Mr Justice Cranston :
INTRODUCTION
- This case raises some novel issues concerning contracts with governmental and public authorities. In particular it raises the issue of the extent to which such authorities themselves can invoke public law flaws in entering a contract when faced with a private law claim by the other party to the contract. In outline the claimant, Charles Terence Estates Ltd ("CTE"), purchased some 30 properties in 2006 and 2007, which it leased to the defendant, Cornwall Council, under schemes designed to house those with housing need. The leases were originally with two district councils in Cornwall, Restormel Borough Council ("Restormel") and Penwith District Council ("Penwith"). These councils in turn used the properties to house those in need. Restormel and Penwith provided grants and loans of some £1 million to assist CTE in its purchase and preparation of the properties, although CTE's expenditure of more than £8 million on the schemes was funded primarily by bank borrowing, personally guaranteed by CTE's directors.
- From 1 April 2009 the district councils in Cornwall, including Restormel and Penwith, and the former Cornwall County Council, were abolished and replaced by a new unitary local authority, Cornwall Council, which has succeeded to their rights and liabilities. Cornwall Council reviewed the schemes which Restormel and Penwith had undertaken with CTE, ceased paying rent under the leases and demanded immediate repayment of the grants and loans. CTE instituted the present proceedings for the unpaid rents. Cornwall Council rejects the claim and contends that the leases were flawed at the outset for both private and public law error. CTE's sister company, Providers of Accommodation and Support Ltd ("PAS"), is also a party to the litigation. As its name suggests it offers support services to those in social housing and did so in some of the properties. During the course of the proceedings the issues concerning it have faded away.
THE HOUSING BACKGROUND
- Part II of the Housing Act 1988 contains the powers which councils have to own, manage and dispose of their social housing. In particular section 17(1)(b) empowers a local housing authority to acquire houses, which includes taking leases. There is a similar power under section 120 of the Local Government Act 1972. As explained later in the judgment a local housing authority with housing stock must generally operate a Housing Revenue Account. Social housing is also provided by registered social landlords such as housing associations and housing trusts. Local housing authorities need not have any social housing: s. 9(5). Before the events relevant to these proceedings Restormel and Penwith transferred their housing stock to housing associations in their areas.
Housing need
- Housing need is one part of the backdrop to the schemes under which CTE granted leases to Restormel and Penwith, and obtained grants and loans from them to assist in the purchase and preparation of the properties. Local authorities are under a statutory duty to secure accommodation to the unintentionally homeless in priority need. Those in priority need include persons with dependent children, those leaving care, and individuals who are vulnerable because of mental illness, disability or other special reason: Housing Act 1996, Part VII, as amended by the Homelessness Act 2002. In fulfilling this duty a local authority may place a homeless person, at least initially, in temporary accommodation. Bed and breakfast type accommodation has been used for this purpose despite acknowledgement that it is expensive, inadequate and has unacceptable long-term effects on the residents.
- In 2002 central government committed itself to ensure that, within 2 years, no families with children should live in bed and breakfast accommodation, except in an emergency, and then for no more than 6 weeks. In 2004 it adopted another target that, by 2010, the number of households living in temporary accommodation should be reduced by 50 percent. Jane Barlow, now head of housing at Cornwall Council, but at the time in charge of housing at another of the former district councils in Cornwall, Kerrier District Council ("Kerrier"), gave evidence about how Kerrier entered into various schemes with registered social landlords to meet these targets.
- Among other measures to reduce the use of temporary accommodation, central government encouraged local housing authorities to explore the use of the private sector. One possibility was arrangements so persons were placed with a private landlord. Another was private sector leasing: privately-owned housing would be leased to local housing authorities or housing associations which in turn would sub-lease or license them to those in housing need. Paragraph 16.15 of the Homelessness Code of Guidance for Local Authorities was amended to read:
"Accommodation leased from a private landlord can provide authorities with a source of good quality, self contained accommodation which can be let to applicants. Where there is a need for temporary accommodation, housing authorities are encouraged to maximise their use of this type of leasing, in so far as they can secure cost-effective arrangements with landlords."
Accommodation of this character, leased by Restormel and Penwith from a private landlord, CTE, is at the heart of this case.
Housing benefit
- Another part of the backdrop to the present proceedings is housing benefit, which is available to assist low income persons pay their rent. It is administered by local authorities, but central government may subsidise it. A local housing authority can claim full subsidy for housing benefit paid to those in its own housing stock. With private sector accommodation the local authority seeks the view of the rent officer service as to the level of rent which the premises should attract. If the local authority pays housing benefit at a higher rate than this it cannot reclaim it from central government.
- To encourage the use of private sector rental accommodation in place of bed and breakfast for those assessed to be in housing need, central government changed the rent rebate subsidy regime in 2002 under which a local authority was entitled to reclaim housing benefit payments from central funds: Income-related Benefits (Subsidy to Authorities) Order 1998, 1998 SI No 562, as amended. The effect of the amendments was that between a threshold figure and a cap figure, set under the Order for each local authority, a local authority was able to recover only 10 percent of the difference between the rent and the threshold up to the cap in respect of bed and breakfast accommodation: article 17(3)(b)(ii) and 17(4)(a). However, it was able to recover 100 percent of the difference between the threshold up to the cap in respect of
"rents … a person is required to pay to a local authority for accommodation outside that authority's Housing Revenue Account [HRA], which the authority holds on a lease granted for a term not exceeding 10 years, and which it makes available to that person: Article 17(4)(c)".
For obvious reasons this is known as non-HRA rent rebate subsidy. The threshold in 2006 for Restormel was £108.16 and for Penwith £94.58; the caps for these local authorities were £191.05 and £177.56 respectively: see also Housing Benefit Circular HB/CTB S2/2006, Appendix 2.
- The 2002 changes created an incentive for local authorities to enter private sector leasing arrangements, where the cost of housing benefit would largely be met by central government, in preference to bed and breakfast accommodation, where they would be liable to meet a substantial portion of the cost from their own resources. However, it became a concern that local authorities were placing persons in accommodation and charging rents inflated to the maximum housing benefit subsidy levels. Apart from the cost, a problem with this is that high rents represent a barrier to persons entering employment, since in work they will no longer receive housing benefit to cover them. As Jane Barlow explained in her evidence the problem has been acute in Cornwall, where wages are lower than the national average. Changes in housing benefit have now been introduced, but these are of no direct relevance to the present proceedings.
Supporting people
- Central government introduced the Supporting People programme in 2003 to offer housing related support to vulnerable people like the homeless, those with drug and alcohol problems, teenage parents and people with learning disabilities. Housing related support services included assisting individuals to access their correct benefit entitlement, ensuring they had skills to maintain a tenancy, and providing home visits for a short period each week or in some cases an on-site support worker. The Supporting People programme in Cornwall was administered by the county council. It awarded PAS a number of supporting people contracts across the county.
THE LEASES AND FUNDING AGREEMENTS
- CTE was formed in 2003 and is jointly owned by Denis Dixon and Stephen Fowley. Mr Dixon was ill at the time of the hearing but Mr Fowley gave detailed evidence. CTE acquires and leases properties to accommodate vulnerable adults. It began in Bournemouth and the surrounding areas and by the beginning of 2007 owned 25 properties. PAS is also jointly owned by Mr Dixon, Mr Fowley and their respective wives. It was formed in 2000 and, as indicated, provides support services for vulnerable individuals. PAS adopts a three stage model, where individuals initially receive a high level of support to bring some order to a chaotic lifestyle, through to subsequent stages where less support is provided until a person can live independently.
Restormel's leases and agreements
- CTE and PAS had had involvement with Restormel from 2003. For present purposes the story begins on 9 December 2005, when Mr Fowley of CTE/PAS wrote to Ms Fowler, Restormel's housing services manager. Ms Fowler did not give evidence. The letter proposed that CTE purchase 5 hostels in Newquay, then operated by Ocean Housing Association ("Ocean"), together with an additional property adjacent to one of the hostels. Restormel had transferred its housing stock to Ocean in 2000, including these hostels. In 2003 it failed to meet targets for reducing reliance on bed and breakfast accommodation. Ocean was unable to keep the hostels in repair and by 2004 Restormel ceased placing homeless people there. At one point it appeared that the council might have to house the homeless on a former RAF base.
- In his letter, Mr Fowley explained that the scheme would provide an investment mechanism to generate a further 20 units over 5 years, the so-called "move on" accommodation, with no further capital required by the council. A project overview set out a break down of costs, including a £350,000 local authority contribution. A "key point" was a 25 year lease, with a 10 year break clause. Rent of £120 per week was specified for residents of the hostels. That figure seems to have emerged in discussions between Karen Waters, the head of corporate and housing services, and Mr Fowley. Ms Waters did not give evidence at the hearing. Mr Fowley said that she had told him that the available budget was £120 per room. For the 20 units of move on accommodation, the lower rent of some £55 per week was specified, that lower rent reflecting the housing benefit available for a normal tenancy. On December 2005 Ocean accepted CTE's offer for sale of the 5 hostels.
- There was a meeting of the Restormel cabinet on 6 March 2006 to discuss the issue. The report by Karen Waters outlined the purpose: to seek approval for the grant of £350,000 to PAS to assist with this purchase of the 5 hostels from Ocean. One risk was that without the funding the needs of some of the most vulnerable would not be met. The other risk was the revenue implications for the council, but the report asserted that the draft lease and management agreement contained clauses to limit it. Ms Waters explained that PAS provided the support element, its partner, CTE bought the property and acted as landlord. Echoing what Mr Fowley had proposed, the report said that as well as the 5 Ocean hostels, 5 move on properties, with an additional 20 bed spaces, would be purchased over the following 5 years. That would not require additional funding from the council.
