Restormel Borough Council (‘Restormel’) and Penwith Borough Council (‘Penwith’) were Cornish local housing authorities. They each entered into arrangements with Charles Terence Estates Ltd (‘CTE’) in 2006/2007 under which CTE purchased properties and leased them to Restormel or Penwith, who in turn sublet or licensed them to vulnerable people who were in priority need of social housing.
There were no issues until April 2009. On 1 April 2009, Restormel and Penwith ceased to exist as they were united under the ‘Cornwall’ Council, who took over their rights and liabilities. Cornwall reviewed the CTE arrangements and in July 2010 stopped paying rent, although continued to occupy and use the properties to house vulnerable people.
CTE commenced proceedings for recovery of the unpaid rents. Cornwall defended the claim, raising a number of defences, including assertions that Restormel and Penwith had breached fiduciary duties owed to their council taxpayers with the result that the leases were ultra vires (outside of their powers) and void. Cornwall argued that this was due to Restormel and Penwith failing to consider the standard market rent rates.
Court of Appeal Decision
CTE appealed to the Court of Appeal and in upholding its appeal, it ruled that:
- the leases were not void;
- there was no fiduciary breach; and
- even if there had been, the leases would still not have been void.
The Court stated the breach would have had to be under section 17 of the Housing Act 1985. This only required rents to be at a ‘reasonable price’, and at no point did the act place any value on what would be considered reasonable. The Court stated that it would be dangerous for it to determine what value would be considered reasonable, as this would throw into question any financial decision taken by Councils and similar bodies. More specifically to this case, there had been no expert proof that the rents were not ‘market rate’. The Court also held that even if this was a breach of duty, this does not in any way mean the Council did not have the capacity to enter into the leases, so whilst a breach could have other consequences, the leases would still stand, and rent would be due. The case of Credit Suisse v Allerdale Borough Council  QB 306 was cited as evidence for this point.
The Court did not want to allow historic breaches being used as a defence in this way. The time limit would have long ago expired for challenging the Council’s decision to enter into the leases, and throughout the entire process, CTE had acted in good faith.