Court of Appeal overturns High Court Ruling – Stopping Council from Escaping Lease Commitments

Ref. Charles Terence Estates Ltd v Cornwall Council [2012] EWCA Civ 1439

The Court of Appeal has overturned a High Court ruling in a landmark judgement that will impact the ability of all councils to escape lease commitments on grounds of breaches of previous fiduciary duties.

The case concerned Cornwall Council who in 2009 consolidated all District Councils in the County including Restormel and Penwith. Before Cornwall Council came into existence, those two district councils provided grants and loans to assist Charles Terence Estates (CTE) with purchasing a number of properties to house vulnerable adults, which CTE then leased back to the Councils at set rent rates. There were 30 leases in total, each lasting for around 25 years.

When Cornwall Council came into existence in 2009 they reviewed this arrangement and became concerned over the rents payable. In July 2010 the Council stopped paying the rent and demanded the return of the grants and loans their previous incarnations had offered. They were taken to the High Court where Mr Justice Cranston ruled that Restormel and Penwith had breached their fiduciary duty to taxpayers by failing to take into account market rents on entering into the leases with CTE.

The leases therefore had no effect and were a legal nullity. Mr Justice Cranston said Cornwall occupied each property under a tenancy at will, terminable at any time.

At the Court of Appeal, however, Lord Justice Maurice Kay took a different stance on the issue and overturned the decision of the High Court. He stated:

“These are important findings, all the more so in the complete absence of any element of private profit, conflict of interest or off-piste political judgment.

“When one compares this case with the leading authorities in which the breach of fiduciary duty approach was propounded and in which it succeeded, it seems to me that the present facts, taken at their highest, establish significantly less culpability.

“There is no evidence of ‘eccentric principles’ or of ‘flagrant violation’ of the kind found in Roberts v Hapwood, or of ‘the making of a gift or present’ to CTE, to use the language of Prescott, or doubling of the ratepayers’ burden as had occurred in the Bromley case. Nor was there the self-evident element of ultra vires (beyond the powers) that underlay Credit Suisse.

“In the present case, the attempt to present it as one of ‘pure’ ultra vires depends upon reading the words ‘at a reasonable price’ into section 17(1)(b) of the Housing Act 1985. There are two reasons for rejecting that approach. The first is that, in the absence of expert evidence, there is no basis for concluding that the rents were not ‘a reasonable price’.

“The second reason is more fundamental. In my judgment, it will rarely be appropriate to read into a statutory power a limitation defined by something such as a ‘reasonable price’. To do so would be to invite judicialisation of the limits of legal capacity in the sense that capacity might be ascertainable only upon a judicial determination of the reasonableness of a price.”

The case, should it stand further potential scrutiny from the Supreme Court, will make it difficult for future councils to escape from their lease commitments on the grounds of ultra vires arguments concerning 17(1) of the Housing Act 1985 or fiduciary breaches concerning the tax payer. Cornwall Council could reputedly have saved at least £4.5m in public funds had the decision of the High Court been upheld, so there are clearly wider implications both to public law and public finances.

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