- In the report, Ms Waters further explained that a draft lease was with the council's legal and housing departments. For PAS and CTE to obtain funding to purchase the 5 hotels, the leases could not have a break clause until 10 years after their commencement. As to housing benefit, the report said:
"3.10 … [T]he level of housing benefit payments would be designed to include administration, management, repairs and void costs … [W]ith housing benefit payments maximised, these costs would be covered, since current housing benefit payments for a 1-bed unit are £179.59 and the rental costs to the council of the proposals are £120.00 per week.
3.11 Under the terms of the draft lease and draft management agreement, which is to run co-terminus with the draft lease, the council has the option to:
terminate the lease after 10 years;
terminate the management agreement at any time if Housing Benefit Subsidy ceases to be available;
under the terms of the rent review in Schedule 1 of the draft lease, if there is a material change in the Housing Benefit regulations (or any replacement State Funded Grant), the rent may be adjusted to an open market rent."
The revenue cost of the £120 per unit per week would be met through housing benefit, any revenue implications being mitigated by clauses in the lease and management agreement.
- In line with the recommendations in the report, Restormel's cabinet agreed to the £350,000 grant to assist in the purchase of the 5 Ocean properties, subject to the council being able to agree satisfactory terms with the companies on their use. Responsibility to negotiate acceptable terms of the lease and grant agreement was delegated to the acting chief executive (Gareth Pinwell), the head of financial services, and Ms Waters, in conjunction with the cabinet member for housing and health (Cllr Roy Taylor). They were all present at the meeting, along with 5 members of the cabinet, 19 other councillors and a number of officers.
- On 28 April Mr Pinwell forwarded to Steven Dyer, the council's lawyer, documentation received from PAS/CTE relating to the purchase of the Ocean hostels. Mr Dyer did not give evidence. The proposals were that the council loan the money, and be repaid after 25 years, rather than to grant it and never see it again. Two months later, on 21 June 2006, Mr Pinwell, by now the council's chief executive, wrote to CTE, confirming that the council was prepared to enter separate private sector leases for the 5 Ocean hostels. That was subject to contract and councillor approval. Rent would be payable when the properties had been refurbished and met council and statutory requirements. A £350,000 grant would be available on acquisition of the properties and was subject to their refurbishment. PAS' role as managing agent of the hostels would be put to one side until a review of its work under the supporting people programme.
- Restormel's cabinet met again on 3 July 2006, so that members could be updated on the negotiations with CTE. The report before the cabinet was prepared by Mr Pinwell. The original report was attached to it. The report explained that CTE would purchase the 5 Ocean hostels but the Christian Alliance, not PAS, would manage them. The report said, incorrectly, that the loan of £350,000 would now be deployed by CTE to purchase further properties to facilitate a further 20 spaces. In the draft lease the payment of grant moneys was declared to be to assist with the purchase and provision of the 5 Ocean hostels. If the council continued the lease of the existing properties beyond 10 years, the £350,000 would be repaid. The cabinet meeting was attended by 8 cabinet members, including Cllr Roy Taylor, the portfolio holder. Neither Mr Pinwell nor Ms Waters were in attendance. The decision was minuted as follows:
"Resolved that the provision of the grant of £350,000 to Charles Terence Estates Limited for the purchase of further properties that can be converted to provide what is termed "move on accommodation" to be approved; in essence this was a type of accommodation which is supported and enables vulnerable people to acquire the skills to move into an unsupported type of housing accommodation."
- Following the cabinet meeting Mr Dyer, Restormel's lawyer, forwarded the draft lease and grant agreement to CTE. He said that they were acceptable to the council, subject to contract and member approval. On 25 July 2006, following further negotiations between the council's housing services manager, Ms Fowler, and CTE, Mr Dyer sent copies of the leases and grant agreement to CTE's lawyer, Mr Lawrenson. For the comfort of CTE's bank, Mr Dyer confirmed that the drafts were approved by the council, subject to any later amendments agreed. In his evidence Mr Lawrenson said that with both Restormel and Penwith he knew that the councils had internal procedures but that he dealt only with their lawyers and it was not part of his remit to inquire further. He assumed that the councils had undertaken the necessary steps to authorise the leases and grants. Mr Fowley's evidence was to similar effect in relation to his dealings with the officers.
- On 10 August 2006 it was agreed that the leases and grant agreements would be signed and sealed by the council and sent to CTE's lawyer, Mr Lawrenson, to be held in escrow until the exchange of contracts with Ocean (in the case of the funding agreement), and the refurbishment of each hostel being completed satisfactorily (in the case of the leases). As the hostels were refurbished, the leases were released from escrow. Five of the leases were completed at dates between 22 June and 3 September 2007. Because of planning issues, the last of the leases was not completed until 28 June 2010. Ultimately PAS was granted a Supporting People contract by Cornwall County Council to provide support to those housed at the properties.
- All six leases which CTE entered with Restormel are in the same form. The recitals envisage that the occupiers will be homeless persons under the homelessness legislation and will be licensees or non-secure tenants. The covenant on use, however, gives Restormel flexibility. Rent is to be at a rate of £120 per unit (bed space) per week. Rent is subject to an annual retail price index adjustment. A rent rebate clause covers changes in housing benefit regulations: CTE must repay the difference between the rent payable and the sum available to Restormel from rent rebate subsidy. However, repayment is limited to one third of the rent and is not to exceed £58,334 in total, less any sum repaid by Restormel under the grant funding agreement. Restormel is obliged to keep the interior in as good a condition as provided, with a schedule of condition; CTE must keep the exterior, structure and utilities in good repair and replace fittings and carpets in accordance with an agreed life cycle. The term is 25 years, although under the break clause Restormel may end a lease 10 years after commencement, conditional on payment of rent and the observance of covenants. CTE may end a lease at any time subject to the repayment of grant money and providing nomination rights to Restormel to equivalent property for the remainder of the term.
- As to the grant of £350,000 CTE and Restormel entered an agreement under which CTE was to use the grant moneys for the purchase and provision of suitable housing in accordance with the council's policy objectives. Under the agreement the council was obliged to pay the grant moneys and to enter a lease subject only to the accommodation meeting certain criteria and the completion of works, set out in a schedule, to the satisfaction of the council. Similarly, rent was not to be become payable under the lease until the properties had been refurbished to the council's reasonable satisfaction. If the council chose not to exercise its right to break the leases after 10 years, CTE had to repay the grant monies. However, as with the leases, if housing benefit rules changed so that the council had to charge its tenants the local reference rent, set by the rent officer service, CTE would reduce its rent to the council by one third, but it was able to use the grant monies to cover its loss of rent.
- There was never any contractual provision regarding the additional 20 units of move on accommodation which CTE had said it would make available, and which featured prominently in the 3 July 2006 report. No such accommodation was ever provided.
Penwith's leases and agreements
- As a result of the central government targets mentioned earlier Penwith needed to reduce the use of bed and breakfast accommodation and its reliance on temporary accommodation. It had no housing stock since it had transferred it to Penwith Housing Association in 1994. In early August 2005, Mr Dixon of PAS/CTE visited Penwith and met with Gila Trevena, then a junior housing officer with the council, to discuss whether CTE/PAS might be able to assist. The next month, on 15 September, Mr Dixon met with Ms Trevena's colleague, Wendy Watts, and Anthony Ball, the housing manager. Ms Trevena gave evidence but Ms Watts and Mr Ball (who now works elsewhere) did not. The notes of the meeting record that there was an urgent need for accommodation for the single homeless, around 30-40 persons. In particular there was a threat that the Salvation Army, which ran a hostel in Penwith, would opt out.
- Following a visit to Bournemouth, and impressed with what CTE/PAS were offering there, Gila Trevena and Ms Watts prepared a four page briefing report for Anthony Ball, dated 21 October 2005. That report drew on a template which had been used by CTE in discussions with Torbay Council, Devon. The report proposed that the council enter agreements with CTE/PAS for the lease of suitable properties, the management of those properties and the provision of capital funding. Council expenditure on bed and breakfast accommodation would be reduced and the risk to the council was relatively low. A pilot scheme and phased delivery would be of benefit. The report explained that CTE/PAS had a proven track record. Changes in housing benefit within the first 10 years was a risk to the housing revenue budget, but that was mitigated by the experience of comparable projects elsewhere and by central government's promotion nationally of this type of leasing from the private sector.
- The report then set out the alternatives: for the council to buy properties, but that would take time; to go to tender, but that was difficult due to the specialist nature of the provision; or to work with a housing association, but that had been unsuccessful in the past. Costs for bed and breakfast accommodation were escalating and needed to be addressed, with the proposed changes to rent rebate subsidy for housing benefit. The report proposed to spend an unspecified capital amount to gain 100 percent "nomination rights", with lease arrangements for up to 25 years, and a break clause at 10 years. The scheme was revenue cost neutral with a built in void level and management fee,
"with the proviso that all occupants are in receipt of full housing benefit and any change to the HB regime does not disadvantage the scheme".
The existing programme for those in temporary accommodation was "silted" and "move on" accommodation was needed to get people on to independent living. The scheme would include the generation of further properties by CTE, ideally at rent officer determined rents. A pilot scheme for one property was attached.
