GATELEY LEGAL: SCHOOL’S OUT – A REAL WORLD LESSON IN PUBLIC SECTOR LEASING

Legal News | 23/07/20

A ‘real-world’ lesson in public sector leasing.

The beauty of the leasing industry is that almost anything can be leased to almost anyone (subject to satisfactory credit checks).

Need to finance a helicopter, sixteen dumbbells, a Volkswagen, and a deep fat fryer? Sure. There’s a finance house out there willing to talk numbers. Sole trader/limited company/partnership/plc? Not a problem. The leasing industry operates across the regulated and unregulated sectors and welcomes all. Well, almost.

The Public Sector

Whilst entering into finance agreements with individuals or privately-owned entities is mostly straightforward, leasing to public bodies, and particularly schools, can be a logistical and procedural minefield.

The recent case of School Facility Management Limited and others -v- Governing Body of Christ The King College and another [2020] EWHC 1477 (Comm) serves as a stark reminder that one cannot be too careful when contracting with public bodies.

The Case

A whistle-stop summary of this complicated case, doing no justice at all to the nuances therein, is as follows:
The College, authorised by the Council, entered into a lease for a modular Sixth Form Building. The lease was described by all parties as an operating lease. The lease was assigned twice before the College defaulted on payment terms, entitling the assignee to terminate and claim liquidated damages. The claimants, various funders, issued proceedings against the College and the Council. The College then claimed it had no power to enter into the lease: it was purportedly Ultra Vires (beyond the powers of) the College.
I’ll refer to each of the claimants in this case together as ‘the Claimants’ and the defendants as variously ‘the College’ and ‘the Council’.

Ultra Vires (Beyond the Powers)

Privately owned and publicly traded companies’ ability to borrow money, or enter into finance agreements, is governed by each company’s constitutional documents and based on some statutory presumptions.

However, where public bodies are involved, a whole myriad of statutory and regulatory requirements exist which must be complied with before an agreement is valid. In the case of Local Authority maintained schools, the School Standards Framework Act 1998 (the SSFA) and Education Act 2002 (the EA) are the statutory starting point.

The provisions of the SSFA and EA are too convoluted and long-winded to recite here. Critically, though, the EA provides that maintained schools have the power to ‘borrow’ where that power is exercised with the written consent of the Secretary of State (or National Assembly, in Wales).

The College’s defence, claiming it had acted Ultra Vires, therefore hinged upon the lease being a finance lease. That is because a finance lease, and not an operating lease, is considered ‘borrowing’ for the purposes of the EA.

Aha, you say, but you’ve already said that the lease was an operating lease! Not quite. The lease said it was an operating lease but, applying guidelines set out in International Accounting Standard (IAS) 17, the judge found that it was in fact a finance lease. It was also, therefore, ‘borrowing’.

The College, in this case, did not seek the written consent of the Secretary of State before entering into the lease agreement. Consequently, the College did not have authority to enter into the lease and it was void (i.e. the lease was treated as though it never existed).

Alternative Ultra Vires Defences

It’s worth noting that the College and Council also contended that the lease was Ultra Vires on the basis that:
1. If the College had the statutory power to enter into the agreement, because it was considered an operating lease, it couldn’t in this case because it had sought to avoid the restrictions of the EA by entering into the lease rather than borrowing.
2. The College’s decision to agree the lease was unreasonable because it had given no or improper consideration to the likelihood of having to pay, and the consequences of such payments. This is known as the Wednesbury Unreasonableness question.
Although they weren’t relevant, because the agreement was void, the Court found that at least the Wednesbury Unreasonableness defence would also succeed. The College, in short, was broke and should have known that it wouldn’t be able to keep up payments due under the expensive lease.

Misrepresentation and Negligent Misstatement

Before finalising the lease, the Claimants had sought (and obtained) written assurances from the College and the Council that the lease didn’t fall foul of the EA or other relevant statutory and regulatory requirements.

If the lease was void, then, the Claimants sought to recover their losses from the College and/or the Council for breach of the Misrepresentation Act 1967 and under the tort of negligent misstatement.

Misrepresentation

Unfortunately for the Claimants, because the agreement was void it followed that the written statements of the College and Council couldn’t be relied upon for misrepresentation.

Negligent Misstatement

The Claimants (particularly the initial funder) were significantly more knowledgeable of operating and finance leases than the school (which is why they asked for the written assurance). Negligent misstatement requires a claimant to rely on another’s expertise when entering into a contract and, in this case, the balance of expertise meant that a negligent misstatement case simply couldn’t succeed.

Unjust Enrichment

As a last-ditch effort, the Claimants sought damages for unjust enrichment against the College for their use of the asset after the lease’s termination. Whilst the Court found that only the first assignee of the agreement, who owned the building when the lease began – was able to claim in unjust enrichment, it did award damages for unjust enrichment but at a significantly reduced rate.

Conclusion

Particularly in times of economic downturn, public bodies may well be keen to utilise finance houses to lessen their financial burdens. However, I urge caution. Unless you’re an expert in dealing with public bodies, know the statutory and regulatory requirements inside-out, and can be completely certain that the public body is acting within its powers, the risk inevitably outweighs the reward.

As this recent case demonstrates, if it goes wrong it goes horribly wrong.

Edmund Laycock
Solicitor
Gateley Legal