Helen Randall: Court ruling over Haringey’s development vehicle offers clarity to councils

Politics killed the controversial Haringey Development Vehicle but a challenge through the courts failed. Helen Randall explains what the ruling means for councils hoping to use development vehicles for similar projects.

Rather surprisingly, despite the considerable political controversy surrounding Haringey’s decision to enter into a limited liability partnership (LLP) with Lendlease, the case does not change the law very much.

What it does do is helpfully confirm issues over which there had been some ambivalence, and which are very relevant to councils wanting to generate extra revenue to fund regeneration schemes, service delivery, or to invest in property.

Here are the big questions:

• Do councils have the powers to participate in LLPs?
• If they do, when can they do it?
• If profit is a by-product of a transaction, does this mean a council is acting “for a commercial purpose”?
• Is establishing a development vehicle like an LLP, a “best value arrangement” on which a council must consult and, if so, when and whom?
• When is the most appropriate time to carry out an equalities impact assessment?
• Do decisions on big investment projects have to be made by full council?
• If a council makes several decisions about a transaction which decision can be legally challenged?

 

Haringey Council decided to procure a private sector partner to enter into a joint venture and reinvest the profits generated from higher value land to cross subsidise regeneration and housing estate renewal.

This was challenged by a local resident and former local government officer on the grounds that: Haringey did not have the power to enter into an LLP because it was acting for a “commercial purpose” and section 4 of the Localism Act 2011 requires councils to set up a company if acting for a commercial purpose; the council had breached its legal duty to consult because the scheme was a “best value” arrangement; the council had not complied properly with its public sector equality duty, under section 149 of the Equality Act 2010, because it had not carried out an equality impact assessment; and the full council, and not the cabinet, should have taken the decision because it involved matters of budget and borrowing limits.

LLP

The Judge, Mr Justice Ouseley, a former town planning barrister (fortunately very familiar with local authority regeneration) made a good, and nuanced, decision.

Local authorities do have the power to enter LLPs if they are not acting for a commercial purpose. The fact that the council’s private sector partner, Lendlease, had a commercial purpose was irrelevant.

The council had a strong paper trail in its reports demonstrating its primary motive was regeneration, not acting for a commercial purpose, which meant it was within its general competence power under section 1 of the Localism Act.

The legality that LLPs by definition are entered into “with a view to profit” did not undermine this.

Councils have a common law duty to obtain value for money, be financially prudent and a statutory duty, under section 123 of the Local Government Act 1972, to achieve the best consideration reasonably obtainable when disposing of land interests, but this is not a “commercial purpose”.

In Haringey’s case, their profit share was not the main purpose and, in any event, the profits were to be ploughed back into physical and social regeneration.

If, however, an authority wants to act as a commercial property investor and its primary motive is making profit (for example, buying a Marks & Spencer store, as Babergh and Mid Suffolk’s property investment company CIFCO has done), then this would be a commercial purpose and a company must be used as required under section 4. Using an LLP for a commercial purpose is outside a council’s powers.

When a council is at the early, formative stage of deciding strategically whether to establish an LLP, or a company, which it hopes will save money or generate revenue, then it can be regarded as a “best value arrangement” to achieve economy, efficiency and effectiveness. Because the authority is exercising a “function”, the authority should consult interested parties, including local residents. However, the best value consultation duty does not require an authority to consult when it is choosing to appoint its private sector investment partner.

Equality

With regard to the public sector equality duty, Haringey had referred at every stage of the decision-making process to the public sector equality duty, and the regeneration where it was anticipated to be beneficial for certain people with protected characteristics. The Judge held that it was perfectly reasonable for the council to wait until specific schemes were proposed before a full equalities impact assessment was carried out.

The regeneration scheme, although it involved financial plans and strategies for a major investment by the council, was not part of the authority’s budget setting process. Hence, it was appropriate that it had been decided by cabinet, not full council.

In the end, the court decided that the claimants had brought their challenge too late. Haringey’s decisions and proposals for the local development had been in the public domain and consulted upon for several months before the final decision to appoint Lendlease as the council’s regeneration partner was made, so the judicial review application was not allowed.

Haringey had a good idea with sound legal and financial means to implement it, but in the end politics got in the way.

The court decision is helpful both for local authorities who want to pursue social objectives, and those who want to pursue solely commercial objectives, but underlines the importance of getting the legal fundamentals right if you want to prevent a challenge succeeding.

Helen Randall is a partner, Trowers & Hamlins LLP.
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