- Subsequent documents, internal to the council, fleshed out the proposal. Council funding would be a grant, although that would be repayable in full after 10 years over the remaining term of the lease. Penwith would charge the residents £175 per unit, but would pay £120 per unit per week as rent to CTE. The difference was the council's management fee.
- On 8 November 2005 Mr Fowley sent Gila Trevena a draft lease and two draft agreements, one for funding from the council, the other for management by PAS of the property. The following day he outlined the project in an email to Gila Trevena, with a copy to Wendy Watts. There were many assumptions in his calculations, Mr Fowley said, but the same principles had been discussed with other local authorities. In evidence Mr Fowley explained that this was a reference to Torbay and Kerrier, although nothing eventuated with either of these councils. Attached were calculations assuming a rent of £120 per unit a week with hostels. The calculations allowed for reinvestment in affordable "move on", i.e. the purchase of five 4 bedroom houses without any further grant, with the rent assumed at £55 per unit a week.
- Gila Trevena prepared a draft report for consideration by the council's Social, Economic and Environment Committee at its meeting on 7 December 2005. It explained that there had been a visit to Bournemouth, where PAS/CTE were based, including a visit to the head of housing services at Bournemouth City Council. He informed them that PAS was a high quality, private sector organisation, which had dramatically reduced single homeless cases in the city. Clients of PAS in Bournemouth, who spoke to the Penwith visitors, were positive about its support. The draft report recommended entry into formal agreements with PAS, to procure "nomination rights" for temporary accommodation for homeless, vulnerable, single people. A further recommendation was that the head of housing should approve and enter into formal agreements with PAS "to procure the lease of suitable properties, and agree terms for funding and management agreements respectively".
- The final report for the 7 December 2005 meeting differed, to an extent, from the draft. The evidence is that the changes were introduced by Mr Ball. The report was in the name of Mr Hampshire, the head of housing, health and community safety. In evidence Mr Hampshire said that he only exercised "high level oversight" and that until 2008 the reports in his name were drafted by Mr Ball. The report identified no legal implications. Its proposal was for an in principle agreement with PAS to secure "nomination rights" for up to 25 years. Initial estimates suggested a significant cost saving over the 25 years and a vastly improved service. Initial discussions suggested PAS were willing to invest £1.6 million to acquire 45 bed spaces, with the council being required to invest up to £360,000. That was less than the £500,000 currently being spent on bed and breakfast accommodation.
- The meeting of the Social, Economic and Environment Committee on 7 December 2005 endorsed the report's recommendation, that in principle the council work "in partnership with PAS to secure nomination rights for better and more cost effective accommodation for homeless, vulnerable single people". The further recommendation in Ms Trevena's draft report – that the council enter formal agreements with PAS "to procure the lease of" properties – had been omitted from the report. The evidence of both Ms Trevena and Mr Hampshire was that they were never in any doubt, however, that leases were being contemplated.
- As part of the 2006/07 capital programme a meeting of the council's Resource Committee on 22 February 2006 authorised an expenditure of £300,000 for "permanent interim housing PAS". A further meeting of the Resource Committee on 15 March 2006 had before it a report in the name of Mr Hampshire. He and the housing manager, Mr Ball, were in attendance. No legal implications were identified in the report. Proposed was the acquisition of a property at Carbis Bay for "move-on", vulnerable single homeless/affordable housing in partnership with PAS. The property had been identified to pilot the project. It would provide the council with 100 percent nomination rights for 5 bed spaces. The report reminded councillors of the "in principle" partnership following the 7 December 2005 meeting of the Social, Economic and Environmental Committee – a copy of that report was attached - and of its own £300,000 allocation, part of the capital grant from central government. The report continued:
"3.4 Penwith District Council propose to invest up to a maximum of £54,000 in this particular property, which represents 20% of the overall cost. PAS have agreed in principle that the grant is repayable on any future sale of the property and for an uplift to be agreed on disposal at some point in the future, whether 10 years or 25 years.
3.5 Penwith District Council would secure 100% nomination rights for the 5 bed spaces over a 25 year period to provide accommodation for single vulnerable homeless people."
- The committee adopted the report's recommendations. However, at a meeting of full council on 12 April 2006 it was resolved to defer the matter. The minutes refer to inaccuracies in the report before the Resource Committee as the reason for referral to full council. Councillors had also received correspondence from the housing manager. Neither the inaccuracies nor the correspondence were in evidence before me, although it appears that one issue in contention was the location of the first property to be purchased in Carbis Bay.
- The report before the Resource Committee on 14 June 2006 differed little from the report it had before it on 15 March. However, the Carbis Bay property no longer featured, and the property now to be acquired was identified as 29 Penare Road, Penzance. This was said to be the first of 5-6 properties PAS intended to acquire in Penwith. For the first time management of the properties by PAS was mentioned. As with the previous committee meeting, the Resource Committee again endorsed the allocation of £54,000 to PAS so it could acquire the property. The minutes record that Mr Ball, as housing manager, reported that the property had been identified to pilot the project, with 100 percent nomination rights for all the bed spaces.
- PAS/CTE now sent the council a draft lease and draft funding agreement. In the lease the rent was the number of units x £120 x 52 per annum, with no mention of any adjustment for housing benefit changes. Those drafts were forwarded to Jonathan Sleeman, the council's lawyer. In July Gila Trevena negotiated with Mr Fowley over whether the grant could be a loan and called in anytime should there be a change in housing benefit. Mr Fowley explained in that case that the council could not share in capital appreciation of the properties should they be sold since this was the only real financial gain to CTE, especially when it was undertaking to provide "move on" accommodation without any council contribution.
- Then on 13 September 2006 there was a crucial meeting of the Resource Committee. As evidenced in the council's sealing register the resolution it passed was used as authorisation for 16 of the leases the council entered with CTE. The report laid before the committee, in the name of the head of housing, had an entry for the first time, under "legal implications", i.e. "Housing Act 2004, Homelessness Act 2002". In fact the first mentioned Act had no relevance to the matter. The executive summary recorded the committee's earlier approval to negotiations, which had taken place
"regarding the formal agreements to acquire and manage accommodation for single, vulnerable homeless people over the next 25 years."
The report continued that several options had been identified, all of which would result in financial savings over the next 25 years, although the extent of the savings was dependent on the risk the council was prepared to undertake. The report then set out the council's benefit of having "100 percent nomination rights" to house single people with housing need. The committee was requested to increase the council loan by £50,000, which could be funded from a government grant, to £350,000. Four options were then identified. Option A was that the council would have a share in the increase in value of the properties, the loan would be repaid, but there would be no "move on" accommodation. Option 2 read as follows:
"Option 2 – Penwith District Council waive the uplift on the asset value of the properties acquired by PAS – this allows PAS/CTE to raise further funding and this would result in 50 bed spaces, made up of 25 for phase one and 25 bed spaces for "move on" accommodation. This is also based on a break clause after 10 years, meaning the council has the option to withdraw from the scheme after 10 years. The loan would be repaid."
Options 2 and 3 tracked option 2, but with break clauses at 15 and 20 years respectively, resulting in more bed spaces in "move on" accommodation.
- The report recommended adoption of option 2. Paragraph 3.8 explained that the "average rental cost" would be £120 per week, which compared favourably with the average cost of bed and breakfast rooms at £210 a week, so representing a reduction of £90 per week. The threshold for the housing benefit payable was £177.56 per week.
"[P]lease note that the rent payable for anyone in receipt of full benefits will attract 100% subsidy from Central Government as they will be leased …" (para 3.9).
In a section entitled "project background", the report said that PAS/CTE were making a 25 year commitment for the full term of the lease (para 4.4). The concluding paragraphs summarised the council's exposure as being fixed at £350,000, with no further capital required, the benefit to it of nomination rights for 50 bed spaces for a minimum of 25 years, and the creation of "move on" accommodation at no cost to it. The Resource Committee adopted option 2 and increased the council's commitment to £350,000.
- Mr Hampshire's evidence was that this £350,000 amount was drawn from the private sector renewal fund. Dispersal from the fund had to be in accordance with a published policy, which in Penwith's case was called "Homesafe". That provided for financial assistance to landlords, who would accommodate households nominated by Penwith. Mr Hampshire accepted that Mr Fowley had never been told that or asked to make written application as required under the Homesafe policy. In late 2007 the Resource Committee approved retrospective amendments to the Homesafe policy to justify the CTE allocation but these were never effective.
- The first five leases, phase 1 of the scheme, were sealed in escrow in January 2007 pending refurbishment of the properties after CTE purchased them. This gave CTE the assurance that it could complete the purchase of four of the properties (CTE had already purchased 29 Penare Road). The funding agreements were also executed in escrow. It was only in January 2007 that the council completed a financial check on CTE. The first three properties were ready in February 2007. Council officers checked the standard of refurbishment. On 12 February 2007 Mr Sleeman, the council's lawyer, confirmed that the council was happy with the financial checks of CTE. The following day Mr Ball confirmed that he wished to proceed and directed Mr Sleeman to release the grant. In his evidence Mr Sleeman confirmed that this was sufficient authority for him to act. The council transferred £102,000 to CTE on 16 February 2007 which enabled it to complete two of the purchases. The remaining two of the five properties in phase 1 of the scheme were completed in June.
