The past few years have seen a considerable growth in contractual arrangements between the public and private sectors in the Real Estate industry. In the current economic climate this trend will undoubtedly continue.
A recent High Court case is a useful illustration of the care that should be taken when entering into a contract with a public body.
Although company law goes some way to protect third parties dealing with companies where there are failures to observe constitutional restrictions the same cannot be said for those who contract with a public body such as a government body or local authority. Such bodies are normally created by statute and if they act outside their powers, it is said that they act ultra vires. The case allowed a local authority to defend itself from litigation by claiming that a contract was not binding because the authority had acted outside its powers, in effect relying on its own unlawful acts to defeat the claim.
The case involved the activities of Penwith District Council and Restormel Borough Council. Both councils entered into an arrangement with a company to provide housing. The company bought and refurbished houses and then let them to the councils to house those in need. Grants and loans were made by the councils to the company to assist with the purchase. When the councils were merged into a new unitary local authority, the terms of the leases were reviewed. The authority stopped paying rent and demanded repayment of the loans. The company commenced proceedings for unpaid rent but the authority claimed that the leases were flawed from the start and were therefore void and unenforceable.
The court found that the councils had breached their fiduciary duties to taxpayers to ensure that its expenditure was reasonable. At the time of the leases, there had been no consideration of the market rent that should be payable to the company. Instead the rent had been fixed by reference to housing benefit rates even before the properties were identified and purchased. Because the councils did not consider the proper rent payable they acted outside their powers so that the leases were void and the company could not recover the unpaid rent.
How can anyone dealing with a public body ensure that the contract will be binding? Some protection is afforded by a certification process under the Local Government (Contracts) Act 1997. This applies to contracts with local authorities that last for five years or more and are for the provision or making available of services for the purposes of, or in connection with, the discharge by the local authority of any of its functions.
If a contract does not fall within this protection, it will be necessary to ensure that a detailed exercise is undertaken to check that the authority is acting within its powers. A statement in the contract from the authority to that effect might assist, although if the authority is later found to have acted ultra vires such a certificate may not be of much comfort.
Law: Charles Terence Estates Ltd –v- Cornwall Council [2011] EWHC 2542 (QB)
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 14/12/2011.
