UK: Private Investment To Achieve A Public Good? Council's Use Of LLP To Secure Housing Regeneration Deemed Lawful.

Last Updated: 7 March 2018
Article by John Gregory

Haringey Council's plan to embark on a major regeneration project in the borough by setting up a development vehicle in partnership with a property developer has exposed deep fault lines in the Labour-controlled Council and led to the resignation of its leader, Claire Kober.

It wasn't just the Council at odds with the plans; the residents were similarly polarised in their views, one of whom led a challenge in the High Court to prevent it from going ahead. However, early in February 2018, the High Court dismissed the claim on all four grounds.

Haringey Council decided to enter into the Haringey Development Vehicle (HDV) with a private sector partner, using its general power of competence under the Localism Act 2011 ("the Act"). The Claimant challenged the decision on a number of grounds but, most interestingly, on the basis that the Council was acting for a "commercial purpose' contrary to Section 4 of the Localism Act 2011, which provides that if an authority is exercising the general power of competence for a commercial purpose then it must do so through a company. The Council contended that this provision did not apply because it was not setting up the HDV for a "commercial purpose".

The principles underpinning the HDV

The officer's report set out the principles underpinning the HDV as follows:

  • The Council would hold a 50% stake in the vehicle, with the remaining 50% stake held by its strategic investment partner or partners.
  • The vehicle would be established for the long term, most likely for a period of up to 20 years with an option to further extend.
  • The Council's contribution and equity stake would comprise some or all of its investment portfolio and development sites. The strategic investment partner(s) would provide funding, as well as services including (but not limited to) asset management, development management and fund management.
  • Receipts would be distributed pro rata between the Council and its partner(s) based on their stake, or recycled to support the delivery of further projects.

The Court held that it will be a question of fact, in any particular case, whether the Council is carrying out the relevant activities for a commercial purpose or not. However, the purpose of the HDV was to develop and manage the Council's land so as to achieve its aims for housing, (especially affordable housing) and employment growth, which it considered it could not achieve without bringing in private sector funds, expertise and experience. This was distinguished from that of a property investor simply seeking to make a profit or to achieve a return on development.

The Judgment

In giving his judgment, Ouseley, J. stated that;

"To my mind, there is no doubt but that the Council's purpose in entering into the arrangements setting up the HDV and governing its operation, including the relationship between the two partners, cannot be characterised as "a commercial purpose" within the scope of the Localism Act. Even more clearly is its dominant purpose not commercial. Any commercial component is merely incidental or ancillary, and not a separate purpose.....

".....The purpose is to develop and manage the Council's land so as to achieve its aims for housing, especially affordable housing, and employment growth, which it considered it could not achieve without bringing in private sector funds, expertise and experience"

It was held that the fact that a service is provided for a charge, even if the charge is set so as to make a surplus or profit, does not in itself demonstrate that the purpose of providing the service is commercial. The Council's purpose in setting up the HDV was to use and develop its own land in order to achieve its housing, employment, growth or regeneration objectives. As such, it was not considered right to characterise the Council as having a commercial purpose at all: it may have been acting in a commercial manner but not for a commercial purpose.

Legal comfort to councils using development vehicles - for now...

The fact that the Haringey case is as much about ideology as it is about law is apparent from the from the public furore surrounding the scheme and the subsequent decision of the Leader of Haringey Council not to take the final decision to set up the HDV prior to May's local elections. This decision will now sit with the next administration and, given that the next administration is widely expected to be run by those ideologically opposed to the HDV, it may yet fail to get out of the starting blocks. Further, in addition to Labour's National Executive Committee taking the unusual step of asking the Council not to go ahead with its plans, Jeremy Corbyn has intimated that public-private housing schemes would be made impossible under a future Labour Government.

Politics aside, for now the judgment should provide some legal comfort to councils looking to utilise resources and expertise from the private sector to address housing need in their areas. A development vehicle, like the one proposed by Haringey, can be used as a way of retaining control over the quality of development while potentially generating income and capital returns to be re-invested in housing or other corporate objectives. There is no doubt that such schemes can give rise to risks and pitfalls if not properly implemented. As such, it is right that they should be subject to healthy scrutiny, but those who say that this approach should never be used ought to be mindful of the gaps in funding and expertise that often stand in the way of councils embarking on ambitious plans for much needed housing and regeneration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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