Contracts and public law: The Cornwall case

Charles Terence Estates Ltd v Cornwall Council [2011] EWHC 2542 (QB) (subnom oh dear, oh dear)

Forgive the length of this note, but this seems to be a significant case with potentially far-reaching ramifications.  The judgment of Cranston J (in my view) is mostly spot-on and hugely learned (see well below for an appreciation).  It will be interesting to see whether this case goes further – my insider information is less than clear on the prospects of an appeal.  For what it’s worth, my view is that an appeal would likely be unsuccessful but important in providing clearer lines about the fiduciary duty and capacity issues discussed below, as well as about the housing revenue account.

Background

LSVT of an entire stock poses many problems for local authorities and the transfer association after the transfer has taken place.  What seemed perfectly reasonable at the time of transfer can dissipate into acrimony.  There are many practical questions once transfer has taken place, not least of which is the mechanism and/or provider through which accommodation can be offered to vulnerable homeless applicants in satisfaction of duties under Part 7, Housing Act 1996.  In 2002/3, that problem was exacerbated by central government edicts about the use (or non-use) of bed and breakfast accommodation for families.  This is what faced Penwith DC and Restormel BC, in which anybody who has been to Penzance, St Austell or the Eden Project will know has a plenitude of b&b accommodation.  (As regards the former, I remember articles in the late, much lamented Roof magazine back in the early 1990s about problems between the LA and transfer HA.)

The arrangements

Fortunately, those authorities were approached by a private company, Charles Terence Estates Ltd (CTE) and its sister company, Providers of Accommodation and Support Limited (PAS).  The companies were offering to take over and/or do up accommodation which would be leased back to the local authority for use as accommodation for such households on a 25 year term with a break clause after 10 years.   They were also offering to provide move-on accommodation (on which more below).  There were some differences in approach by the different local authorities, Restormel jumped into the arrangement; Penwith appeared more circumspect at the outset with a pilot but the “pilot” was soon followed by the full agreement being put into place.  CTE were also given £350k by each of the councils.  The mechanism through which that £350k was given is important.  Restormel appear to have used their general powers to make a grant of the money either for the purchase and rehabilitation of the temporary accommodation or for the purchase and provision of move-on accommodation, although that accommodation was never provided.  Penwith paid the money by way of loan from its private sector renewal fund under its published policy, “homesafe”, although the proper forms were never completed (and an attempt at retrospective changes to the policy to accommodate it never formally completed), and the money was used to provide the temporary accommodation.  In both cases, the £350k was to be repaid by CTE (Restormel) or written off (Penwith) if the agreements lasted more than 10 years.  Penwith also made a grant of £750k to CTE drawn from its second homes council tax fund.

Now this summary does little justice to the jejeune approach of the councils to the use of their formal powers.  This is laid bare in the forensic judgment of Cranston J and bears reading by any local authority officer and member concerned with their proper roles.  In very brief summary, it was shambolic (misinformation, incorrect appreciation of the effect of the agreements on the statutory obligations [my favourites is the report to Penwith’s resource committee which mentioned the Housing Grants and Construction Act 1996 even though this had been repealed in 2003 – others will found much of delight in the wreckage of these reports], and one could go on; the critique particularly of Penwith is at [87]-[88])).  What was driving the councils, though, was the concern about the escalating costs of b&b as well as the government targets.

Penwith rather belatedly reviewed the scheme by way of risk assessment, the Audit Commission became involved – amazingly, the District Auditor said that he was satisfied with the council’s approach but that it should have been more explicit about why it didn’t tender, should have referred to the relevant financial regs, and should have explained these points to the Members but that the reports “have been transparent and sufficient enough for members to ask relevant questions of the scheme”. Penwith also asked a consultant to prepare a report after concerns were raised by Members and officers.  The consultant “conducted an internal, and to my mind cursory” review which lead to an email of less than a page (!).  More of this below.

In anticipation of the shift to unitary status – hence Cornwall Council’s involvement – a report was commissioned on the relationship between CTE/PAS and Restormel/Penwith.  The reporter noted that Bournemouth, another council which had entered into similar relationships, had a break clause of three months: “Surely, wrote [the reviewer], one of the two councils’ auditors or lawyers would have questioned the length of the leases?” ([51]).

And now, here’s the rub: the costs of the leases of the properties entered into by the council.  How did they work them out?  They appear to have worked out the maximum amount of housing benefit payable, deducted an amount of around £50 per week, and that was it.  Thus, CTE got £120 pw for each of the properties grossed up to an annual figure.  The Penwith consultant’s review noted as follows:

Regarding the discrepancy between the £120 per week rent paid to CTE, and the £175 per week the council charged residents in the single person accommodation, i.e. £55, Mr Lee concluded that this was relatively straightforward because it was comparable to the management fee of £52 the council charged on private sector leases.  It was based on the estimated cost of agent’s fees, voids, bad debts, repairs and general housing services and its legality was not in doubt.  [47]

The issues

After Cornwall took over, it stopped paying the rents on the basis of its reviewer’s report.  There was another rather crucial issue – changes to HB regulations meant that the calculations of the rent might be out of whack and what was to be done if a household were not entitled to HB?  Amazingly, little thought had been given to this risk when the agreements were entered into by Penwith (if the word “jejeune” covers anything, it covers this!), although Restormel did have a provision.

In this action, CTE claimed arrears and the council defended on both private (mistake) and public law grounds (practically all of them).

Mistake

The defence of mistake was clearly a non-starter.  Everybody knew what they were doing, but Cornwall had a rather interesting proposition.  Penwith and Restormel had no housing revenue accounts (“HRA”) after their LSVTs, and the mistake was said to be that the agreements with CTE should have been run through an HRA as well as the fact that the residents would be eligible for HB to meet the rents for which they were liable.  Cranston J dismissed this defence on the basis that CTE had no knowledge of the HRA requirement, and Penwith/Restormel had not made a mistake: “None of the reports to the councils’ committees mention the HRA.  If there was any mistake it was attributable to the fault of the councils, who ought to have known about HRA requirements” ([56]).  As regards HB, the agreements were not predicated on the availability of HB and it was not sufficiently vital to avoid the contracts; indeed, even if an occupier was not eligible, Cornwall would have to find the rent from somewhere else in its budget.  These agreements were also commercial so reg 9(1) did not apply.

Public Law

On the public law grounds, the starting point (of course) is that burden is extremely high when a public authority is seeking to avoid a contract lawfully entered into on public law grounds.  The balance is between protecting commercial contracting and the policy that public bodies must act lawfully.  There were three grounds raised: capacity; fiduciary duties; and discretionary decision-making.  If you want the punch line now, then it’s that Penwith/Restormel were held to have breached their fiduciary duties.  But the rest of the judgment will be just as significant to LSVT local authorities concerned by the impact of this judgment (and there may well be quite a few of them).

Capacity

There were two points taken here: the first was about the HRA; the second was about the grants/loans.  On the first, the argument for Cornwall was that, although the councils clearly had the power to take the leases, the councils had to run the leases through their HRA – the argument was that rent cannot lawfully be paid if no HRA is kept, and an HRA is a prerequisite of the lawful exercise of powers to take leases over 10 years.  Cranston J’s position was that this argument was incorrect because the HRA does not operate at the level of individual transactions with a debit value as that value can be made good from elsewhere.  I’m not sure that I necessarily follow (ie agree with) that argument but the second point he made was that the leases were with CTE not individual tenants and entry into those leases did not require an HRA and the council’s subsequent use of the properties was not relevant to that exercise.  Thus, no HRA needed.  Again, I’m not convinced that one can unbundle the transaction in that way but a key point for future reference is as follows:

The fact that 25 year leases cannot be accounted for outside the HRA does not render performance of the contracts between CTE and Cornwall Council impossible, or different in quality to any degree.  It may simply mean that Cornwall Council must operate an HRA, and if necessary charge no more than local area reference rents. ([70], my emphasis)

As regards the grants and loans made to CTE, Penwith’s Homesafe loan to CTE of £350k was unlawful.  Not only had the proper procedures not been complied with but also CTE did not qualify for such a loan anyway.  Restormel was protected because the Cabinet Committee had authorised the grant.

Fiduciary duties

Cornwall had success here.  After a summary of the authorities (Bromley LBC v GLC [1983] 1 AC 768, the ‘fares fair’ case, and Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1), Cranston J understood that local authorities have a fiduciary duty to their council tax payers which included a duty to deploy its financial resources to best advantage, not necessarily thriftlessly, but by balancing its duties to its taxpayers against its other duties.  There then followed a discussion of the open market value of these properties, an imponderable because (on CTE’s case) these were unlike “ordinary” private rentals, there were no comparables, and the level of HB personal subsidy was set at the standard rate which “should be treated as a carefully considered assessment of the amount which, in each area, it would reasonably be expected to cost to provide accommodation for this group” ([77]).

Cranston J disagreed, however, because “the crucial point is that the councils never had regard to what was the market rent for the various properties leased from CTE” (again !, [79]).  the rents had been fixed before the properties had been bought/developed and the figure arrived at was based on the maximum sum available to the councils through rent rebate subsidy: “the rent was formulaic, fixed even before the properties were identified and purchased.  The £120 figure was simply multiplied by the number of bed spaces to produce the weekly, and ultimately the yearly, rent for each property” ([79]).  In failing to have regard to the market rent, the councils had breached their fiduciary duties.

Discretionary decision-making

This ground concerned improper purposes, irrelevant considerations, failure to take into account relevant considerations, and irrationality.  Let me give a flavour of the claim on improper purposes because, in a way, it summarises the problems which the councils had unwittingly entered into (and also the irrelevant considerations):

The improper purposes were said to be to abuse of the housing benefit system by determining rents under the leases with CTE and under the agreements with residents by reference to housing benefit rates; to charge excessive rents to licensees; to pay excessive rents to CTE; to pay such rents to CTE notwithstanding the absence of any adjustment provision for housing benefit changes in the Penwith leases and a provision in the Restormel leases which is virtually worthless; and to pay such rents on the basis that they would contribute to financing move-on accommodation when there was no contractual obligation upon CTE to provide such accommodation and no provision for the repayment of rents if it were not provided. ([82])

It is important to note that these points were disposed of shortly by Cranston J as of no substance, although the provision of move-on accommodation was conceded by CTE: “Foolishly, neither Restormel nor Penwith made the provision of move on accommodation a contractual commitment on CTE’s part.  There was not even an incentive in the leases or funding agreements with CTE to live up to the aspiration it set itself.” ([84])  That absence of provision suggested that this was not a significant part of the bargain between the parties.  If you’ll forgive a summary of Cranston J’s view of this sub-ground, it is that the reports just about passed muster and all significant relevant matters had been taken into account.  Irrationality didn’t advance the case any further.

Outcome

The leases were of no effect and Cornwall had a restitutionary claim for repayment of the rents.  CTE defended that on the basis of the restitutionary defence of change of position (cue fond memories of being taught CoP by the late, great Peter Birks, who put up with my hangover state at his Thursday 9am classes; RIP).  CTE’s change of position defence was successful – they had acted in good faith and could not be taken to doubt the councils’ decision-making procedures which were of no interest to them; and it did not matter that CTE had changed its position before it received the monies.  The equitable outcome was this:

[S]since the councils have had the benefit they were supposed to under the terms of the leases it is proper that the level of rent payable in respect of Cornwall’s occupation should be the amount that was agreed.  As for the Penwith £350,000 loans, the equitable outcome is that CTE should repay them in due course in accordance with the terms and conditions of the relevant loan agreements. ([99])

Cranston J: An appreciation

Ross Cranston is a former academic and I would suggest to anybody with sufficient interest to read his magisterial tome, Legal Foundations of the Welfare State.  OK, he was involved with the Blair government as an MP and Solicitor General, but (in my view) he is one of the outstanding High Court Judges.  He certainly demonstrated that accolade in this case.  He weaves a comprehensible survey of basic legal principles with academic work (referring, for example, to the great Law and Administration by Carol Harlow and Rick Rawlings – one could say that’s the LSE connection, but I’m charitable), and deals with the almost impenetrable HRA provisions with aplomb (although I’m not totally convinced correctly).  The point about fiduciary duties is potentially far-reaching and may well cause a few LAs to be just a little concerned.

Posted in Benefits, Homeless, Housing law - All, Regulation and planning.

11 Comments

    • Oui, but a very common error since the 19th Century.

      Kingsley Amis called it his “favourite solecism of all time”, pointing to the original sense of meagre or unsatisfying.

      So, while Dave’s spelling may be in error, at least it is an error with a pedigree and taste.

    • I had no knowledge of this pedigree but was merely repeating the way in which I’ve seen it used in academic texts. Damn them!

  1. I probably misunderstood it but does it seem that the ‘equitable outcome’ basically means the lease of no effect is allowed to continue in practice? And the unlawful loan will be repaid as if it was lawful ?

    • Unlawful loan repaid as per the agreement, yes. Lease of no effect, but no restitution of the rent previous paid.

      I can’t see that the lease continues in practice, though.

    • But the judge said

      “since the councils have had the benefit they were supposed to under the terms of the leases it is proper that the level of rent payable in respect of Cornwall’s occupation should be the amount that was agreed. ”

      Was he simply talking about the past? As in Cornwall’s occupation up until now?

      Also is there a way to find out what costs were awarded?

    • “Cornwall Council therefore occupies each property under a tenancy at will, terminable at any time.”

      Costs – dunno. I would guess that they wouldn’t be straightforward. Possibly no order. But you’d have to ask the parties…

  2. CTE’s appeal 100% successful. See [2012] EWCA Civ 1439, handed down 13.11.2012.

    (1) No evidence produced by Cornwall as to what market rents were or whether regard was had to them.
    (2) Even if Cornwall had not had regard to market rents that would not have been a breach of fiduciary duty.
    (3) Even if it had been a breach of fiduciary duty Cornwall could not rely on a form of ultra vires, where its decisions were voidable but not void, as a defence to a private law claim.

  3. Notice is hereby given that an item of business, ” Charles Terrence Estates/ Providers of Accommodation and Support – Part 2″ will be conducted in private at this meeting on the grounds that there is likely to be a disclosure to the public of exempt information by virtue of Schedule 12A of the Local Government Act 1972 – Category 3. Any representations as to why the private part of the meeting should be open to the public should be made to: the Democratic Services Manager, Room 3E.01, County Hall, Truro, TR1 3AY. https://democracy.cornwall.gov.uk/ieListDocuments.aspx?MId=5032&x=1&Cabinet
    Wednesday, 29th January, 2014 10.00 am

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