Unitary succeeds in getting leases entered into by districts declared void, but fails to recoup rents paid

A unitary council has successfully argued in the High Court that leases entered into by two of its predecessor district authorities were void and unenforceable, but its bid to recoup the rents it paid has failed.

The case of Charles Terence Estates Ltd v Cornwall Council & Anor [2011] EWHC 2542 centred on 30 leases between Penwith District Council and Restormel Borough Council and private company Charles Terence Estates (CTE).

CTE bought the properties, which were used to accommodate vulnerable adults, in 2006 and 2007. Restormel and Penwith provided grants and loans worth £1m to help the company in buying and preparing the accommodation, although CTE principally funded the acquisitions through £8m in bank borrowing that was personally guaranteed by its directors.

When Cornwall took over responsibility for the leases in April 2009 on achieving unitary status, it reviewed the schemes and became concerned over the level of rents payable to CTE.

Cornwall stopped paying rent in July 2010 and demanded immediate repayment of the grants and loans. This led to CTE initiating legal proceedings for the outstanding amounts. The local authority rejected the company’s claim, and also launched a counter-claim for repayment on the basis that the leases were flawed for both private and public law error.

Mr Justice Cranston ruled in the High Court this month that Restormel and Penwith had breached their fiduciary duty to taxpayers when they failed to take into account market rents on entering into the leases with CTE.

The leases therefore had no effect and were a legal nullity, he said. Cornwall, as successor to the two districts, was entitled to “invoke this vitiating feature of the leases”.

But Mr Justice Cranston concluded that Cornwall could not succeed in raising the other public law flaws it contended infected the councils’ decision-making when entering the leases.

The judge ruled that Cornwall occupied each property under a tenancy at will, terminable at any time. He also said that with the leases being of no effect, Cornwall had a restitutionary claim against CTE for repayment of the rents it had paid.

However, Mr Justice Cranston concluded that CTE had a defence of change of position. Such a defence is based on a principle of justice “designed to protect a party from a restitutionary claim in circumstances where it would be inequitable to pursue the claim, at least in full”.

Cornwall argued that the equitable outcome should have been that it should pay for its use and occupation of the properties, but at reasonable and lawful rates, not those fixed under the leases, and that it should be reimbursed the loans and grants.

But Mr Justice Cranston disagreed. “In my view, the equitable outcome is that 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,” he said. “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.”

The judge said CTE had at all times acted in good faith. “It was in no way negligent or foolish in the way it changed its position,” he added. “It was invited by Penwith and Restormel to assist them address their pressing responsibilities to house homeless and vulnerable people and to meet central government targets. CTE had no reason to doubt the decision making procedures behind the scenes at both councils.”

A spokeswoman for Cornwall said: “The council notes the judge’s conclusions in this long and difficult case which safeguard significant levels of funding for the people of Cornwall.

“We are always keen to work with private organisations to provide services and have successfully achieved this in a large number of cases.  This case, however, arises from an unusual and unfortunate set of circumstances which Cornwall Council inherited as a new unitary authority. As a result we were forced to take action to resolve the situation and we welcome the decision announced by the court.”

The spokeswoman said the council would now study the judgment “very carefully to understand the full implications for the council and the residents who are directly affected”.

She added: “We are committed to ensuring that the people living in these properties are not disadvantaged by this case and will be working with them to address their housing needs.”

Philip Hoult