At a time when pressure to deliver housing continues to increase, the ruling in Peters v London Borough of Haringey will be welcomed by a wide range of housing stakeholders.
The judgement represents the first substantive analysis of how the term "commercial purpose" should be interpreted when a local authority is exercising the general power of competence pursuant to the Localism Act 2011 (the Act) – in this case concerning the decision to enter a joint venture with Lendlease in the form of a Limited Liability Partnership (LLP) as part of a major housing-led regeneration initiative.
LLPs – analysis of local authority powers
Partnerships are increasingly used by the private and public sector to escalate housing delivery – usually because of a clear symbiosis of interests. Many public authorities (e.g. local authorities, combined authorities, Homes England, NHS trusts) have robust housing objectives and access to land or funding but lack development resource. Housing associations and private developers are well placed to fill this resource and the potential for capital and/or revenue generation (in the form of private sales or rental income) is welcomed by both partners.
When considering a partnership vehicle, an LLP can be attractive as it provides governance flexibility and tax transparency – the latter is particularly appealing to charitable housing associations and local authorities (who do not pay corporation tax). Until this judgement, however, there was considerable uncertainty as to how to interpret the prohibition in Section 4(2) of the Act on using LLPs where the authority (i) is relying on its general power of competence under Section 1 of the Act; and (ii) is doing so for a "commercial purpose".
Mr Justice Ouseley determined that Haringey's purpose in entering into the LLP was non- commercial and the authority was therefore not in breach of Section 4(2) of the Act. His analysis focused on the following principles:
- It was necessary to identify the authority's dominant purpose – in Haringey's case this was to regenerate deprived areas, develop new and improved housing and deliver other social and economic benefits in the borough, all of which were non-commercial objectives.
- Although it was hoped that the LLP would make a profit, this was ancillary to the dominant purpose and, in any event, such profits would be used to further the Council's wider function-related objectives. Justice Ouseley contrasted Haringey's purposes with those of Lendlease, the LLP itself or a property development company – three clearly profit-driven entities.
- The Council could act on a commercial basis when entering into the LLP but this would not necessarily mean that it had a commercial purpose – i.e. the fact that a commercial return may be achieved did not automatically mean that the Council was acting for a commercial purpose.
Who is impacted by the Haringey case?
This decision is clearly significant to local authorities – those who so far eschewed joint venture arrangements may wish to consider direct participation in an LLP structure, either with the private sector or with another public authority, on the basis of purposes which are predominantly non-commercial.
Certain combined authorities have the same powers as those set out in Section 1 and 4 of the Act, therefore the Haringey analysis of "commercial purpose" will be relevant – particularly where these are in the early phases of housing development, the opportunity to partner with an established developer or housing association through an LLP could accelerate delivery.
Whilst there has been an increased appetite for joint venture arrangements in the sector generally, private sector developers and housing associations may wish to use the judgement as a catalyst for discussions with public authorities about new housing delivery partnerships.
Future considerations
We set out below additional principles that follow on from the Haringey judgement – these should be considered by both public authorities and their partners when establishing an LLP:
- Where authorities are relying on the analysis of commercial purpose set out in the Haringey case they must be careful to document their decision-making process consistently and at an early stage – the audit trail should reflect the primary / ancillary purpose in a way which demonstrates the dominant non-commercial nature of the Council's purposes.
- If the authority's purpose is primarily commercial, e.g. establishing a vehicle for revenue generation or trading activities, it must act through a company. This would not preclude a local authority participating in an LLP indirectly, i.e. through a wholly-owned subsidiary company.
- A commercial purpose should be distinguished from the "commercial character" referred to in the definition of a "body governed by public law" in the Public Contract Regulations 2015 (the Regulations) – the fact that an authority does not have a commercial purpose in entering into the LLP, will not be determinative of whether that joint venture (whether an LLP or otherwise) is subject to the Regulations.
What's next?
For the time being, the judgement in Haringey has provided much needed clarity to the question of when a public authority has the power to directly participate in an LLP. However, residents opposed to the Haringey LLP have expressed an intention to appeal the decision therefore, provided they are given leave, this may not be the final word in the matter. In the meantime, if public or private partners have been considering the use of an LLP, now is the time to take action.
