Local authority – Housing – Lease — Central government encouraging councils to lease accommodation from private landlords — Claimant private landlord purchasing properties and leasing to district councils to meet housing needs — Councils providing grants and loans to assist claimant in purchase and preparation of properties – Defendant council replacing district councils — Defendants ceasing to pay rent and demanding repayment of grants and loans — Whether claimant entitled to rent arrears – Whether defendants having restitutionary claim for rent paid – Claim dismissed
Central government had encouraged local authorities to lease accommodation from private landlords in order to sublet or license it to residents. Local authorities were under a fiduciary duty to council taxpayers to approach such arrangements with prudence.
In 2006 and 2007, the claimant company purchased 30 properties that it leased to two district councils. Those district councils were replaced by the defendant council in 2009. The district councils had used the properties for council housing. They provided grants and loans of around £1m to assist the claimant in its purchase and preparation of the properties, although the claimant’s expenditure of more than £8m was funded primarily by bank borrowing.
On their succession to the district councils, the defendants reviewed the schemes, ceased paying rent under the leases and demanded the repayment of the grants and loans. The claimant commenced proceedings for unpaid rent. The defendants opposed the claim, contending that the leases were flawed at the outset for both private and public law errors, which had infected the district councils’ decision to enter into them.
The defendants claimed that the leases were vitiated in private law because the parties had entered into them under the common mistaken belief that the leases were not required to be administered through the defendants’ housing revenue account (HRA); and that residents would be eligible for housing benefit. Furthermore, the district councils had failed to take account of market rents and lacked capacity to enter into the leases, which were accordingly void and unenforceable.
Held: The claim was dismissed.
(1) The parties had not made a common assumption as to whether the leases were required to be administered through an HRA. If a mistake had occurred, it was attributable to the district councils, which ought to have been aware of the HRA requirements. Further, the leases had not been predicated on the availability of housing benefit. As a matter of construction, that was not a matter that could be the subject of a common mistake. Even if a subtenant or licensee of the councils had not been eligible for housing benefit, performance of the contractual obligations between the claimant and the district councils would not be rendered impossible. The defendants could pay the rent, although they would have to find a different source of revenue to meet the obligation. Therefore, the defendants could not rely on a common mistake to avoid the contract: Great Peace Shipping Ltd v Tsavrilis Salvage (International) Ltd [2002] EWCA Civ 1407; [2003] 3 WLR 1617 considered.
(2) The legislation conferring a power on a local authority had to be read subject to the fiduciary duty owed to their taxpayers. The statutory duty to the homeless was a duty against which the fiduciary duty had to be balanced. However, a local authority had to take into account the interests of its taxpayers in having their funds preserved. The statutory power of the district 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 had regard to market rents on agreeing the rents payable to the claimant for the properties. In failing to do so, they had acted outside their powers so that the leases were void and could not be ratified: Bromley London Borough Council v Greater London Council [1983] 1 AC 768, Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1.
(3) Since the leases were legal nullities, the defendants had a restitutionary claim against the claimant for repayment of rents. However, the claimant had acted in good faith, having been invited by the district councils to assist them in addressing their housing responsibilities and to meet central government targets. The claimant had had no reason to doubt the decision making procedures behind the scenes at both councils. It had borrowed funds from its bank, purchased the properties and invested in their refurbishment. Almost all of the rents received were expended on servicing the loans. There was no reason to suppose that the claimant would have otherwise bought or invested in those properties. Consequently, the restitutionary remedy that the defendants had for repayment of the rent moneys was defeated by the claimant’s change of position.
Martin Rodger QC and Joseph Ollech (instructed by Charles Russell LLP, of Guildford) appeared for the claimant; James Goudie QC and Guy Adams (instructed by the legal department of Cornwall Council) appeared for the defendants.
Eileen O’Grady, barrister