College bosses signed an agreement promising Alumno Miller Telford Ltd an annual income of around £500,000 a year as part of the deal to fund the accommodation block on West Granton Road.
But the builders took court action after new members of the college board sought to have the agreement annulled.
Board members were left feeling “extremely nervous” that the clause would leave the college exposed to a massive yearly pay-out if not enough rent was collected from students living at the site.
The agreement pledged that the college would fill 99 of the 125 rooms at the facility, opened last September, or hand over any shortfall to the builders behind the project.
Although the deal could leave the college facing a maximum pay-out of £500,000 annually over 15 years, it is understood that any actual exposure would be far lower.
At the Court of Session, Lord Glennie ruled in favour of Alumno Miller Telford Ltd following a recent hearing, throwing out arguments from college lawyers that the agreement was “not binding and enforceable”.
Lord Glennie rejected claims that the agreement did not properly specify the rooms which had to be rented out, and that rules prevented the college from being exposed to liabilities greater than four per cent of its annual income.
But Jim Donaldson, the chairman of the college board, said that a further legal challenge over the deal by Telford College remained a possibility.
He said: “This agreement between Alumno Miller Telford Ltd and the college was made in 2009 when many of the current board were not in place. It concerns an occupancy agreement which began in September 2010, when the accommodation was opened, where the college agreed to fill 99 of the 125 rooms or make up the shortfall.
“This agreement left the new board feeling extremely nervous as the college could be left to pay up the difference so we decided to contest it for a number of reasons.
“There was no indication in the agreement as to which rooms the guarantees referred to. We also argued that it would break rules on the college being left to pay in excess of four per cent of its annual income.
“Lord Glennie has made his ruling and we’ve lost this particular part. As a board, we now have to have another look at it and take advice from counsel before deciding on our next step. It remains ongoing.”
The student accommodation was built on a vacant site near Telford College and was primarily designed to offer rooms to international students.
It was intended to cater for a growing student population at Telford, which is the city’s largest further education college.
Alumno Miller Telford Ltd took out a £4.5m loan to pay for the facilities, and let the rooms directly to students at the college. A spokesman for McGrigors, the solicitors acting for Alumno Miller Telford Ltd, said he could not comment on an ongoing court case.