tenancy, but held it on trust for a partnership of which A & B were the only partners; and C then sought to terminate that tenancy by serving a tenant’s notice to quit, against the wishes of A & B:

- C as a trustee owed fiduciary duties to A & B when deciding whether or not to serve a notice to quit
- C had acted in breach of those fiduciary duties when serving the notice to quit, having acted in her own interests and not those of the partnership of A & B
- the Court could and should remedy that breach of trust by ordering rescission of the notice to quit, as an equitable remedy, with the result that the periodic tenancy would continue.

The 92-page judgment of the High Court also deals with:

- The nature of the trust, where a tenancy is held on trust for a partnership
- The financial entitlement of a partner on retirement from a partnership
- The operation of estoppel by deed and estoppel by grant in relation to the assignment of freehold titles
- The law concerning concurrent leases
- The law of merger
- The application of the deemed vesting provisions of section 40(1) of the Trustee Act 1925 to a deed of appointment and retirement; and what amounted to a ‘contrary intention’ under s. 40(1)(a)

With regard to the notice to quit issue, the Court had previously held (Procter v Procter [2021] EWCA Civ 167, [2021] Ch 395) that the tenancy was an annual periodic tenancy subject to the Agricultural Holdings Act 1986; that the three joint tenants were two brothers and their sister; and that the three of them held the tenancy on trust for a partnership, of which the two brothers were the only partners. The sister had formerly been a partner, but had retired from the partnership in 2010.

The sister then served a notice to quit, seeking to determine the periodic tenancy, against the wishes of the brothers. She claimed that, as a joint tenant, she was entitled to do so.

The High Court held that:

– the sister, as a trustee of the tenancy, owed fiduciary duties to the partnership when deciding whether or not to serve a notice to quit. She was not a co-owner in equity, but was in the position of a trustee holding the property on trust for the partnership, and subject to quite different duties and obligations than a simple co-owner in equity. She owed fiduciary duties to act in the best interests of the partnership, not to act for a collateral purpose (her own self-interest), to preserve the trust property (which was a periodic tenancy, with an ability to prolong the same by not carrying out the step of serving a notice to quit), and to avoid a conflict between self-interest and duty.

– the sister had acted in breach of those fiduciary duties when she served the notice to quit: she was not acting bona fide in the best interests of the partnership when she served the notice, but had done so for a collateral purpose, namely to seek to put herself in a better position, and the clear intention and effect of serving the notice was to destroy rather than preserve the trust property

– the Court could and should grant relief in respect of that breach of trust, and the appropriate remedy was to make an order for rescission of the notice to quit. Rescission is a well known equitable remedy for breach of trust or fiduciary duty. There was no reason why a notice to quit could not be the subject of rescission in an appropriate case. The landlord was well aware of the circumstances that the notice to quit was served in breach of several fiduciary duties. There were no grounds as a defence to rescission.

Edward Peters instructed by Peter Williams of Ebery Williams acted for the brothers. The full judgment is here: https://www.bailii.org/ew/cases/EWHC/Ch/2022/1202.html