- During 2007 Gila Trevena continued to identify properties for CTE to purchase. Anthony Ball was also involved. Ms Trevena's evidence was that CTE did not purchase properties without their approval. Eleven properties were purchased as part of Phase 2 of the project. As in Phase 1 a lease would be completed for a particular property and held in escrow. The council would release a portion of loan funding to CTE. Refurbishment was in accordance with specifications laid down by the council, covering matters such as fire safety, amenities, electrical inspection, lighting and signage. In some cases there was a need for internal restructuring. After the properties were refurbished, the council would inspect them. Once the properties passed their final inspection the council's lawyer, Mr Sleeman, would authorise release of a lease from escrow. The council would then move people into the property.
- All sixteen phase 1 and phase 2 properties are houses in multiple occupation. Fourteen of the sixteen are let on what are known as Type A leases, similar to those agreed with Restormel with a 25 year term, and a break clause at 10 years enabling the council to terminate. For some unknown reason one property is on a 27 year lease, with a 12 year break clause. The council is responsible for internal repairs, the landlord for the structure, exterior and service installations. Rent is subject to annual RPI increase. The main differences between the Penwith and Restormel leases are that the former contain more restrictive user and alienation clauses limiting use of the property for those in housing need, and an option for the council to renew for a further term of 25 years. Moreover, there is nothing in the Penwith leases about variation in the rent in the event of a change in housing benefit.
- Phase 3 of the CTE – Penwith relationship was housing for families. In all some 10 houses fell under that phase. It was considered by the Resource Committee on 1 August 2007. The committee had before it a report from Mr Hampshire. Under the heading "legal implications", the Housing Grants Construction and Regeneration Act 1996 was mentioned, even though this had been repealed in 2003. The request to committee was to use £750,000 from the second homes council tax fund. A table in the report compared the CTE option against the options of using a registered social landlord and a private landlord. The CTE option had the advantage of earlier delivery. It would involve a loan, "repayable in future should need cease". The properties would be eligible for a loan through the "Homesafe" programme. The council would have "100 percent nomination rights over a 25 year period", with an option to continue after 25 years. The rent would be in line with rent officer area reference rents, to allow for housing benefit entitlement. At £147-£198 per week, the rents might appear to be expensive, but they were in line with the current private market and were eligible for housing benefit.
- In accordance with the report's recommendation, the Resource Committee resolved to adopt the report's option 1. This was to acquire 20 properties, with a 25 year break clause, and to allocate the £750,000 referred to in the report. The following month, on 19 September 2007, the Resource Committee resolved that the £750,000 should be a grant, rather than a loan, so as to achieve a rent reduction for the next 25 years of between £900 and £1200 per annum. Mr Hampshire's evidence is that since the £750,000 was to be dispersed from the second homes council tax moneys, which was revenue funding, it was not subject to policy constraints such as "Homesafe". Counsel's opinion was sought in November as to whether a 25 year lease on these homes would constitute a secure tenancy.
- The 1 August 2007 resolution was used as authorisation for the council to enter leases with CTE in relation to 8 family homes as well as 2 other properties, 2 Treneere Street (used as a mother and baby unit) and 11 Morrab Road (converted into flats as part of a single homeless project). This is evidenced in the council's sealing register. The leases for the 8 family homes were dated between 18 December 2007 and 19 September 2008. The 2 Treneere Street lease was dated 25 August 2008, that for 11 Morrab Road, 16 March 2009. Mr Hampshire gave evidence that he took legal advice about the latter but was told that the council was bound to proceed. The rent for 2 Treneere Road was agreed at £37,440 a year, being a multiple of £120 per week. It had previously been estimated that the property as a whole would attract a rent of £600-700 per month. The rent for 11 Morrab Road, 3 flats, was agreed at £56,160 each year.
- The so-called Type B leases differ from those of the phase 1 and phase 2 properties. There is also a variation within Type B leases. In general the term is for 25 years, without a break clause after 10 years. The council has full repairing and insuring obligation. Assignment is permitted, subject to CTE's consent. The rent is subject to an annual increase at the rate of the retail price index plus 2 percent. If there is no increase, or indeed a decrease in the retail price increase, the rent still increases by two percent.
- By contrast with Restormel, where there is one agreement governing the funding allocation to CTE, in Penwith there is a separate funding agreement for each property, with different amounts. With loans, the loan is to be written off should the council exercise its break option. Otherwise a loan is repayable monthly over a period of fifteen years from a specified date in 2017. Where the money was advanced as a grant, CTE is under no obligation to repay. The exception is with the family Type B housing leases, where termination by CTE means it must repay the money in full when it receives vacant possession of the property, unless it reaches agreement with the council to provide suitable accommodation on a similar leasehold basis.
Review of the schemes
- Within Penwith, the arrangements with CTE/PAS led to concerns among councillors and officers. As a result a consultant to the council, Shaun Lee, conducted an internal, and to my mind cursory, review in 2007. The results were reported in an email of less than a page. The council's legal department confirmed to him that the contractual arrangements were correct and in place. Regarding the discrepancy between the £120 per week rent paid to CTE, and the £175 per week the council charged residents in the single person accommodation, i.e. £55, Mr Lee concluded that this was relatively straightforward because it was comparable to the management fee of £52 the council charged on private sector leases. It was based on the estimated cost of agent's fees, voids, bad debts, repairs and general housing services and its legality was not in doubt. Gila Trevena informed Mr Fowley of the outcome of Mr Lee's inquiry.
- In mid 2008 the council carried out a corporate risk assessment of its partnership with CTE and PAS. On 18 June 2008 Mr Hampshire reported on this to the Resource Committee. Appendix 2 noted that there was a financial risk to the council if housing benefit was not claimed, not paid or stopped, because the council would have to meet any shortfall.
- Then the Audit Commission became involved. Mr Rainey, a local resident, raised with it the issue of value for money and competitive evaluation with the Penwith/CTE scheme for single persons. In a letter to Mr Rainey on 18 September 2008, the District Auditor said that he was satisfied overall with the council's approach. However, he had recommended that it should be more explicit as to why it did not need to tender, should have referred to the relevant financial regulations, and should have explained these points to councillors. The revenue costs were met through housing benefit, and some of the contributions to CTE to assist with renovations were repayable should CTE dispose of the properties. The council had undertaken a full risk assessment of the scheme, which had been reported to members. As to reporting to members, the District Auditor added:
"I am satisfied that, other than the points raised above regarding compliance with financial regulations, reports to members have been transparent and sufficient enough for members to ask relevant questions of the scheme"
- In December 2008 Penwith's Social, Economic and Environmental Committee resolved to "remodel" the scheme. This followed the June risk assessment and had been foreshadowed in a report in September, which had highlighted concerns raised by local residents. Mr Hampshire's report for the December meeting of the committee outlined the successes of the scheme, as with the September report, but now proposed a reduction in the number of houses across the project. In particular, to address concerns of neighbours, there would be no more than one such property in any one road.
- In anticipation of the creation of a unitary local authority for the whole of Cornwall Jane Barlow, who was the officer taking the lead for housing, commissioned Anna Brooks to prepare a report on the relationship between CTE/PAS on the one hand and Restormel and Penwith on the other. Dated 20 February 2009, the report outlined that Bournemouth Borough Council had been advised that with this type of scheme there should be an early termination clause, with 3 months notice. It was not clear how sound the audit or legal advice had been at the time the Restormel and Penwith leases were entered. Surely, wrote Ms Brooks, one of the two councils' auditors or lawyers would have questioned the length of the leases?
- After the formation of the new Cornwall Council on 1 April 2009, its legal department proposed to CTE that negotiations be entered, in the light of housing benefit changes, with a view to the council purchasing the freehold reversions of the properties. However, discussions never eventuated. Eventually the council ceased paying rent on the properties. These proceedings for rent arrears and interest were initiated in October 2009. When the council lodged its defence it raised for the first time the enforceability of the leases. There were interlocutory proceedings. There is no need to revisit them, except in respect of criticisms made at one point of one of Cornwall's lawyers, Sancho Brett. In light of the much fuller information at the trial it is only fair to record that those criticisms of Mr Brett were misplaced.
VALIDITY IN PRIVATE LAW: MISTAKE
- All of the leases were validly executed and bear the seal of either Restormel or Penwith. Although there is no evidence from Restormel, copies of Penwith's sealing register show that all the leases were entered in it. In the case of the Penwith leases, they were signed by the head of legal services, whose responsibility was to execute documents on behalf of the council. Any document purporting to bear the signature of the proper officer of a council is deemed, until the contrary is proved, to have been duly given, made or issued by its authority: Local Government Act 1972, s. 234(2). Notwithstanding this Cornwall Council contends that the leases are vitiated in private law because of common mistake. The council also raises public law issues by way of a challenge to the leases, loans and grants.
- Since this is an action in private law, it seems appropriate to begin with a conventional private law defence, the council's contention that the leases are invalid for common mistake. Both parties are said to have entered them under the mistaken belief (1) that the CTE-council leases were not required to be administered through the councils' Housing Revenue Account, and (2) that the residents would be eligible for housing benefit to meet the rents they were liable to pay. The Housing Revenue Account ("HRA") point was put, alternatively, as an issue of ultra vires. In that regard it is dealt with later.
- There is no need to explore the twists and turns of the English doctrine of common mistake and its differing conceptual bases. For present purposes the conditions which must be present for a contract to be void on the grounds of common mistake were authoritatively stated by the Court of Appeal in Great Peace Shipping Ltd v Tsavrilis Salvage Ltd [2002] EWCA Civ 1407; [2003] QB 679. In giving the judgment of the court Lord Phillips MR said:
"[76] [T]he following elements must be present if common mistake is to avoid a contract. (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible."
