Social Housing Speed Read – Lawfulness of using LLPs for local authority joint ventures
13th May, 2019
In this week's Speed Read we look at the case of Peters v Haringey London Borough Council in which the High Court considered whether Haringey LBC (the Council) had acted lawfully in using a limited liability partnership (LLP) when entering into a joint venture with a private limited company.
The Council entered into an LLP, the Haringey Development Vehicle (the HDV), as a joint venture with a private sector partner in order to develop the Council’s land for its better use. The partner would bring finance, experience and expertise to the joint venture and assist the Council in achieving its aims in the provision of housing, affordable housing and employment, as well as taking responsibility for a number of the Council’s functions.
In order to enter into the joint venture, the Council invoked the general power of competence contained in section 1 of the Localism Act 2011 (the Act) which gives local authorities the power to do anything that individuals generally may do. The Council’s general power under s1 of the Act is qualified by s4 of the Act which mandates that where a local authority exercises the general power for a commercial purpose, it must do so by way of a company limited by shares, which is a different type of corporate vehicle to an LLP.
The claimant, Mr Peters, a resident in Haringey, brought judicial review proceedings against the Council, arguing that the Council had lacked the ability to enter into the HDV in the form of an LLP.
Mr Peters argued that the Council, in setting up and becoming a member of the LLP in order to carry out the joint venture, was acting for a commercial purpose and so had acted ultra vires in choosing an LLP instead of a limited company as its corporate vehicle.
The Council contended that s4 of the Act did not apply as it was not acting for a commercial purpose, but was carrying out its regular statutory duties; any commercial purpose which this involved, including any profit generated, was merely ancillary.
Further challenges raised by Mr Peters which included a failure by the Council to properly consult under s3 of the Local Government Act 1999, a breach of the public sector equality duty, and acting through cabinet alone when the relevant decisions should have been taken through full council. The first two issues were deemed to have been made out of time, while the latter was rejected by the court.
The court rejected Mr Peters’ arguments, holding that the Council engaging in commercial arrangements and acting in a commercial manner did not automatically mean that the Council was acting for commercial purposes, even if the commercial activity was a profitable one.
In the opinion of the court, the obligation under s4 of the Act required a consideration of the overall purpose of the Council’s actions. If the commercial purpose is simply incidental or ancillary to the fundamental purpose, then it cannot be said to be “for a commercial purpose” and so does not fall under s4.
In this case, it was clear to the court that the reason for the Council establishing the HDV as an LLP was to fulfil its statutory obligations and so was not for a commercial purpose. As a result, the Council had not acted ultra vires in using an LLP to establish the HDV.
The court’s decision will be encouraging for local authorities, as the use of LLPs as corporate vehicles for joint ventures or for investment purposes are especially popular for housing and regeneration projects, as well as offering advantages over other forms of corporate vehicle, primarily because of tax transparency and the flexibility of governance arrangements.
This case illustrates that it is a local authority’s purpose behind entering into a corporate vehicle rather than the outcome which will be important in deciding whether it has acted with authority. A number of functions carried out by a local authority in meeting their statutory and social responsibilities will be likely to generate a profit, such as management and development of property, and so it is welcome news that this alone will not mean that authorities will be deemed to be acting for a commercial purpose.
It is therefore important that each local authority accurately documents throughout the decision-making process the reasoning behind its decisions and that such evidence stresses the dominant purpose for its actions, to ensure that no accusations can be made that it has acted beyond its powers.
If you have any questions on the above and how it will affect social housing providers, or any other questions as a social housing provider, please do not hesitate to contact John Murray or a member of our expert Social Housing Team.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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