High court rules that local authorities may establish limited liability partnerships

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In an important case on local authority powers, the High Court has found that the London Borough of Haringey did not act outside its powers in deciding to use a limited liability partnership to develop housing.

The Council decided to enter into a joint venture vehicle with Lendlease, which was intended to provide new homes of high quality, progress the Council’s affordable housing policy create the potential for jobs. The structure of this venture, Haringey Development Vehicle, would be a limited liability partnership with subsidiaries which would also be limited liability partnerships. This would mean that as the Council was not liable for corporation tax, it would not be taxed on its share of profits from the limited liability partnerships. The Council was expecting to use the general power of competence in section 1 of the Localism Act 2011. Reports considered by members of the public recognised that if the Council acted for a commercial purpose, section 4 of the Localism Act 2011 would require it to do so through a company. However, they were told that although the Council would be acting on a commercial basis as a partner in a joint venture, the primary purposes of the project were non-commercial. The objectives of the project were to comply with the objectives of the corporate plan, which were non-commercial socio-economic objectives.

The proposed arrangements were controversial and a local resident applied for judicial review, challenging the Council’s decision to confirm Lendlease as the preferred bidder and to approve the structure of Haringey Development Vehicle. The claimant had four grounds: (1) The Council had acted outside its powers in using a limited liability partnership rather than a limited company because it was acting for a commercial purpose. (2) The Council had failed in its statutory duty of consultation under section 3 of the Local Government Act 1999. (3) The Council had not complied with the public sector equality duty under section 149 of the Equality Act 2010. (4) Regulation 4(1)(b) of the Local Authorities (Functions and Responsibilities) (England) Regulations 2010 required the Council to take the decision in full Council, not by the Cabinet. (This was on the basis that the claimant argued that the decision to set up Haringey Development Vehicle was the formulation of a strategy or plan for the control of the Council’s borrowing, investments or capital expenditure.

The claimant was refused permission on all grounds and the challenge failed.

On the question of whether the Council was using the general power of competence for a commercial purpose, the judgment of Mr Justice Ouseley found that the Council’s purpose could not be characterised as a commercial purpose within the scope of the Localism Act. The purpose was to develop and manage the Council’s land so as to achieve its aims for housing and employment growth, which it considered it could not achieve without bringing in private sector funds, expertise and experience. The Council might be acting in a commercial manner but it was not acting for a commercial purpose. It had therefore been acting within the scope of the general power of competence when it decided to enter into a limited liability partnership.

This provides a helpful clarification for local authorities which are involved or anticipate being involved in development and regeneration. Limited liability partnerships have been used by local authorities before but the question of the powers of a local authority to use such a vehicle had not been the subject of a court judgment. The judgment in favour of the Council should provide reassurance to any local authorities or persons working with them who might have had doubts about the powers available to local authorities and give them greater flexibility in the range of options they consider when making arrangements for development.

Although none of the grounds of challenge succeeded, the judge did find reason to consider that the Council had not complied with its consultation obligations and could not conclude that it was highly likely that the decision would still have been the same if it had done so. However, permission to argue this ground was refused because it was out of time. Although flaws in consultation did not lead to the Council’s decision being quashed in this case, the judgment does provide a reminder to local authorities of the importance of identifying and complying with their duties to carry out consultation before taking decisions.



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