After citing with approval a decision of the High Court of Australia, McRae v Commonwealth Disposals Commission (1951) 84 CLR 377, in particular the judgment of Dixon and Fullagar JJ, Lord Phillips MR explained that the doctrine of mistake "fills a gap in the contract where it transpires that it is impossible of performance without the fault of either party and the parties have not, expressly or by implication, dealt with their rights and obligations in that eventuality": [80]. Quoting Steyn J in Associated Japanese Bank (International) Ltd v Credit du Nord [1989] 1 WLR 255, at 268, Lord Phillips then held that the first task is to determine whether the contract itself provides who bears the risk of the relevant mistake. Later in the judgment Lord Phillips MR said that instances of common mistake were likely to be less frequent then instances of frustration: [85].
- In my view, there was no common assumption by the parties as to whether the leases were required to be administered through an HRA. CTE, for its part, made no assumption regarding the HRA. I accept the evidence of CTE's co-owner, Mr Fowley, that he had no knowledge or experience of it. Not surprisingly he was not concerned with what as is explained below would be a matter of accounting relevant only to the councils and their relationship with central government. Nor is it apparent that any mistake about the need for an HRA was made by either Penwith or Restormel. None of the reports to the councils' committees mention the HRA. If there was any mistake it was attributable to the fault of the councils, who ought to have known about HRA requirements. Common mistake cannot be relied on by Cornwall Council to avoid the contract.
- As for Mr Goudie QC's second prong to common mistake, the eligibility of the residents for housing benefit, it faces the practical difficulty that so far housing benefit seems to have been paid to all of them. Penwith's housing benefit officer, Sheila Ashby, gave evidence that central government had never questioned rent rebates subsidy payable in relation to the residents' rents. Moreover, housing benefit eligibility was a factor considered by the councils. In Restormel it featured in the report of 3 July 2006 and, however defective, there is a clause in the Restormel leases referring to the consequences of a change in housing benefit. While there is no counterpart in the Penwith leases, Ms Trevena raised the issue of changes in housing benefit subsidy in her report of 21 October 2005. Further, the leases between CTE and the councils were not predicated on the availability of housing benefit. As a matter of construction that was not a matter sufficiently vital to be capable of being the subject of a common mistake, avoiding the contracts between CTE and the councils. Even if any sub-tenant or licensee of the councils was not eligible for housing benefit, performance of the contractual obligations between CTE and the councils would not be rendered impossible. Cornwall Council is still capable of paying the rent, although it would have to find a different source of revenue to meet the obligation.
- A particular mistake is said to have arisen because of regulation 9(1) of the Housing Benefit Regulations 2006, 2006 SI No 213. Under it housing benefit should not be paid if the tenancy or agreement is not on a commercial basis or if a liability is created to take advantage of the housing benefit scheme. It is submitted that residents of the properties ought to be treated as if they were not liable to make payments to the councils either because their licences were not on a commercial basis or because they were created to take advantage of the housing benefit scheme. Mr Goudie QC suggested that CTE and the councils worked on the mistaken basis that the licenses were valid whereas, because of regulation 9, they were not.
- In R v Stratford-upon-Avon BC ex parte White (1998) 31 HLR 126, the Court of Appeal held that, to conclude that the liability to make payment had been created in order to take advantage of the housing benefit scheme, it was necessary to find that the dominant purpose of residents when they entered into the agreement was not to provide adequate accommodation for them or their family: per Otton LJ, at 135. There had to be some purposive conduct on the part of the person seeking benefit and the liability must have been devised or contrived for the purpose of taking advantage of the scheme: at 137. Peter Gibson LJ added that the words "created to take advantage of" meant "created to take advantage unfairly or improperly" and do not exclude from benefit the ordinary case of a tenancy agreed on proper terms in the knowledge that the tenant needed housing benefit to pay the rent: at 141. The mere fact that in order to pay the rent a person will have to obtain housing benefit cannot be adverse evidence of abuse under regulation 9(1): R v Solihull MBC ex parte Simpson (1993) 26 HLR 370, 379).
- Despite appearances, it is impossible to conclude on the evidence that the terms agreed between the councils and their licensees were uncommercial. The rents charged by the councils reflected the costs they had to incur for the lease of the properties from CTE. There is no evidence about whether these were market rents. The councils then added an additional amount on top of that for voids and administration. Both Mr Fowley and Ms Barlow gave evidence that lesser amounts could have been applied but the report by Mr Lee concluded that the £55 could be justified given what was charged in comparable situations. The residents would previously have been liable to pay larger sums for the bed and breakfast accommodation which the councils arranged. In the light of that it could be said to make commercial sense for both residents and councils to agree to the terms of the licenses. Moreover, it cannot be said on the councils' part that the dominant purpose was to take advantage of the housing benefit scheme unfairly and improperly. Even if ill-conceived, the scheme's dominant purpose was to discharge the council's statutory duty to the homeless and to meet government targets to reduce the use of temporary accommodation. The argument about mistake as a result of regulation 9(1) fails.
PUBLIC LAW CHALLENGES
- At the outset it is appropriate to consider some general principles. It is unattractive, to say the least, that a public body should raise its own unlawful actions to defend a claim made against it under an agreement it has entered. It has access to legal and financial advice, albeit that it may need to consult externally. For this reason, when a health authority sought to attack, as irrationally generous, a compromise agreement it had negotiated with its chief executive after dismissing her, the Court of Appeal held that it had a very steep hill to climb, and that the judge was wrong to think it had done so: Gibb v Maidstone & Tunbridge Wells NHS Trust [2010] EWCA Civ 678, [7], per Laws LJ, drawing on Simon Brown LJ's judgment in Newbold v Leicestershire County Council [1999] ICR 1182, [36]-[37] (the burden on a public authority in these circumstances is a "heavy one indeed").
- The obvious justification behind this approach with commercial contracting is to uphold bargains which a public body freely enters. Especially in these days of public bodies contracting-out services to small business and charities, it seems especially important to protect agreements which the latter make in good faith with them. The party best placed to guarantee lawful action and procedural propriety is the public body itself. In an ideal world the counterparty would check these matters but certainly with routine contracts it would frustrate expectations if public bodies could renege on their bargains by later alleging that somehow they failed to conform with their own rules and procedures. Further, there is a conceptual difficulty if in a private law action a public authority can raise the full panoply of public law flaws in its decision-making which are public, not private, law concepts. At a practical level it is unsatisfactory because in a public law action remedies can be tailored, whereas in private law the consequences of the bargain being unlawful are much starker, subject to any protection afforded by restitutionary principles: see C Harlow & R Rawlings, Law and Administration, 3rd ed, 2009, 370.
- On the other side of the coin is the important legal policy of ensuring that public bodies act lawfully and are called to account if they fail to do so. The corollary of this is said to be that public bodies themselves must be able to raise the legality of their actions in entering a contract: see ACL Davies, The Public Law of Government Contracts, 2006, 104-8. Allowing public bodies to do so also addresses the problem of asymmetry since other parties may be able to raise public law flaws about government contracts, see e.g. R v Legal Aid Board ex parte Donn & Co [1996] 3 All ER 1. The leading case is Credit Suisse v Allerdale BC [1996] QB 306, where the bank sought to recover on a guarantee given by a local authority of a company's borrowings when the latter became insolvent. The guarantee, and formation of the company, were part of a scheme to avoid controls on the local authority's borrowings. The local authority's defence was upheld, that it lacked statutory capacity to give the guarantee, which was consequently void and wholly unenforceable. In the course of his judgment, Neill LJ also held that decision to enter the scheme was void because it was not for a proper purpose – it was designed to circumvent the restrictions on the council's borrowings: at 334 G-H, 343 A-E. Peter Gibson LJ preferred to leave that issue open. Hobhouse LJ focused on the lack of statutory capacity, emphasising that the action on the guarantee was a private law action, in which only private law defences such as lack of capacity were applicable: at 350 F-G.
- The upshot is that a public authority can invoke its lack of capacity as a defence to an action under a contract. Success in raising other public law flaws in the exercise of its discretion to enter a contract attracts no bright line rule: Gibb v Tunbridge Wells NHS Trust, supra. It would seem to turn on factors such as the character of the flaw, whether it was easily remediable by the public authority, its visibility to the party with which the public authority has contracted and the nature of the subject matter. Thus bad faith or improper motive on the part of a public authority has long been regarded as vitiating a decision and that would extend to its contract making. If the flaw in contracting is a failure to act for, or take account of, a non-statutory purpose or consideration, however, that would militate against a remedy. In general a public authority making a contract in breach of internal rules and procedures should not be able to invoke these when they are not readily visible to the counterparty and the counterparty has acted in good faith. That accords with the well known common law rule for public companies established in Royal British Bank v Turquand (1855) 5 E & B 248. That had commercial convenience as one of its purposes, a consideration of importance in this context as well. As to subject matter, fundamental to a public body's accountability is the care it exercises in handling public moneys. In the context of local authorities this takes legal shape in the principle of their fiduciary duty to local taxpayers. As will be seen, a contract made in breach of that principle can be a contract made without statutory power.
Capacity
(a) The leases and Housing Revenue Account
- For Cornwall Council Mr Goudie QC contended that the councils lacked the capacity to enter into the leases and consequently they are void and unenforceable. He conceded that both councils had power to take the leases, under either section 17 of the Housing Act 1985 or section 120 of the Local Government Act 1972. However, he submitted that, as a result of the statutory provisions governing Housing Revenue Account, the leases, along with the rents under them, are unlawful.
