UK: Cornwall Clots The Landlord’s Cream

Last Updated: 27 April 2012
Article by Alison Crabbe

In a case handled by Charles Russell LLP, in which we acted for Charles Terence Estates Limited ("CTE"), Cornwall Council has walked away from 30 leases pleading its own ineptitude and incompetence as its main defence. Its landlord, CTE has been left seeking relief in the Court of Appeal in a case which, in the words of Mr Justice Cranston

"raises some novel issues concerning contracts with governmental and public authorities".

In outline, in 2005 CTE was approached by two district councils in Cornwall (Penwith and Restormel) and was asked to purchase houses which the councils could use to house vulnerable homeless people. As a consequence, CTE purchased some 30 houses between 2005 and 2008 and let them to the councils. CTE also entered into substantial financial commitments to provide the scheme. Cranston J has now rated that the leases are void. A harsh decision (even in the Judge's eyes) Cranston J said

"In my view CTE has at all times acted in good faith. It was in no way negligent or foolish in the way it changed its position. It was invited by Penwith and Restormel to assist them address their pressing responsibilities to house homeless and vulnerable people to meet central government targets. CTE had no reason to doubt the decision making procedures behind the scenes at both councils".

There has been a trend towards allowing a governmental authority (whether local or central) to plead its own lack of capacity as a defence to a contract. Invariably, the cases have involved contracts that have worked out to be unprofitable for the government authority, and this latest case is no exception.

The local authorities entered into agreements with CTE, whereby CTE would lease properties at fixed rents. The councils then sublet or licensed the accommodation to vulnerable people in housing need to whom statutory housing duties were owed. The councils provided initial funding in the form of grants to assist in the purchase of the accommodation. The rent agreed was calculated at a standard rate of £120 per person per week (or on a similar basis). The agreed rents represented a substantial saving for the councils on the sums they had been paying for other private sector accommodation.

After the two local authorities were unified under Cornwall Council, the contracts were subsequently reviewed, and with pending government cuts Cornwall reviewed its leases and financial exposure. Under the new regime, Cornwall Council subsequently decided that these leases were surplus to requirements and refused to pay the rents due. CTE issued proceedings for rent arrears.

Cornwall raised the defence that the leases were unenforceable on a plethora of different grounds.

Mistake

Cornwall contended that it had entered the leases under the mistaken belief that:

  • The leases did not have to be administered through a statutory Housing Revenue Account (HRA); and
  • Residents would necessarily be eligible for housing benefit to meet the rents they were liable to pay.

Cranston J dismissed this argument, finding that there was no common assumption by the parties as to whether the leases were required to be administered through an HRA. As a matter of construction, the issue of the eligibility of the residents for housing benefit was not a matter sufficiently vital to be capable of being the subject of a common mistake and avoid the contracts between CTE and the authorities.

Housing Benefit

The council also argued that the leases fell foul of a particular regulation under the Housing Benefit Regulations 2006 (SI 2006/213) which requires that housing benefit will only be paid if the tenancy is set at a commercial rate. The judge rejected this argument. He held that it was impossible to conclude, on the evidence, that the terms agreed between the councils and their licensees were uncommercial.

Breach of Cornwall's own public obligations

Cornwall's defence relied on its purported breaches of its own public obligations.

These grounds took a variety of forms. Cranston J rejected the following arguments raised by Cornwall:

  • Cornwall argued that it had breached certain specific statutory provisions governing the need to maintain an HRA in order to administer social housing. Since it did not have such an account, it had no power to enter into the leases in question.
  • The arrangements were entered into for improper purposes, namely the abuse of the housing benefit system, by determining rents under the leases with CTE and agreements with residents by reference to housing benefit rates.

However, Cornwall also argued that entering into these arrangements was a breach of its fiduciary duty to taxpayers to ensure its expenditure represented good value for Cornwall's rate payers, relying on Bromley LBC v Greater London Council [1981] UKHL 7.

It was this ground which ultimately succeeded for Cornwall.

Having found against Cornwall on the multitude of other grounds, the judge held that this duty had been breached. He found that, as a matter of fact, the authorities never had regard to the market rent for the various properties leased from CTE. Further, the rent charged was not demonstrably a market rent and therefore the Council did not take reasonable steps to ensure the transactions were good value.

Cranston J held that "compliance with their fiduciary duties" required Cornwall to have regard to market rents on agreeing the rents payable to CTE. In failing to do so, they had acted outside their powers. Accordingly, the leases were void and of no effect.

Surprisingly, Cornwall's litigation team had failed to respond to an interim order requiring a decision to be made about calling valuation evidence and they had been subsequently debarred from calling this evidence. In the interim application a different High Court Judge (Mr Justice Coulson) said

"in my judgment... any expert evidence relating to the open market is, at best, peripheral to the issues in this case... open market rent is not a critical component of the Defendant's defence on liability".

The judge accepted that it was unattractive to say the least that a public body could raise its own unlawful actions to defend a claim under an agreement it has entered. Nonetheless, he was prepared to hold that, despite the high hurdle it had to meet, Cornwall Council had breached its own fiduciary duty to its taxpayers and could avoid its obligations altogether.

The consequences of this finding were drastic. It rendered the leases void altogether, in effect converting fixed terms of 25 years into tenancies at will.

Christopher Heather of Tanfield Chambers says

" this case harks back to the 1980s and early 1990s when politics, local authority finance and third parties clashed many times in the courts including the House of Lords decisions in Bromley LBC v GLC [1983] 1 AC 768 and Hazell v Hammersmith & Fulham LBC [1992] 2 AC 1. It is a reminder that even an arm's-length property transaction between a third party and a local authority which is entered into in good faith and which is unimpeachable in private law terms may nonetheless be void for public law reasons. In this case it allowed the authority, which inherited obligations under leases which it viewed as unattractive in the light of cuts in funding, to avoid the leases. However, other cases have allowed the third party who has lost out from the transaction to avoid it: see Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 1 WLR 938 (CA)."

It now remains to be seen whether they Court of Appeal will uphold this unusual and apparently unfair judgment. If the judgment is not overturned then the conclusion of the CTE case will be that transacting with local authorities will become increasingly difficult. Whether it is really possible for Cornwall Council to abandon its obligations remains to be seen. The appeal is scheduled to take place in July and we will keep you informed...

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