Housing and Fiduciary Duties

November 15th, 2012 by Christopher Knight

The Court of Appeal has today handed down an important judgment on the ability of local authorities to avoid bargains by relying on their own unlawful acts. The context of Charles Terence Estates Ltd v Cornwall Council [2012] EWCA Civ 1439 is one of housing; the Council had entered into agreements with CTE whereby CTE purchased properties and leased thm to the Council to provide accomodation for people to whom the Council owed homelessness duties. The Council argued, successfully at first instance in front of Cranston J ([2011] EWHC 2542 (QB) ; [2011] LGR 813), that in entering into the agreements – which calculated rents based upon set rates – the Council had failed to comply with its fiduciary duty to the council tax payer because it had not considered the market rents in the locality, with the result that the leases were ultra vires and void. The Court of Appeal has overturned that conclusion.

There are two points of particular importance in the context of housing law, and a more important point about virus and public authorities generally. As to housing law, the Court of Appeal held first (in arguably the only point which formed the ratio) that the section 17 of the Housing Act 1985 power to acquire land could not be read as restricting the power to acquire land at a reasonable price. Maurice Kay LJ held that to do so would invite judicialisation of the limits of legal capacity so that only upon determination of a reasonable price could capacity be ascertained, which was a surprising outcome for a local authority to argue for: at [21]. In any event, the total abscence of expert evidence before the Court as to what the market or reasonable rent was meant that it was not possible to undertake any sort of meaningful comparison and so the case failed on an evidential basis too: at [19]-[20], [22], [24]-[25] per Maurice Kay LJ and [41] per Etherton LJ.

The second housing law point is a firm rejection by their Lordships of the argument that the leases were void because the Council had been obliged by section 74 of the Local Government and Housing Act 1989 to set up a Housing Revenue Account before it could exercise the section 17 power, and that it had been failed to do so. The Court held that the Account was a matter of book-keeping, and need only be established when money was actually recieved: at [26] per Maurice Kay LJ and [43] per Etherton LJ.

Of wider significance was their Lordships’ discussion of the circumstances in which a public authority can successfull invoke its own public law error as a defence to a private law claim, and in particular, the comments on the well-known decision of Credit Suisse v Allerdale BC  [1997] QB 306, CA. There has long been a tension between the approaches of the judgements of Neill LJ and Hobhouse LJ, the former taking a broad interpretation which permitted any public law illegality to be relied upon as a defence, and the latter narrowed the application to cases involving a ‘want of capacity’ (as there was on the facts). The Court of Appeal in CTE unanimously preferred the approach of Hobhouse LJ. Maurice Kay LJ disputed that the Ansminic aggregation of all errors of law had any impact in this area, stressing the undesirablitity of a historic breach of fiduciary duty defeating an otherwise good claim by a party who had acted in good faith: at [37]. Any breaches of the Council had not gone to legal capacity. Etherton LJ drew the same distinction between ‘narrow’ ultra vires acts (in the sense of legal incapacity) and ‘wider’ ultra vires (in the sense of breach of powers or duties), preferring the approach of Hobhouse LJ because he could see no reason why the position should be any different where the transaction whose validity is questioned is that of a public body or that of a commercial party under the lack of capacity jurisprudence most famously set out in Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246: at [48]-[52]. Moore-Bick LJ agreed with both judgments: at [39]. As a result, even if the Council’s decision to enter into the leases was ultra virus for any reason, it was a matter of ultra vires not going to capacity, and as such the leases could not be a nullity.

While the housing law findings of the Court may be some interest in future cases, the very clear alignment of the Court of Appeal with the judgment of Hobhouse LJ is of considerable wider significance for public authorities across all areas of public law.

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