- The Local Government and Housing act 1989 ("the 1989 act") sets out the statutory framework for a financial regime for local authority housing. It provides for the ring-fencing of the Housing Revenue Account, a system for central government subsidy and control of local authority borrowing to meet capital expenditure on social housing. Essentially, the 1989 structure remains in place, although some aspects were substantially altered by the Local Government Act 2003. Section 74 (1) of the 1989 Act imposes a duty upon a local housing authority to have a Housing Revenue Account ("an HRA"). The HRA must be kept in respect of sums falling to be credited or debited in respect of, inter alia, council houses provided under the Housing Act 1985. Section 75 then provides that Schedule 4 shall have effect with respect to the keeping of an HRA. Part II of Schedule 4 relates to debits to the HRA. These include (item 3) the rents which the authority is liable to pay for the year in respect of houses within the account. Part I of Schedule 4 relates to the credits to the HRA. These include (item 1) the income of the authority for the year from rents in respect of houses within the account. The account is "ring-fenced" and a local authority can only transfer sums to it from its general fund at the direction of the Secretary of State (item 9). Section 76 imposes a duty to prevent a debit balance across the HRA as a whole.
- Mr Goudie QC submitted that the power in section 17 of the Housing Act 1985 to acquire housing and charge rent is subject to the duties in sections 74-76 of the 1989 Act. In particular rent cannot lawfully be paid if no HRA is kept. Keeping an HRA as required by the 1989 is a condition precedent to the lawful exercise of the power in section 17 of the Housing Act 1985 to incur expenditure on the acquisition of houses, or to agree to do so, unless the Secretary of State has given a prior direction pursuant to section 74(3)(d) that section 74(1) shall not apply to the acquisition. The Housing Revenue (Exclusion of Leases) Direction 1997 excludes from the detailed statutory regime of the HRA leases taken by a local authority, but these must not exceed 10 years and be for the purpose of housing homeless households.
- Having disposed of their housing stock, neither Restormel nor Penwith had an HRA at any material time. Yet both purported to enter into 25 year leases, in one case a 27 year lease, without establishing an HRA or complying with the detailed statutory regime required to operate an HRA. Mr Goudie QC submitted that it was unlawful and a breach of statutory duty for the councils to have entered into these leases, required to be administered through an HRA, at rents which would result in a debit balance accruing on the HRA. The ten year break clause in some of the leases did not make them 10 year leases to fall within the 1977 exclusion. The two councils lacked the capacity to enter the leases.
- In my view the absence of an HRA did not render these leases invalid. Firstly, the HRA provisions do not operate at the level of individual transactions. It is not unlawful or a breach of statutory duty if individual items within the HRA, considered in isolation, have a debit value. Loss making assets can be balanced by profits from elsewhere in the account as long as overall the HRA does not show a debit balance. The conduct of the whole of a council's housing enterprise in a manner which results in a debit balance on its HRA would be unlawful. However, entry into any particular lease will not be unlawful, since no individual transaction can be regarded as placing the HRA in deficit.
- Moreover, the issue in this case is not the validity of the arrangements entered into between the councils and their own tenants, but the validity of the leases entered between the councils and CTE. Entry into those leases did not require an HRA. The subsequent decisions which the councils would take about the uses to which the houses would be put, and their accounting treatment, were a stage removed from the decision to enter into the leases. Mr Goudie QC sought to avoid this conclusion by reference to the user covenant in the CTE leases, which contemplates housing local authority tenants or licensees. In my view, however, the decision to take the CTE leases can not be invalidated by a consideration relevant only to a subsequent stage of the scheme. The fact that 25 year leases cannot be accounted for outside the HRA does not render performance of the contracts between CTE and Cornwall Council impossible, or different in quality to any degree. It may simply mean that Cornwall Council must operate an HRA, and if necessary charge no more than local area reference rents.
(b) The grants and loans
- A local authority has power to provide financial assistance for the provision of housing accommodation under the general consents given under section 25 of the Local Government Act 1988 where it is not the immediate landlord of the occupier: Local Government Act 1988, ss. 24(1)-(3). In other cases it had power to provide financial assistance in accordance with the Regulatory Reform (Housing Assistance)(England and Wales Order) 2002, 2002 SI No 1860. Under regulation 3 a local housing authority has powers to provide assistance to persons for the purpose of enabling them (a) to acquire living accommodation; (b) to adapt or improve living accommodation; or (c) to repair living accommodation, provided the conditions in regulation 4 have been satisfied. These conditions are that the local authority has adopted a policy, it has given public notice of the adoption of the policy, the policy document is available and the power is exercised in accordance with that policy.
- As far as Restormel is concerned, the Cabinet Committee, on 6 March 2006, authorised the provision of a grant for the purchase of the properties. There is no evidence from Cornwall Council about whether Restormel had adopted policies under regulation 3 and, if so, whether the £350,000 grant fell within it. That being the case the only course open to me is to assume that the grant was lawfully made.
- As mentioned earlier, Penwith adopted policies pursuant to regulation 3, for example the "Homesafe" policy. It was later appreciated that the initial £350,000 allocation was not possible under the Homesafe policy. Retrospective amendments were authorised but in effect not made. CTE did not qualify for Homesafe loans, even if the policy had been amended. It was not intended that CTE would accommodate households nominated by Penwith. The £350,000 advances to CTE were thus made without lawful authority. However, there is no evidence that any remaining Penwith disbursements were made without lawful authority.
The councils' fiduciary duties
- Bromley LBC v Greater London Council [1983] 1 AC 768 contains an authoritative statement of the principle of a council's fiduciary duties to council tax payers. That was the well-known case where the Greater London Council ("GLC") resolved to reduce fares on public transport by 25 percent. To fund London Transport for this purpose it passed a precept for the London boroughs to levy a supplementary rate. Lord Wilberforce said that the statutory provision conferring a power on the GLC to fund London Transport, although widely expressed, could not be read in isolation. The extent and manner in which it was to be exercised had to be controlled by the fact that the GLC owed duties to different classes, the duty to transport users on the one hand, and the duty of a fiduciary character to ratepayers on the other, both of which had to be fairly balanced: 814H-815C. In the course of his speech Lord Diplock said that the GLC's fiduciary duty included a duty not to expend moneys thriftlessly but to deploy its financial resources to best advantage, the relevant financial resources being the rate fund obtained by issuing precepts and the grants the GLC obtained from central government. The existence of the fiduciary duty cast light on the true construction of the legislation: 830A. Lord Scarman accepted that the House of Lords had "to construe the Act in the light of the principle that a local authority owes a fiduciary duty to its ratepayers": 837H.
- This binding authority means that relevant legislation conferring a power on a local authority must be read subject to the fiduciary duty owed to its taxpayers. A local authority cannot exercise a statutory power without regard to that duty. If it purports to do so it is acting beyond its statutory power. That does not mean that there is a legal duty imposed on a local authority to act thriftlessly, to use Lord Diplock's phrase since, as Lord Willberforce explained, the fiduciary duty to local taxpayers must be balanced with other duties. In the present case the statutory duty to the homeless is such a duty against which the fiduciary duty must be balanced. However, a local authority must at the least take into account the interests of its local taxpayers in having their funds preserved (as the House of Lords put it in Hazell v Hammersmith LBC [1992] 2 AC 1, 37H).
- There is no evidence as to market rents in Restormel and Penwith at the relevant times, although it was not in dispute at the hearing that rooms were available in Penwith at about £55 per week. As mentioned earlier the figure of £191 for Restormel and £177 for Penwith were set out as the caps for central government rent subsidy under Housing Benefit Circular HB/CTB S2/2006. There was no evidence about how these figures were fixed. They covered a range of accommodation. The local authorities themselves appear not to have been consulted on the figures but it seems likely that they were based on information from the rent officer service. Bed and breakfast rates in Cornwall for the homeless cost on average £200 a week. Because of their sometimes chaotic lifestyle and antisocial behaviour, the rents such persons would have to pay may have exceeded the market rates ordinarily payable for a room in a house in multiple occupation. Mr Fowley attributed that partly to the extra measures such as CCTV, security doors and sprinkler systems necessary when providing such accommodation. He also he explained that banks are more reluctant to fund housing in multiple occupation because of matters such as the potential damage, bad publicity, and blight on property.
- On this basis Mr Rodger QC for CTE submitted that there was no breach of duty in the councils' decision to pay rent of £120 per unit per week to CTE for all but the family properties in Penwith. First, the fact that landlords were prepared to enter into short term lettings of individual rooms to private individuals at £55 was of no assistance in determining the open market value of houses let for at least ten years on leases designed to provide accommodation for an unpopular group, and not capable of being terminated if CTE was unhappy about residents' conduct, or wished to sell. Secondly, no similar accommodation was available in Restormel or Penwith from any other source. Thirdly, and in Mr Rodger QC's submission most tellingly, the level of subsidy made available by central government to house vulnerable homeless people was £177 for Penwith and £191 for Restormel. That should be treated as a carefully considered assessment of the amount which, in each area, it would reasonably be expected to cost to provide accommodation for this group. The £120 CTE charged the councils represented 69 percent of the subsidy level in Penwith and 63 percent in Restormel. There was adequate room for the rent the councils charged residents to cover voids, repair costs and so on. In the case of Penwith, the sum of £55 selected by the council was very close to the £52 management fee which it added to its other private sector leasing agreements. That point was made by the external consultant, Shaun Lee.
