Charles Terence Estates Ltd v Cornwall Council
| Jurisdiction | England & Wales |
| Judge | Lord Justice Maurice Kay,Lord Justice Moore-Bick,Lord Justice Etherton |
| Judgment Date | 13 November 2012 |
| Neutral Citation | [2012] EWCA Civ 1439 |
| Docket Number | Case No: A2/2011/2773 |
| Court | Court of Appeal (Civil Division) |
| Date | 13 November 2012 |
[2012] EWCA Civ 1439
Lord Justice Maurice Kay, Vice President of the Court of Appeal, Civil Division
Lord Justice Moore-Bick
and
Lord Justice Etherton
Case No: A2/2011/2773
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (CRANSTON J)
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Martin Rodger QC and Mr Joseph Ollech (instructed by Messrs Charles Russell LLP) for the Appellant
Mr James Goudie QC and Mr Guy Adams (instructed by Cornwall Council) for the Respondent
Hearing dates : 23–25 July 2012
It is well known that there are circumstances in which a public authority can escape liability to a private party by invoking its own lack of capacity in relation to a transaction. In Credit Suisse v Allerdale Borough Council [1996] QB 306, Peter Gibson LJ described such an outcome as "unattractive" but that case (to which I shall return) is a vivid example of successful resort to the principle. It was successfully raised by Cornwall Council (Cornwall) in the present case at first instance before Cranston J: [2011] EWHC 2542 (QB). Charles Terence Estates Ltd (CTE) now appeals against his order. At this stage a brief outline of the facts will suffice to set the scene. The judgment of Cranston J contains a very full account.
By Part VII of the Housing Act 1996 (as amended by the Homelessness Act 2002), local housing authorities are under statutory duties to secure accommodation for the unintentionally homeless who are in priority need. Those in priority need include persons with dependent children, those leaving care and individuals who are vulnerable because of mental illness, disability or other special reason. It has always been difficult to find suitable accommodation for the vulnerable groups. In 2002, central government began to take steps to reduce the number of families with children in bed and breakfast accommodation. It later committed itself to the reduction of households living in temporary accommodation. The policy included encouragement to local housing authorities to engage with the private sector. One way was for the authorities to take leases of residential accommodation from private owners and to sub-let or license the premises to those in housing need.
Restormel Borough Council (Restormel) and Penwith Borough Council (Penwith) were Cornish local housing authorities. They each entered into arrangements with CTE under which CTE purchased identified properties. CTE then leased them to Restormel or Penwith which then sublet or licensed them to their client groups, including vulnerable people who were in priority need. CTE financed the purchase of the properties partly by loans or grants from Restormel or Penwith but mainly by bank borrowing. Generally, the leases were for terms of 25 years. Some (Type A) contained a 10 year break clause and imposed only internal repairing obligations. Others (Type B) did not include a break clause and imposed full repairing obligations.
From 2006 or 2007, when the transactions were entered into, until April 2009, the arrangements proceeded as anticipated. However, on 1 April 2009 Restormel and Penwith ceased to exist and Cornwall, as the new unitary authority, took over their rights and liabilities. Cornwall reviewed the CTE arrangements and in or about July 2010 it stopped paying rent, although it has continued to occupy and use the properties to house vulnerable people. In due course, CTE commenced proceedings for recovery of the unpaid rents. Cornwall defended the claim, raising a number of defences, including assertions that Restormel and Penwith had breached fiduciary duties owed to their council taxpayers with the result that the leases were ultra vires and void. It counterclaimed for restitution of all sums paid to CTE as rent, grants or loans, subject to a credit for mesne profits at a modest level.
