Local authorities are statutory corporations and must act within their legislative powers, failing which their contracts will be void. Charles Terence Estates Ltd v
The company bought and refurbished 30 properties and let them on long leases to district councils to house the homeless. The councils made grants and loans to the company. However, most of the company’s costs were funded by borrowings, backed by personal guarantees from its directors.
The councils were reorganised and replaced by a new unitary local authority, which inherited their contractual rights and responsibilities. The authority stopped paying rent to the company. It claimed that the unlawful actions of its predecessors rendered the leases void and demanded the immediate repayment of the sums that had been paid to the company.
The judgment began promisingly. The court agreed that it was unattractive for public bodies with access to legal and financial advice to rely on their own unlawful actions to defend claims under agreements that were freely made. It also accepted that it would frustrate expectations if public bodies could renege on their bargains by claiming that they had failed to conform with their own internal rules and procedures – which are not readily visible to counterparties. However, public bodies must act lawfully. Consequently, they are entitled to invoke their lack of capacity to defend themselves.
The local authority argued that its predecessors had acted irrationally. They had taken irrelevant considerations into account, ignored relevant considerations and had consulted, and obtained approval from, the wrong committees. They also claimed that the leases had been made for improper purposes. The judge rejected these arguments, but agreed that local authorities owe a fiduciary duty to local taxpayers and must exercise their statutory powers with this in mind.
The councils had agreed arbitrary rents for the properties, fixed by reference to housing benefit rates before the properties were identified and purchased, without attempting to discover what their open market rental values might be. This meant that they had acted outside their powers and that the leases were void – which meant that they could not be ratified.
The judge decided that the local authority occupied the properties under tenancies at will, which were terminable at any time. However, the company was entitled to charge the rates fixed by the leases for the previous use of the accommodation and to repay the loans in accordance with the terms and conditions of the relevant loan agreements.
The Local Government (Contracts) Act 1997 was enacted to provide reassurance to contractors entering into PFI transactions. It enables local authorities to certify certain contracts to render them immune from challenge in private law proceedings. Contracting with a local authority will be less risky in these limited situations. Care is required when contracting with local authorities in all other cases.
Allyson Colby is a property law consultant
