General power of competence

For local authorities that previously had seen their functional creativity significantly curtailed, the general power of competence (GPC) in the Localism Act 2011 promised a brave new world. This enabled specified local authorities to ‘do anything that individuals generally may do’ even though this may be ‘in nature, extent or otherwise… unlike anything that other public bodies may do’.

But in addition to the extensive subliminal constraints of public law, section 2 of the 2011 act set out boundaries to the new power, including applying relevant statutory restrictions governing overlapping powers in place before the 2011 act commenced. And by section 4(2), where an authority uses GPC for a commercial purpose, it must do so through a company as defined by section 1(1) of the Companies Act 2006. This definition excludes use of a limited liability partnership (LLP). The government’s rationale for section 4(2) was so that local authorities do not use their public status to gain commercial advantage over the private sector.

This was unfortunately where Haringey Council found itself under fire when it decided to use an LLP structure for a joint venture between it and Lendlease Europe Holdings Ltd – the Haringey Development Vehicle (HDV). It did so because this structure would bring VAT and corporation tax advantages, as well as governance flexibility to cope with the two partners’ differing interests. The HDV was to further the council’s strategic aims of economic development, regeneration, job creation and growth, as well as improved and additional housing (including affordable housing). The council also envisaged receiving a financial return to be reinvested in its statutory functions, particularly in measures to achieve socioeconomic objectives.

However, Gordon Peters, a Haringey resident and former senior local government officer, brought a judicial review challenge against the council. This was for confirming Lendlease as the successful bidder to become the council’s HDV partner and approving the HDV structure, namely the 50/50 split between Lendlease and the council and related legal documents. The grounds of challenge included that the council could not use an LLP for these purposes since the council was acting for a commercial purpose under section 1 Localism Act 2011 and so was required to use a limited company.

The key question therefore was whether (under section 4(2) of the 2011 act) the council was structuring the joint venture arrangements for a commercial purpose. If so it was required to use a company. The council, however, contended that section 4(2) did not apply because it was not ‘doing things for a commercial purpose’.

This was the issue before Ouseley J on 8 February in Gordon Peters v London Borough of Haringey and another [2018] EWHC 192 (Admin). He heard the matter as a rolled-up hearing in the light of ‘significant delay issues’, taking both permission and substantive issues together.

Court view

Ouseley J noted (among other things) that the attention of Haringey Council’s cabinet had been drawn to some of the most significant elements of the proposed joint venture arrangements. These included: an estimated 6,400 high-quality new homes, including affordable housing, and potentially more than 20,000 jobs overall; estimated development returns to the council of £275m, plus a share of enhanced rental returns from the commercial portfolio and £8m HDV investment into the council’s social and economic programme; and £20m investment from Lendlease in a social impact vehicle to drive long-term social outcomes. Overall, the agreement was envisaged to drive ‘long-term improvements in the prosperity and wellbeing of the borough and its residents, at a scale and pace that the council could never achieve alone’.

While the court considered that the purpose of GPC is to give authorities a considerably broader range of powers than they had enjoyed hitherto, nevertheless, if the power being exercised is one that can be undertaken only through a company, it would be ultra vires for it to be done through an LLP. However, Ouseley J did not think that parliament intended that council activities which might generate a profit or return for the council (which he considered to be a commonplace of many council activities related to authority land assets, and which the council could then put to use for its functions) could now only be lawfully done through a company, and indeed not through an LLP.

In the court’s view, ‘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’.

Ouseley J said even more clearly that the dominant purpose of the joint venture was not commercial. For any commercial component was merely incidental or ancillary and not a separate purpose. The purpose was in fact to develop and manage the council’s land so as to achieve the authority’s aims for housing, especially affordable housing, and employment growth, which the council considered it could not achieve without bringing in private sector funds, expertise and experience. The purpose of making a return was to enable continuance of the process of further development to yield the public benefit that that in turn would bring.

Ouseley J, therefore, did not consider it right to characterise the council as having a commercial purpose at all. The fact that a hoped-for return was planned to be reinvested for the same council policy objectives did not turn those objectives into commercial purposes. Therefore, although the council may have been acting in a commercial manner, it was not acting for a commercial purpose.

In the circumstances, although Ouseley J found this ground to be reasonably arguable, he refused permission on grounds of delay. Nevertheless, he would have dismissed the challenge on its merits.

Comment

Local authorities keen to use available legal powers creatively to support their statutory functions in the public interest will be relieved by this judgment. For the arguments on behalf of the claimant gained no judicial traction. These included that, by statute, the establishment of the LLP was for the carrying on of a business ‘with a view to profit’. Also, as the claimant submitted, a relevant council report had referred throughout to ‘the indicia of commercial purposes: investment, return of profit, sharing risk and reward with its private sector partner’, with profit maximisation submitted to be ‘key to its purpose’.

However, instead, Ouseley J said that he largely agreed with the approach (albeit obiter) taken by Warren J in the Upper Tribunal in R (The Durham Co. Ltd) v HMRC and HM Treasury [2017] STC 264. There he said (among other things) that:

• ‘The fact that a service is provided for a charge, even if that charge is set so as to make a surplus or profit, does not demonstrate that the purpose of providing the service is commercial’; and
• A local authority ‘has wide social responsibilities which a private sector operator does not, responsibilities which include statutory duties. Its purposes in providing a particular service may be to fulfil those responsibilities. The service is not, in those circumstances, a commercial purpose’.

Whether or not GPC is being used for a commercial purpose will always of course be fact-sensitive. However, if material council decision documentation makes it cogently clear that the prime purpose of the project in question is to advance council functions rather than merely pursuing a commercial purpose, then an authority is much less likely to encounter a judicial red light in driving such a joint venture forward.