Cranston J had to consider many issues. I need not refer to those in respect of which he found in favour of CTE and which are not the subject of this appeal. For present purposes, I need only record that he found that Restormel and Penwith had breached their fiduciary duties by failing to have regard to market rents when agreeing the terms of the leases with CTE. He considered that, as a result of that failure, Restormel and Penwith had acted ultra vires and that the leases were therefore void (paragraph 80). He further found that, as there was no lawfully agreed rent, Cornwall was in occupation of the premises under tenancies at will, terminable at any time. However, Cornwall's restitutionary claim failed because CTE had at all times acted in good faith and had changed its position in reliance on the perceived validity of the leases. He considered that the equitable solution was that, since Cornwall had had the benefit of the properties as contemplated by the leases, the sums payable should be those agreed in the leases and that CTE should repay the loans in accordance with the relevant loan agreements.
The significant feature for present purposes is that, by invoking its own (in fact, its predecessors') lack of capacity which was the consequence of the breach of fiduciary duty, Cornwall succeeded in ridding itself of what it considered to be bad bargains. The key to this success was the failure to have regard to market rents. The principal questions arising on this appeal are (1) whether Cranston J was correct to find breaches of fiduciary duty; and (2) whether any such breaches have the seismic consequences which he found.
Breach of fiduciary duty
The threshold question on this appeal is whether the Judge was correct to find breaches of fiduciary duty. His reasoning was expressed as follows (at paragraph 80):
"… the parties never addressed what were the market rents for any of these properties. Given that market rents would vary from property to property, and over time from unit to unit within each property, a formulaic approach was incapable of producing market rents. The statutory powers of the councils to acquire property had to be construed in the light of the principle that they owed a fiduciary duty to their council taxpayers.
Compliance with their fiduciary duties demanded that their councils have regard to market rents on agreeing the rents payable to CTE for these properties. In failing to do so they acted outside their powers. The upshot is that the leases are void and of no effect."
In other words, the breaches of fiduciary duty went to the capacity of the Council to enter into the transactions which were therefore void. By "formulaic", the Judge meant that each rent was "fixed even before the properties were identified and purchased", on the basis that "the starting point … seems to have been the maximum sum which they could charge the residents of the properties and receive full rent rebate subsidy from central government, with some £55 deducted to cover management costs and voids" (paragraph 79). This produced the figure of £120 per unit per week.
The law
Section 17 of the Housing Act 1985 is headed "requisition of land for housing purposes". It confers on a local housing authority the power to
"acquire houses, or buildings, which may be made suitable as houses, together with any land occupied with the houses or buildings." (Section 17(1)(b)).
It is a power which may be exercised "for the purposes of this Part", viz the purposes of providing housing accommodation. It is common ground that the acquisition of houses includes acquisition by way of lease. There is a more general power to acquire land by agreement for the purposes of any of a council's functions pursuant to section 120 of the Local Government Act 1972 which could also supply the necessary vires but counsel have been content to assume that in the present case the councils were acting or purporting to act under section 17 of the Housing Act.
Section 17 says nothing about the consideration paid by a local housing authority for the acquisition. The case for Cornwall is that the power conferred by section 17 has to be read as a power to acquire at a reasonable price and that that requires those acting on behalf of the local housing authority to act in compliance with the fiduciary duty to council taxpayers. This, in turn, required the councils to have regard to market rents before entering into any commitment.
The use of the fiduciary concept in this context derives from a well-known line of authority. It began with Roberts v Hopwood [1925] AC 578, in which a council had paid its lowest grade of workers a minimum wage of £4 per week, notwithstanding that the cost of living had fallen during the year from 176% to 82% above its pre-First World War level. The council was motivated by the belief that it ought to act as a model employer towards its employees. The district auditor disagreed, considering that the excess payments were not wages but gratuities. The House of Lords upheld his surcharge on the excess. Lord Atkinson said (at page 594):
"The council would … fail in their duty if, in administering funds which did not belong to their members alone, they put aside all these aids to the ascertainment of what was just and reasonable remuneration to give for the services rendered to them, and allowed themselves to be guided in preference by some eccentric principles of socialistic philanthropy, or by a feminist ambition to secure equality of the sexes in the matter of wages in the world of labour."
The language now seems quaint but the principle...
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