Stop Press: Lawfulness of using LLPs for local authority joint ventures

For many years local authorities have entered into corporate joint ventures with private and other public sector partners. Limited liability partnerships have become the favoured vehicle for joint ventures, primarily because of tax transparency and the flexibility of governance arrangements. The case of Peters v London Borough of Haringey; Lendlease Europe Holdings Limited (Interested party) [2018] EWHC 192 (Admin) questioned local authority vires to enter into a corporate JV structured as an LLP. However, the High Court ruled on 8 February 2018 that LLPs can lawfully be used where the local authority's primary or dominant purpose is not a "commercial purpose". 

The legislative context

Prior to establishing a separate entity, a local authority must identify both the appropriate statutory powers and the purpose in setting up the entity. Councils have wide statutory duties and powers to carry out their functions, additional powers for trading activities (e.g. ss.1 and 3 Localism Act 2011 (LA 2011) and s.95 Local Government Act 2003 (LGA 2003)) and ancillary powers in s.111 Local Government Act 1972 (LGA 1972), with the latter enabling the creation of corporate joint ventures.  The purposes could be wide-ranging – for example housing, regeneration, improved service delivery and to facilitate shared services – and could be effected either on a wholly-owned and controlled basis or with another public sector or private sector partner.  Those purposes in turn can determine the type of vehicles used, so that:

• if the sole or primary purpose of those activities is to deliver a statutory duty or discretionary service, then any form of vehicle may be used, including an LLP, albeit for various reasons a company would sometimes be the preferred vehicle (e.g. for leisure trusts, where a charitable company limited by guarantee may be appropriate).
• if the activity is solely or primarily for a commercial purpose then a company (within the meaning given by s.1(1) of the Companies Act 2006) or a registered society (within the meaning of the Co-operative and Community Benefit Societies Act 2014) or a society registered or deemed to be registered under the Industrial and Provident Societies Act (Northern Ireland) 1969 must be used in accordance with the LGA 2003/LA 2011 provisions.
• if the primary purpose of the activities is the furtherance of other responsibilities and statutory duties, where the local authority can rely on other statutory powers, then those activities are unlikely to constitute either primary purpose trading or undertaking those activities for a commercial purpose, even if the local authority generates a profit. In such a scenario, again, any form of vehicle could be used including an LLP.

The issues considered

Mr Peters challenged the validity of the Council's decision to establish the Haringey Development Vehicle (HDV), a joint venture between the Council and a private sector partner, where the partner would bring finance, experience and expertise to the task of developing the Council's land for its better use, and thereby achieve the Council's strategic aims in housing, affordable housing and employment. The HDV would also take responsibility for delivering a number of the Council's functions, particularly asset management and development. The court considered whether the Council had entered into the joint venture arrangements for a "commercial purpose". 

The Council had relied on the power in s.1 LA 2011 to enter into the joint venture (albeit it could also have relied on a combination of the other powers including s.2 Local Authority (Land) Act 1963 to develop land, ss.120-123 LGA 1972 to acquire, appropriate and dispose of land and s12 LGA 2003 to invest for any purpose relevant to its functions under any enactment, which would include its functions under the Housing Act 1995). The Council contended that s.4(2) LA 2011 did not apply because it was not doing things for a commercial purpose.

The issues included:

• whether the Council was doing anything in relation to the HDV which was for a commercial purpose;
• whether the purpose of the HDV was relevant; and
• whether, to come within s.4(2) LA 2011, any commercial purpose had to be the "true and dominant purpose" to require a company to be used (as submitted by the Council and Lendlease) rather than it having a commercial purpose to require a company to be used (as submitted by the claimant).

There were also challenges based on failure to properly consult under s.3 Local Government Act 1999 (which was considered to be out of time), breach of the Public Sector Equality Duty and an allegation that the decisions should have been taken by Council not the Cabinet under the Functions & Responsibilities Regulations 2000 (which were dismissed by the Judge).

The judgment

Mr Justice Ouseley held, amongst other things, that:

• if the power being exercised by a local authority can only be undertaken through a company, it is ultra vires for it to be done through an LLP;
• in passing the LA 2011 - a deregulatory Act - Parliament would not have intended to restrict profit-making activities undertaken for non-commercial purposes to being undertaken solely through a company, when prior to the LA 2011 such activities could have been undertaken using various vehicles;
• s.4(2) requires an overall view to be taken of "the thing" being done and of the overall purpose for which it is done;
• of real importance is the question of what the local authority's purpose is in entering into the commercial arrangements; it was recognised that the purposes of a joint venture vehicle and of a Council's JV partner are likely to be different;
• if the purpose which is said to be commercial is simply an incidental or ancillary purpose to the non-commercial purpose, it should be seen as part of the non-commercial purpose and not as a commercial purpose at all;
• the mere fact that a profit may be made does not of itself show that the activities have any commercial purpose given the obligations of financial prudence imposed on local authorities;
• the fact that a profit or return is hoped for, to be reinvested in policy objectives, does not turn a local authority's decision to enter into commercial arrangements into being for commercial purposes - acting in a commercial manner does not equate to acting for commercial purposes;
• it was clear that the Council's purposes in entering into the arrangements were non-commercial and so it was open to the Council to establish the HDV as an LLP.

Comment

The validity of using an LLP as the corporate vehicle for any joint venture or other trading arrangements will depend on the relevant local authority's primary or dominant purpose in entering into the joint venture or trading arrangements. That said, given the number of LLPs which are being used around the country for local authority joint ventures, it is reassuring that using an LLP as a joint venture vehicle was held to be lawful where a local authority's primary purpose was to better manage its land and deliver housing and regeneration (i.e. non-commercial purposes) even where there was a commercial element, since that commercial element was seen to be incidental and ancillary and not a separate purpose.  

This case highlights the importance of the business case and minutes of council, cabinet and committee meetings accurately identifying and recording the various purposes and the relevant statutory powers being relied upon to establish and enter into any corporate joint venture, particularly where a certain power may restrict the type of vehicle which could be used, when other powers do not.

Local authorities which have already embarked on either procuring a joint venture partner or entering into other commercial arrangements may wish to revisit business cases and the decisions, to ensure that the correct statutory powers have been identified and to check whether the dominant or primary purposes have been properly recorded and are clearly identifiable.

For further information about local authority joint ventures or trading entities, please contact Judith Barnes, Chris Harper, Matthew Waters or Richard Hiscoke.