- As to the bed and breakfast rates, Mr Rodger QC suggested that they were relevant in various ways. To ascertain market rental value of a property "a landlord is bound to be influenced by consideration of what he could get for letting the premises for some other use": Zubaida v Hargreaves [1995] 1 EGLR 127, per Hoffmann LJ, 128 G-L. The houses CTE leased to the councils could equally have been used to provide bed and breakfast accommodation to the same group. Indeed some had previously been operated as bed and breakfasts. Had CTE chosen to use the properties as bed and breakfasts it would not have been necessary to provide the CCTV and other equipment, and CTE would have retained complete flexibility over whom it chose to accommodate and for how long. A room in the same property used as a bed and breakfast would have yielded a much higher weekly rent than £120. Certainly, the rent rebate subsidy received for bed and breakfast accommodation was only 10 percent of the sum in excess of the threshold up to the cap. But even if no subsidy was paid in respect of the £120 per week in private sector leased accommodation there was likely to be a saving to the councils when compared to the costs for bed and breakfast accommodation. Finally, the local authorities were under a statutory duty to house the homeless. They were faced with a choice between bed and breakfast and the private sector leasing offered by CTE. The continued use of bed and breakfast was not an option since there was the target to cut its use. In any event, bed and breakfast accommodation was often unsatisfactory and certainly could not provide the support which vulnerable clients needed.
- In my view, the crucial point is that the councils never had regard to what was the market rent for the various properties leased from CTE. It seems that the £120 per unit per week figure for the houses in multiple occupation first emerged in discussions between Mr Fowley and Karen Waters, the head of corporate and housing services in Restormel. In Penwith Mr Fowley and Mr Ball arrived at the same figure. With both Restormel and Penwith the starting point for the £120 figure seems to have been the maximum sum which they could charge the residents of the properties and receive full rent rebate subsidy from central government, with some £55 deducted to cover management costs and voids. The £120 figure was agreed at an early stage with both councils, since Mr Fowley wanted to know what budget he was working to for the purposes of financing the schemes through his bank. But this £120 was not a market rent and no attempt was made to discover what a market rent for the properties would be. Rather, the rent was formulaic, fixed even before the properties were identified and purchased. The £120 figure was simply multiplied by the number of bed spaces to produce the weekly, and ultimately the yearly, rent for each property. With the eight family properties in Penwith, the rents were fixed having regard to local reference rents, with an annual increase of two percent plus the retail price-index. Again that was not an approach consistent with determining a market rent.
- As Mr Fowley explained, the market rents for all these properties had to factor in the nature of the residents, their sometimes chaotic and anti-social lifestyles. There was also the refurbishment the properties required, sometimes not insignificant. However, the parties never addressed what were the market rents for any of these properties. Given that market rents would vary from property to property, and over time from unit to unit within each property, a formulaic approach was incapable of producing market rents. The statutory power of the councils to acquire property had to be construed in the light of the principle that they owed a fiduciary duty to their council taxpayers. Compliance with their fiduciary duties demanded that the councils have regard to market rents on agreeing the rents payable to CTE for these properties. In failing to do so they acted outside their powers. The upshot is that the leases are void and of no effect.
The council's discretionary decision-making
- Cornwall council also attacks the leases and funding agreements on the classic judicial review grounds that in concluding them they were acting for improper purposes, that they had regard to irrelevant considerations, that they did not take into account relevant considerations, and that what they did was as a matter of law irrational. To an extent the factual bases under which these various heads were advanced substantially overlap. As I have explained the approach I must adopt in this context is that set out in Gibb v Maidstone & Tunbridge Wells NHS Trust [2010] EWCA Civ 678, elaborated in the manner suggested earlier. Because the flaws which Cornwall Council exposes are, as a matter of institutional succession, of its own making, the burden on it is especially heavy.
(a) Improper purpose/irrelevant considerations
- By the end of the hearing Mr Goudie QC had refined his case as regards these heads of review. The improper purposes were said to be to abuse of the housing benefit system by determining rents under the leases with CTE and under the agreements with residents by reference to housing benefit rates; to charge excessive rents to licensees; to pay excessive rents to CTE; to pay such rents to CTE notwithstanding the absence of any adjustment provision for housing benefit changes in the Penwith leases and a provision in the Restormel leases which is virtually worthless; and to pay such rents on the basis that they would contribute to financing move-on accommodation when there was no contractual obligation upon CTE to provide such accommodation and no provision for the repayment of rents if it were not provided. Mr Goudie QC also advanced each of these factors as irrelevant considerations.
- Most of these matters can be disposed of shortly. There is no evidence that the housing benefit system was being abused or that the rents charged to residents by the council were excessive. What residents paid was gauged by how rent rebate subsidy was paid and what the councils paid to CTE had no regard to market rates, but that is not the same thing as abuse or excessive charging. Clearly the leases with both councils should have had effective adjustment clauses, in the light of changes to the housing benefit system, but the councils' incompetence in that regard is not equivalent to their acting for an improper purpose or in the light of irrelevant considerations.
- That leaves the move on accommodation. As Mr Rodger QC conceded, the provision of move on accommodation, at no additional cost, was part of CTE's pitch to both councils. It was a pitch which featured prominently by in the crucial Penwith report of 13 September 2006. Foolishly, neither Restormel nor Penwith made the provision of move on accommodation a contractual commitment on CTE's part. There was not even an incentive in the leases or funding agreements with CTE to live up to the aspiration it set itself. Certainly no move on accommodation was ever provided although Mr Fowley justifies that because of a combination of factors such as changes in his bank funding, the council grants in some cases becoming loans and, at least with Penwith, the remodelling proposals in 2008.
- The absence of any contractual provision for move on accommodation is highly suggestive that it cannot be regarded as a purpose, certainly a significant purpose, behind the scheme. If it had been, the councils would have ensured a contractual commitment on CTE's part. As a matter of fact, while the prospect of move on accommodation was an attraction to the councils, the immediate purpose in Restormel was to address the crisis posed by the 5 Ocean hostels. In Penwith Ms Trevena sensibly proposed a pilot project, although that quickly snowballed and all suggestions of testing out the CTE scheme were soon abandoned. With a pilot, Penwith cannot have been counting on the move on accommodation as a significant element in its initial decision-making. The primary purpose of the leases taken by both councils was to enable them to discharge their statutory duties to provide accommodation and to meet central government targets. There was nothing improper in the councils anticipating that the immediate arrangements might develop in future. The arrangements were far removed from those in Credit Suisse v Allerdale BC [1997] QB 307, where the whole purpose of the scheme was to circumvent statutory controls on the council's borrowing powers.
(b) Failure to have regard to relevant considerations
- Mr Goudie QC submitted that both councils failed to take account of relevant considerations. At base these were the extent of their legal powers and the Housing Revenue Account requirements. More generally he submitted that the councils did not consider rental values, the necessity for flexibility given fluctuations in demand, and the massive risk if it became impossible to charge more than area reference rents. As well, there was an omission to explore alternative options, as was done in Kerrier, such as utilising registered social landlords, taking short leases of private properties at open market rates, or encouraging private landlords to seek financial assistance in return for the right of the councils to nominate tenants.
- To advance these submissions Mr Goudie QC proceeded with a forensic analysis of the reports submitted to councillors. Mr Goudie QC was especially scathing about Penwith's reports, which he described as woefully inadequate, indeed misleading, and as coming nowhere near to passing muster to see off a judicial review challenge. Members in his submission were ill served. The reports' inadequacies included that they did not address legal issues, they failed to consider rental values, they overlooked housing risks, they did not make clear that leases would be entered into, and they ignored other options.
- In my view there is no doubt that the Penwith reports fell short by a considerable distance of what councillors should expect from their officers. That is despite the District Auditor's more favourable view of the reports. Perhaps the most notable flaw was the constant references to "nomination rights" rather than to leases. The officers understand what was intended but at first glance the busy councillor may not have appreciated the point. The early reports, such as those to the Social, Economic and Environment Committee on 7 December 2005, and to the Resource Committee on 15 March 2006 and 14 June 2006, also identified PAS, not CTE, as the counterparty and stated that there were no legal implications of the proposed scheme. In the 14 June 2006 Resource Committee report the description "pilot" scheme was used. That concept could have been better defined. Then the reports to the Resource Committee on 1 August and 19 September 2007 with respect to the family project, phase 3, had the reference to the Housing Grants Construction and Regeneration Act 1996, repealed some years previously, and again did not refer to Penwith having leases with CTE under the scheme.
- However, the crucial authority relied on in entering into the type A leases was given by the Resource Committee on 13 September 2006 and that for the type B, family project, leases by the same committee on 1 August 2007. In my view a fair reading of the report before the Resource Committee on the first occasion, the basis of Penwith's action, was that authority was being sought for entry into leases. It reported on negotiations for formal agreements to acquire and manage accommodation and explained that PAS/CTE had already acquired 29 Penare Road and were undertaking work to prepare it for use by the council. The implication was therefore that CTE would acquire properties and the council would lease them. There was repetition of the notion of nomination rights, but use of the phrase "100% nomination rights" contains the implication that the exclusive use of the acquired property is by the council. The option adopted, option 2, was for a total of 50 bed spaces. Both paragraphs 3.8 and 3.9 referred to rental costs and that the properties were to be leased. Paragraph 4.4 referred to PAS/CTE being committed for the full term of the lease, 25 years. The committee's resolution to adopt option 2 must be construed in the light of the whole report, as well as the previous reports before the committee. It was apparent that that option was for the council to acquire the exclusive use of property under 25 year leases, with 10 year break clauses, under which the rent would be calculated at £120 per week per unit of accommodation.
