Tiffany Cloynes and Rebecca Hazeldine outline the key considerations for local authorities, knowledge and understanding of which will place private investors at an advantage.
Due to growing demands and financial pressures, local authorities are increasingly considering how to make the best use of their assets, as well as how they may generate revenue and income. In particular, the need for housing remains high and regeneration is continuing in a number of areas.
Local authorities are looking at what opportunities there are to work with the private sector (ranging from landowners and developers to investors and funders) to deliver their objectives and meet those demands. Therefore, this is a great time for the private sector to enter into dialogue with the public sector to discuss working together in a way that can benefit both parties, as well as delivering a particular purpose or enabling regeneration to take place.
There are a number of ways in which the public and private sectors can work together, including through the disposal of assets, development agreements or entering into collaborative arrangements or joint ventures.
Disposal of assets
Local authorities could dispose of their surplus land by way of a straightforward sale of land at “best consideration” or they could retain the freehold interest and grant a lease to an occupier for a term at a market rent.
Local authorities may wish to enter into an agreement with a developer in relation to a particular piece of land that will contain obligations on the developer to procure and carry out the scheme within prescribed time scales.
If the developer fails to carry it out, the local authority would be able to step in and terminate (subject to the right of any funders).
Once the development has been completed, a local authority will transfer the freehold interest or grant a long lease to the developer. This arrangement will more than likely require the local authority to run a competitive procurement process (if above the threshold) in accordance with the procurement rules.
Collaborative agreements/contractual joint ventures
A local authority and private sector partner could enter into a contractual joint venture. This would involve the parties signing a contract under which they would work together to achieve a common objective. Their rights and obligations under the arrangement would be set out in the contract.
Corporate joint ventures/asset-backed delivery vehicle
A local authority and a private sector partner may wish to establish a corporate entity (ie a company or LLP) to deliver a particular purpose.
The entity will be owned jointly in agreed proportions (typically, but not necessarily, 50/50). This may involve the parties sharing assets, resources, land, capital, staff and investment. For example, the local authority may transfer land and the private sector body invests funds to match the local authority’s contribution. The parties would usually agree a business plan to set out the objectives and outcomes they expect the vehicle to achieve.
There are ways of structuring a corporate JV to ensure that what is created is not a public body and that non-public body could then procure goods, works and service outside the procurement regime.
Public body constraints
Given the unique nature of local authorities and the legislation backdrop against which they must operate, there are a number of additional considerations a local authority will need to bear in mind when entering into such transactions and arrangements.
Governance, powers and decision making
A local authority needs to ensure that every action it takes is within its powers or it will be unlawful. When entering into any transaction, a local authority must identify the relevant power and ensure it acts reasonably in the exercise of the power. This should ensure the local authority will be able to avoid any challenge to its actions or, if challenges, that it is able to defend any challenge successfully.
Local authorities in England have a general power of competence under section 1 of the Localism Act 2011, which permits them to do anything that individuals generally may do. Anything done for a commercial purpose must be done through a company.
There are also a range of other powers which may also be relevant in these types of arrangements, including section 111 of the Local Government Act 1972. This allows a local authority to do anything that is calculated to facilitate or is conducive or incidental to the discharge of any of its functions and which could be used together with the power for the relevant function (or, in Wales, the well-being power in section 2 of the Local Government Act 2000). There are other specific powers which might be relevant for a particular action, for example, section 9 of the Housing Act 1985 provides power for a local housing authority to provide housing accommodation.
Although the availability of powers such as the general power of competence give local authorities a lot of flexibility to act, some powers are subject to particular requirements and constraints which must be complied with.
Public procurement legislation sets out rules on the procedures which local authorities and other contracting authorities are obliged to follow when awarding contracts to external contractors for the carrying out of works, supply of goods or provision of services.
The rules are contained in The Public Contracts Regulations 2015, in European Directives and in general treaty principles such as transparency and non-discrimination. These must be compiled with where the value of the contract exceeds the relevant thresholds (which for public works is currently £4,551,431). There are, however, some exemptions and exclusions which mean that, in some circumstances, the Regulations do not apply or apply only to a limited extent.
In a “straightforward land transaction” there would be no requirement for a competitive procurement process to be undertaken pursuant to the procurement rules, provided there is no legally enforceable obligation on the purchaser to develop the land.
As mentioned above, if a local authority wishes to enter into a development agreement that contains obligations on the developer to build out land, this is likely to be subject to the procurement rules if it is above the relevant thresholds.
A local authority may wish to dispose of surplus land to a purchaser but provide for some limited obligations in the contract to build out by using the “Flensburg principle” (which has been confirmed in a number of recent cases). This would not require a competitive procurement process to be undertaken, provided there are no legally enforceable obligations on the purchaser to develop the land.
The Flensburg principle provides for the parties to have a statement of intent that the land will be developed in the documentation but to place no legally binding obligations on the purchaser/developer to carry out the development. This is coupled with a right for the local authority to repurchase the land in the case, for example, of the development not being constructed by a certain date. In effect, the positive obligations one would normally see in a developer agreement are “inverted”.
At present, local authorities are required to comply with the rules relating to state aid and will need to ensure any transaction they enter into is compliant and does not amount to unlawful state aid.
If land is sold for at least its full market value, then it is unlikely to amount to state aid. However, if a local authority is intending to make a disposal of land for less than the market value, it will need to analyse whether there are any state aid issues and, if so, how to address these.
If a local authority is proposing to enter into a corporate entity with a private sector partner to ensure there is no state aid, the local authority will need to consider whether it is behaving in a way which satisfies the “market economy operator principle” (MEOP). The purpose of the exercise is to establish that the local authority is investing in the vehicle on terms that would be acceptable to a private market operator. In other words, a local authority will be trying to show that the investment is on market terms, meaning that there is no state aid.
Local authorities have the power to dispose of land under section 123 of the Local Government Act 1972, provided that the local authority obtains the best consideration that can reasonably be obtained unless the disposal is for a short tenancy or the consent of the secretary of state has been obtained.
The consideration to be taken into account needs to have an economic value and local authorities will often run a competitive exercise or obtain an independent valuation to show that best consideration has been achieved. R (on the application of Faraday Development Ltd) v (West Berkshire Council  EWHC 2166 (Admin);  PLSCS 240 contains a straightforward analysis of how best consideration is presently viewed by the courts.
A general consent has been issues that allows a local authority to dispose of land for less-than-best consideration without the need to specific consent if the local authority considers that the disposal will contribute to the promotion or improvement of the economic, social or environmental wellbeing of its area and the extent of the undervalue is no more than £2m.
There may also be other relevant powers to consider if the land is held for a particular purpose and in such case, there may be specific requirements which will need to be complied with, for example, housing, open space, playing fields or allotments.
With understanding comes opportunity
A thorough understanding of these considerations should assist when entering into discussions with local authorities about possible opportunities to work together and the journey to collaboration.
This article was originally published in the Estates Gazette (www.egi.co.uk)