Charles Terence Estates Ltd v Cornwall Council & Anor

A public authority may invoke lack of statutory capacity to resist enforcement of a contract. Other public law defects do not automatically make a contract unenforceable. The court should consider the character of the defect, whether the authority could readily have remedied it, its visibility to the counterparty, the counterparty’s good faith and the subject matter.

A local authority’s statutory powers must be exercised consistently with its fiduciary duty to local taxpayers. In agreeing rents for publicly funded housing, the authority must have regard to market rents. A formula based only on housing benefit subsidy levels does not satisfy that duty. A contract entered without that consideration is void.

Charles Terence Estates Ltd acquired and refurbished properties which Restormel Borough Council and Penwith District Council leased for housing homeless and vulnerable people. The councils also provided grants and loans. Cornwall Council succeeded to their rights and liabilities following local-government reorganisation, stopped paying rent and defended the claim for arrears.

The council alleged common mistake, lack of statutory capacity and public law flaws, including improper purpose, failure to consider relevant matters and irrationality. It also challenged the funding arrangements. The central issues were whether the leases and funding agreements were legally effective and, if not, what restitutionary consequences followed.

1. Common mistake. The leases were not avoided for common mistake. There was no common assumption about Housing Revenue Account treatment. Any mistake on that issue was attributable to the councils. Housing benefit eligibility was not sufficiently vital to the contracts, and any loss of benefit would not make contractual performance impossible.
2. Housing Revenue Account. The statutory HRA regime operated at the level of the authority’s housing enterprise, not individual transactions. The absence of an HRA did not invalidate the leases with CTE.
3. Public authority contracts. Cornwall Council could rely on lack of statutory capacity. Other public law defects required a contextual approach. The court considered the nature of the defect, its remediability, visibility to the counterparty, the counterparty’s good faith and the subject matter. Internal procedural failures ordinarily should not defeat a contract made with a good-faith counterparty unaware of them.
4. Fiduciary duty. Under the principle explained in Bromley LBC v Greater London Council, statutory powers must be exercised with regard to the interests of local taxpayers. The councils agreed rents by reference to housing benefit thresholds and caps, without investigating market rents for the properties. That failure meant they acted outside their statutory powers. The leases were void and of no effect.
5. The other challenges failed. The councils’ purposes were principally to discharge their homelessness duties and meet government targets. The absence of a contractual obligation to provide move-on accommodation did not establish an improper purpose. The reports and resolutions, viewed fairly, authorised the leases. The machinery-of-authorisation challenge also failed because CTE acted in good faith and was entitled to assume that internal requirements had been met.
6. The Penwith £350,000 funding advances lacked lawful authority, but the remaining disbursements were not shown to be unlawful. The ineffective leases did not create periodic tenancies because no lawful rents had been agreed; Cornwall occupied as tenant at will. CTE’s change-of-position defence defeated restitution of the rents and required repayment of the Penwith loans in accordance with their terms. The claim for additional human-rights damages failed.