The case of Peters v London Borough of Haringey (Haringey) provides welcome clarity over the extent of the local authorities powers to form limited liability partnerships (LLPs) for the delivery of regeneration projects carried out in partnership with the private sector.
Partnership approach
LLPs offer benefits:
- tax transparency (particularly for the private sector participant) in relation to corporation tax and VAT;
- governance (often a key concern for the public sector): the fact that LLP members don’t generally owe a fiduciary duty to the LLP can alleviate concerns over conflicts and other issues.
Haringey Development Vehicle
The case concerned the high profile procurement, by Haringey, of a joint venture partner to participate in the Haringey Development Vehicle (HDV). The HDV was to have responsibility for the delivery of specific projects as well as the general management and exploitation of Haringey estate. The various reports identified some key benefits from participating in the project including: (a) an estimated 6,400 new homes; (b) development returns of £275m, plus S106 and CIL payments; (c) £8m HDV investment into a social and economic programme and £20m Lendlease investment in a Social Impact Vehicle. The HDV was formed as a LLP, with 50/50 control between Haringey and Lendlease.
Opposition
However, the HDV project faced fierce political opposition, one manifestation of which was the challenge by a former senior local government official in Haringey in relation to the lawfulness of the project on a number of grounds, including (the exclusive focus of this blog) the use of an LLP as the legal entity to deliver the project.
Haringey had relied upon Section 1 of the Localism Act 2011, which provides a general power of competence to “do anything that individuals generally may do“. Section 1 of the Act is however qualified by Section 4(2), which states that “where, in exercise of the general power, a local authority does things for a commercial purpose, the authority must do them through a company“, with “company” being defined specifically as a company under the Companies Act 2006 (and not a partnership).
The Claimant was therefore arguing that, by using a LLP as opposed to a limited company, Haringey was acting unlawfully – but this was dependent on whether Haringey was undertaking the HDV project “for a commercial purpose”.
Commercial purposes?
In determining whether there was a commercial purpose the judge, Ouseley J, held that Section 4(2) of the Act is not intended to narrow the scope of pre-existing powers. He also made clear that Lendlease’s purposes (which were clearly profit driven) were not relevant to the analysis; neither were those of the LLP itself – what was important was Haringey’s purposes.
And on that question Ouseley J was clear that the purposes were not commercial, and the challenge therefore failed. The objective of the HDV project was for the achievement of “housing, employment and growth or regeneration objectives”. He said “achieving a return is neither purpose or the activity of itself”. The fact that profit may be a consequence of achieving best consideration on land disposals and of acting prudently did not mean that the Council was acting for a commercial purpose. To the extent it was doing so, it could be said to be doing so in order to further its primary non-commercial purposes.
Relevance
For local authorities and developers alike the case provides helpful clarity on the lawfulness of using LLPs to deliver regeneration projects. Although each case will need to be considered on its facts (including some analysis of the intentions of the authority), the case provides a very helpful sign-post toward what local government powers allow for.
Post script…
While the challenge failed at law, but the future for the HDV project itself is uncertain.
Following the judgment, the Labour leader who had originally promoted the HDV scheme was replaced and the Labour party (under new leadership) fought the May 2018 elections on a platform which included scrapping the HDV – illustrating that very often at local government level political support for a project can be as important as being legally “.
The case illustrates that a claim can “succeed” in the broader sense of creating a pause in which political opposition may overcome a unpopular (but lawful) decision. That should influence the circumstances in which delivery vehicles are deemed to be the appropriate mechanism for regeneration – sometimes a lower risk strategy will be to opt for an easier to understand and less legally contentious approach will be the right option.
As of July 2018, the precise status of the HDV is unclear, but the “Stop HDV” group continues to campaign against any kind of reanimation of the scheme.
Post post script
On 17 July 2018, Haringey Council finally decided to scrap the HDV project.
Their stated reason was that the risk level had increased in the period since it initially entered the deal (a decision taken under the Council’s previous Labour leadership), although the political pressure to act was no doubt a significant contributory factor. The risks highlighted (and used to justify the decision) include those related to committing its commercial portfolio to the HDV, as well as the satisfaction of conditions and land for development.
According to press reports, Haringey Council have been threatened by Lendlease with a multimillion pound lawsuit for the loss of profit from the project. It has also been revealed that the Council is obligated to pay £500,000 to cover the costs of Lendlease relating to HDV. The Council also faces cost of around £2.5m spent on setting up the HDV.