- Similarly, the resolution on 1 August 2007, which was relied on as authorising the family project B type leases, was based on the report setting out the other options of using a registered social landlord or a private landlord. The options identified the number of properties, the term of 25 years and the rents, which were to be in line with area reference rents. In the context of the earlier reports and resolutions, the resolution of 1 August 2007 must be construed as giving authority for Penwith to take up to 20 leases of family houses, for terms of 25 years, at area reference rents.
- Moreover, in reaching their decisions Penwith and its officers seem to have taken all significant relevant matters into account. The alternative strategy of Penwith purchasing property of its own had been in Ms Trevena's original briefing report. Alternatives were set out in both the 13 September 2006 and 1 August 2007 reports. The financial status of CTE was checked, albeit at the eleventh hour, before the transactions were entered. The basis of the residents' occupation was explored. Counsel's opinion was taken on the status of the rights which would be available to the occupiers of the family houses. There is no evidence of what Penwith's lawyers did in terms of due diligence but when Shaun Lee carried out his inquiry in August 2007 he was satisfied that the charging structure and contractual arrangements were correct and lawful.
- As far as Restormel is concerned, delegated authority was given to the acting chief executive, head of financial services, and head of housing in consultation with the portfolio holder, Cllr Roy Taylor, to negotiate acceptable terms for the leases and grant. That delegation was made after Ms Waters' report covered all relevant matters, in particular the risk of housing benefit changes. That was ultimately dealt with by terms in the leases, albeit that the housing benefit clause was neutered in the drafting. The chief executive's report of 3 July 2006 certainly got the wrong end of the stick but Ms Waters' earlier report was attached and the £350,000 grant had already been authorised. At one point Mr Dyer, Restormel's lawyer, queried whether 25 years with 10 year break could be treated as short term and asked if there was any relevant statutes. In any event the power having been delegated it was not for the cabinet committee later to approve the terms of the leases.
(c) Irrationality
- Mr Goudie QC submitted that it was irrational for the councils to agree to pay housing benefit-driven, uncommercial rents, and to agree to do so for at least 10 years. Risk mitigation for changes in housing benefit was absent in Penwith, ultimately illusory in Restormel's case. There was no contractual right to move accommodation or a provision for adjustment in the rents if no move-on accommodation was provided. All these points of review were raised and have been addressed under the previous heads and I cannot see that dressing them up as irrationality advances the case.
(d) Machinery of authorisation
- It is said by reference to Penwith's constitution that the leases were authorised by the wrong council committee, namely the Resource Committee, when they should have been authorised by the Social, Economic and Environment Committee. That submission is entirely unmeritorious. CTE acted throughout in good faith. It had no access to Penwith's deliberations and was not aware of its constitution. It was entitled to assume that internal procedural and constitutional requirements were met. The sealing register shows that the resolutions of the Resource Committee were regularly relied on as giving authority to seal leases between Penwith and other organisations. Under Penwith's constitution the Resource Committee had power to authorise the acquisition of land for any of the purposes or services of the Council, albeit that the Social Economic and Environmental Committee had authority in relation the acquisition of land for housing purposes. The latter's specific power cannot be said to exclude the Resource Committee from authorising the taking of leases for housing purposes.
CONSEQUENCES
- Given my finding that Restormel and Penwith lacked the power to enter the leases because they had no regard to their fiduciary duty to council taxpayers in doing so, they have no effect and are a legal nullity. That means that they are incapable of being ratified: Co-operative Retail Services Ltd v Taff-Ely BC (1979) 39 P&CR 223, 239, (1981) 42 P&CR 1. There is no question of any estoppel arising to give effect to the leases (Rhyl UDC v Rhyl Amusements Ltd [1959] 1 WLR 465: R (Reprotech (Pebsham) Ltd) v East Sussex County Council [2002] UKHL 8, [2003] 1 WLR 348, [35]) nor any legitimate expectation of their being enforced as a private law right: Nadarajah v Secretary of Sate for the Home Department [2005] EWCA Civ 1363 [68]-[69], per Laws LJ.
- Since the leases are of no effect, the issue arises as to basis on which the councils have been in occupation of the properties. Ordinarily, when tenants enter under an agreement for a term which is void at law, they are liable as a tenant from year to year on all the terms of the agreement applicable to a yearly tenancy: Rhyl UDC v Rhyl Amusements Ltd [1959] 1 WLR 465, 477; Inntrepeneur Estates Ltd v Mason [1993] 2 EGLR 189, 196. However, no periodic tenancy can have arisen in this case because no lawful rents for the properties have ever been agreed. Cornwall Council therefore occupies each property under a tenancy at will, terminable at any time.
- The leases being of no effect, Cornwall Council has a restitutionary claim against CTE for repayment of the rents it has paid: Auckland Harbour Board v R [1924] AC 318. CTE accepts this but relies on the defence of change of position: Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, 578F -581B. Cornwall Council contends that the defence fails on the facts, since CTE was a party to the councils' wrongdoing, or at least turned a blind eye to the want of authority to enter the leases.
- In my view CTE has at all times acted in good faith. It was in no way negligent or foolish in the way it changed its position. 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. It borrowed funds from its bank, purchased 30 properties and invested in their refurbishment. The bank loans CTE undertook were associated with interest rate swaps and a personal guarantee from each of the directors. Almost all of the rents received were expended on servicing the loans. CTE has not paid a dividend. There is no reason to suppose that CTE would have otherwise bought or invested in these 30 properties. With respect to the monies advanced by Penwith, apparently the sums were largely exhausted in purchasing the properties and carrying out the works to render them suitable for their intended purpose. Again CTE changed its position without any fault on its part. It does not matter that on some occasions that change of position occurred before CTE received the moneys, since it did so in anticipation of their future payment: Dextra Bank and Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm) 193, PC, [38]. Nor is it necessary for CTE to demonstrate precisely where each council disbursement went: A Burrows, The Law of Restitution, 3rd ed, 2011, 535-6.
- The defence of change of position 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: Dextra Bank at [38]. Cornwall Council contends that the equitable outcome is that it should pay for its use and occupation of the properties, but at reasonable and lawful rates, not at the rates fixed under the leases, and that they be reimbursed the loans and grants. 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. 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 upshot of CTE's change of position defence puts paid to its contention that it is entitled to just satisfaction by way of an award of damages on the basis that it will have been denied the peaceful enjoyment of its possessions contrary to Article 1, Protocol 1, of the European Convention on Human Rights. The possession which it submitted has been interfered with is its unencumbered freehold interest in the properties. Mr Rodger QC submitted that the councils have had use of the houses since the grant of the leases on the understanding that they would remain for at least 10 years. If they now walk away from the 10 year commitment the whole basis on which they were originally allowed into possession would be disrupted. It will not be just CTE's future rights which will be disturbed but also that a significant part of the consideration for the council being allowed to enjoy exclusive possession since the commencement of the leases will have been taken away.
- In support of his submission that a legitimate expectation is a possession within the meaning of Article 1 of Protocol 1, Mr Rodger QC cited Stretch v United Kingdom (2003) 38 EHRR 196, [2004] LGR 401, when a leaseholder of a local authority had a legitimate expectation of the renewal of his lease pursuant to an option granted by a council which was ultra vires, being in breach of its powers. In Stretch, however, the leaseholder was effectively granted restitution of the consideration it had paid for the void option in the lease: see Rowland v Environment Agency [2005] Ch 1, [88]. In this case it is CTE to whom moneys have been paid under the ineffective transactions. Moreover, in Stretch the court held that it would be disproportionate for the leaseholder to have to bear the full financial consequences of the council's error. Thus it ordered payment of just satisfaction to compensate it for the breach. Here the claimant through its change of position defence will be able to retain the full value of the bargained for rental payments for the period the council has been in occupation. Mr Rodger QC submitted that damages should also include payment of CTE's costs of hedging arrangements it was required to enter into as a result of the loans it raised to purchase the properties. No authority was cited to me that this falls under the head of just satisfaction in ECHR jurisprudence.
CONCLUSION
- To address housing need in the first part of the last decade central government encouraged local authorities to consider as one solution leasing accommodation from private landlords so that the councils could then to sub-let or licence it to residents. Central government's guidance conditioned this advice on securing "cost-effective" arrangements with landlords. In any event local authorities were obliged by their fiduciary duty to local taxpayers to approach such arrangements with prudence. By failing to take into account market rents when they entered the leases with CTE Restormel and Penwith breached that duty. Cornwall Council, as successor to Restormel and Penwith, is entitled to invoke this vitiating feature of the leases. However, for the reasons given in the judgment, it cannot succeed in raising the other public law flaws which it contends infected the councils' decision-making when entering the leases with CTE. Under the case-law the consequence of breaching the fiduciary duty to local taxpayers is that the leases are of no effect. For different reasons so, too, are Penwith's arrangements with CTE to provide £350,000 of funding. However, as is explained in the judgment the restitutionary remedy which Cornwall Council has for repayment of the rent moneys and the £350,000 is defeated by CTE's change of position consequent on the leases and the Penwith funding arrangements being agreed.
