Charles Terence Estates Ltd v Cornwall Council

A local authority does not lack statutory capacity merely because, when entering a housing transaction, it failed to consider market rents. A breach of fiduciary or analogous duty requires a proper evidential basis and conduct of sufficient gravity. Courts should rarely imply a requirement to acquire at a reasonable price into a statutory housing power, particularly where the authority made a multifactorial decision within its functions.

In private-law proceedings, a transaction is void if it is beyond a statutory corporation’s capacity. A breach of duty in making a transaction within its capacity does not itself make the transaction a nullity. The public-law classification of an error as ultra vires does not automatically provide a defence to a contractual claim.

Restormel Borough Council and Penwith Borough Council leased residential properties from Charles Terence Estates Ltd for use in discharging homelessness duties. Cornwall Council succeeded to their liabilities after becoming the unitary authority. It stopped paying rent but continued to use the properties, and defended the owner’s claim by alleging that the leases were void.

Cranston J held that the predecessor councils had breached fiduciary duties by failing to consider market rents. He treated the leases as void, although he rejected Cornwall’s restitutionary counterclaim. The owner appealed. The central issues were whether there had been a fiduciary breach going to capacity, and whether such a public-law error could defeat a private contractual claim.

1. Appeal allowed. The court held that Cornwall had not established that its predecessor councils breached a fiduciary or quasi-fiduciary duty when taking the leases. There was no expert evidence identifying a relevant market or showing that the rents were unreasonable. There was also no evidence that the decision-makers lacked knowledge of market rents, while the arrangements addressed an urgent housing need and were intended to reduce the use and cost of bed-and-breakfast accommodation.
2. The court rejected the implication into section 17(1)(b) of the Housing Act 1985 of a general restriction that property may be acquired only at a reasonable price. Such a restriction would improperly make legal capacity depend on a later judicial reassessment of price. The transactions involved multifactorial decisions within the councils’ statutory housing functions, not the flagrant misuse of ratepayers’ funds shown by the earlier fiduciary-duty authorities.
3. In any event, a breach of fiduciary duty in the exercise of a power does not necessarily render a private commercial transaction void. The decisive distinction is between a transaction beyond the statutory corporation’s legal capacity, which is a nullity, and a transaction within its capacity but made in breach or abuse of a duty, which is not thereby a nullity. The wider public-law use of ultra vires after Anisminic does not automatically govern private-law rights and defences.
4. Credit Suisse v Allerdale Borough Council [1997] QB 306 remained an example of want of capacity. The court preferred Hobhouse LJ’s analysis there and disapproved Neill LJ’s wider suggestion that every public-law error capable of challenge by judicial review makes a commercial transaction void for private-law purposes.
5. The failure to establish a Housing Revenue Account under section 74 of the Local Government and Housing Act 1989 was not a condition precedent to exercising the housing acquisition power. It did not invalidate the leases.

• Court of Appeal (Civil Division): Allowed the owner’s appeal and reversed the conclusion that the leases were void.
• High Court (Queen’s Bench Division): Cranston J held that failure to consider market rents was a fiduciary breach which rendered the leases void: [2011] EWHC 2542 (QB) .