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...

To read this update in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions