Council cannot escape leases on grounds of own breaches of fiduciary duty: Court of Appeal

The Court of Appeal has overturned a High Court ruling that would have allowed a unitary council to extricate itself from expensive leases by invoking a lack of capacity on the part of two of its predecessor authorities.

In Charles Terence Estates Ltd v Cornwall Council [2012] EWCA Civ 1439, the Court of Appeal unanimously ruled that Cornwall could not rely on claimed breaches of fiduciary duty by Penwith District Council and Restormel Borough Council to get out of leases they had entered into.

The judgment is said to have considerable significance for public authorities across all areas of public law.

Cornwall, which anticipated that the High Court ruling if upheld would have saved at least £4.5m in public funds, expressed disappointment at the Court of Appeal's decision and said it was considering taking the case to the Supreme Court.

A spokeswoman for the local authority said: “This saving would have benefited the taxpayer in Cornwall whilst allowing the council to secure better and more appropriate housing. Unfortunately, the result of this judgment is that the leases are valid and the council is still bound by their terms and the rents under them.

“In the absence of any appeal, the council will carefully consider how the properties should be used having regard to all relevant matters including housing need, the impact of any use on local communities and the ongoing financial burden.”

The background to the case was that Charles Terence Estates (CTE), a private company, bought properties to house vulnerable adults in 2006 and 2007. Restormel and Penwith provided grants and loans to help CTE make the acquisitions and prepare the accommodation. However, the purchases were principally funded by £8m in bank borrowing.

CTE entered into 30 leases – most lasting 25 years – with the councils, with the rents based upon set rates. But when, on becoming a unitary authority, Cornwall took over responsibility in April 2009 from Restormel and Penwith, it reviewed the schemes and became concerned over the rents payable.

Cornwall stopped paying the rents in July 2010 and demanded repayment of the grants and loans. CTE began legal proceedings for the outstanding amounts.

In the High Court Mr Justice Cranston ruled that Restormel and Penwith had breached their fiduciary duty to taxpayers by failing to take into account market rents on entering into the leases with CTE.

The leases therefore had no effect and were a legal nullity, the judge said. Mr Justice Cranston said Cornwall occupied each property under a tenancy at will, terminable at any time.

The judge concluded that Cornwall had a restitutionary claim for repayment of the rents it paid, but that CTE had a defence of change of position.

Cranston J also found that it was proper that the level of rent payable in respect of Cornwall’s occupation should be the amount that was agreed. As for the loans, CTE would have to repay them in accordance with the terms and conditions of the loan agreements.

CTE appealed on the issue of whether Mr Justice Cranston was correct to find breaches of fiduciary duty, and whether any such breaches should have the consequences that he found.

The Court of Appeal has now ruled in CTE’s favour. On the issue of failure to have regard to market rents, Lord Justice Maurice Kay said: “Transposed to the private corporate sector, I doubt that that would be characterised as a breach of a company director’s fiduciary duties – more a matter of his duty of skill and care.”

He added that Cranston J’s findings elsewhere in his judgment – when rejecting Cornwall’s case on improper purpose – “tend to negate breaches of fiduciary duty in the classic sense”.

Lord Justice Maurice Kay said: “These are important findings, all the more so in the complete absence of any element of private profit, conflict of interest or off-piste political judgment.”

The Court of Appeal judge said: “When one compares this case with the leading authorities in which the breach of fiduciary duty approach was propounded and in which it succeeded, it seems to me that the present facts, taken at their highest, establish significantly less culpability.

“There is no evidence of ‘eccentric principles’ or of ‘flagrant violation’ of the kind found in Roberts v Hapwood, or of ‘the making of a gift or present’ to CTE, to use the language of Prescott, or doubling of the ratepayers’ burden as had occurred in the Bromley case. Nor was there the self-evident element of ultra vires that underlay Credit Suisse.”

Lord Justice Maurice Kay continued: “In the present case, the attempt to present it as one of ‘pure’ ultra vires depends upon reading the words ‘at a reasonable price’ into section 17(1)(b) of the Housing Act 1985. There are two reasons for rejecting that approach. The first is that, in the absence of expert evidence, there is no basis for concluding that the rents were not ‘a reasonable price’.

“The second reason is more fundamental. In my judgment, it will rarely be appropriate to read into a statutory power a limitation defined by something such as a ‘reasonable price’. To do so would be to invite judicialisation of the limits of legal capacity in the sense that capacity might be ascertainable only upon a judicial determination of the reasonableness of a price.”

Lord Justice Maurice Kay said that the case – and that of Gibb v Maidstone & Tunbridge NHS Trust – illustrated the need for a court not to justify intervention by adopting an expansive approach to vires and fiduciary duty.

He added that the evidence “falls well short of a lack of vires by reason of unreasonableness of the rent to be paid to CTE” and the judge was wrong to find that the leases were void because of a failure to have regard to market rents.

“There was neither a legal nor an evidential basis for such conclusion in the circumstances of this case,” Lord Justice Maurice Kay said.

The overarching submission on behalf of CTE was that, as a result of the arrangements that were made, the outcome was the provision of an improved service to a vulnerable group at reduced cost to the local authorities.

“I do not think that this can be gainsaid,” Lord Justice Maurice Kay said. “Moreover, not only did Cornwall come to court without expert evidence to support its case; it chose not to call as witnesses a number of employees and former employees, some of whom had made statements. These are unpromising circumstances in which to attempt to substantiate a breach of one's own fiduciary duty.”

The Court of Appeal judge went on to consider, if the High Court had been correct in finding breaches, what the consequences would have been. Lord Justice Maurice Kay said the supposed breaches would not sustain a defence to CTE’s claim.

Both Lord Justice Maurice Kay and Lord Justice Etherton suggested that – in the context of ultra vires in public law as a defence to a private law claim – they preferred the approach of Hobhouse LJ to that of Neill LJ in the Credit Suisse case.

Lord Justice Maurice Kay said: “I do not think that the assimilation of the various types of public law error in Anisminic had the effect of imposing a rule which extends inexorably to public law error as a defence to a private law claim.

“There is no logical reason why it should and this case demonstrates why it should not. It would be highly undesirable if, years after time expired for the making of a prompt public law challenge by a person with a sufficient interest, the fact of an historic breach of fiduciary duty should inevitably lead to the defeat of a private law claim brought by a party who acted throughout in good faith.”

Lord Justice Maurice Kay said: “Credit Suisse was a clear case of lack of legal capacity. Here, however, Penwith and Restormel were doing what they were empowered to do by section 17(1)(b) in order to meet their onerous statutory duties.

“I would respectfully adopt the words of Hobhouse LJ: ‘breach of duty, fiduciary or otherwise, may be a defence depending on the circumstances’. I am satisfied that the breaches in this case (if there were any) simply did not go to legal capacity.”

The judge acknowledged that at some point, it would be desirable for there to be judicial consideration of the territory between the extremes of Credit Suisse and the present case. But he said he had come to the conclusion that the Court of Appeal had not heard sufficient argument to enable it to articulate more comprehensive guidance.

Philip Hoult

See also: More than you bargained for? Christopher Knight explains the significance of the Court of Appeal's ruling in CTE.