Property contracts and public law principles

David Shakesby looks at the lessons to be learned from a dispute between a further education college and a district council over the planned sale of an empty and unused property.

The case of Warwickshire College v Malvern Hills District Council [2023] EWHC 2008 (Ch) is an interesting decision of the Chancery Division, which is a hybrid between the ordinary principles of contract law applicable to the proper construction of property documents and covenants and the principles of public law (and particularly those relating to the lawfulness and rationality of decisions) where the parties to a property contract are public bodies and exercising statutory powers, or functions.

It is a cautionary reminder to public bodies (and particularly local authorities) that they often do not have an absolute discretion in how they act pursuant to a property contract, even if they are not directly exercising statutory functions.

The facts

The case concerned a building that the Claimant (“C”) had acquired from MHDC to use as a further education college. The transfer contained a restrictive covenant that C would not use the building other than as a college, unless MHDC confirmed in writing that it was satisfied that the Learning and Skills Council (“LSC”) or its successor in function had “properly determined” that there was no longer a functional need for a college.

C had used the building to provide government funded FE courses to 16-19 year olds and self-funded courses to older / other students. It was loss making for several years, largely because the fees for over 19’s courses did not cover the cost of providing courses and operating the facility.

In 2020, C closed the building, stopped providing over 19’s courses and moved its 16-19 courses to another venue. By this time, the LSC no longer existed and had been (partially) replaced by the Education and Skills Funding Agency (“ESFA”). C applied to the EFSA for a determination that there was no longer a functional need for a college. The ESFA stated that there was no longer a functional need for a college delivering 16-19 provision (as that was provided for elsewhere), but because it neither funded, nor collected data on over 19 provision, it could not comment on demand, or whether there was a functional need.

C then applied to MHDC to confirm that it was satisfied that there was no longer a functional need for a college, in order that it could lift the restriction.

MHDC refused to provide the confirmation, arguing:

1. That the EFSA was not the LSC’s successor in function.
2. The statement that the EFSA had provided was a not a “determination”, as it did not cover over 19 provision.
3. Even if what EFSA had said was a “determination”, it was not rational or procedurally sound.
4. In any event, MHDC had an absolute discretion to refuse to provide the confirmation, or agree to lift the restriction.

The decision

The Court dealt with the first two points fairly briefly. The EFSA was the LSC’s successor in function. When the LSC was dissolved, it’s functions devolved to the Secretary of State, who had created the EFSA to replicate some of the functions of the LSC. Some of the functions were not replicated, but it was the broad functionality which mattered, and the EFSA was broadly the successor in function of the LSC. In the same vein, while the EFSA did not fulfil exactly the same functions as the LSC, this was because there was no replacement body given the same functions, because post 19 education provision had changed. The EFSA’s determination was partial, as it could not deal with post 19 education, but the determination was sufficient for the purposes of the covenant.

The second two points also overlapped and the Court considered carefully the overlap (where public bodies are involved) between so called Braganza (Braganza v BP Shipping Ltd [2015] UKSC 17, which held that implied terms would be read into a contract, so that a decision making process by a party to a contract should be lawful, rational, made in good faith and consistent with the contractual purpose for requiring that decision making process) and the public law principles of Wednesbury reasonableness, rationality and lawfulness, which would be required of a public body when exercising statutory powers or functions.

The Court held that these overlapping principles required a public authority to assume that another public authority (i.e. the EFSA in this instance) had properly exercised its statutory functions, absent facts which indicated otherwise. As a consequence, MHDC was unable to look behind the reasoning, or decision making of the EFSA and had to accept the determination that had been made at face value. In addition, where the parties to a contract had decided that a determination (of an issue of fact, as in this case, which should be distinguished from an arbitration clause, or some other form of dispute resolution provision) was to be made by an independent third party, they would be bound by that determination and had to follow it. If the parties had intended that MHDC would have an independent power of veto over the lifting of the covenant, they would have said so and in any event, permitting MHDC to have an absolute discretion, or a veto, would have rendered the need for the determination by the LSC meaningless.

On that basis, the Court held that MHDC was bound to accept the determination by the EFSA and were required to certify that there was no longer a functional need for a college. As a consequence, the restriction should be lifted and C was entitled to sell the building or use it for a different purpose.

David Shakesby is a Director in Freeths’ Property Litigation Team.