GUIDE TO INCOME GENERATION FOR LOCAL AUTHORITIES

SERVICES FOR THE PUBLIC & NOT-FOR-PROFIT

1. Introduction

1.1 This guide provides an introduction to some of the key issues for local authorities to take account of when seeking to achieve income generation. It covers:

(a) Strategies for income generation

(b) Powers for income generation and constraints on these

(c) Land disposal

(d) Asset backed delivery vehicles

(e) Use of companies

1.2 This note is intended to provide an introduction and source of reference on issues relevant to income generation for local authorities. It is not intended to be relied upon as legal advice in the context of any specific income generation activity. If you require legal advice relating to specific matters involving income generation, Geldards would be pleased to receive your instructions.

2. Strategies for Income Generation

2.1 Local authorities should produce strategies for income generation to ensure that they have identified all opportunities for income generation and have plans as to how to bring these into effect. An income generation strategy should identify all the different options which a local authority has to pursue income generation. It should identify and analyse any risks associated with each particular option and state how the local authority will address these. It should identify any legal requirements which apply to particular options. It should set out a business case, making the case as to why the local authority should proceed with particular income generation activities. (Note: If a local authority uses the power in section 95 of the Local Government Act 2003 and the relevant statutory instrument to trade commercially in function-related activities, there is a specific statutory obligation to prepare and approve a business case.) It should include a business plan, setting out the local authority’s objectives and how they are expected to be met. It should include an implementation plan which sets out in detail how the local authority will progress each income generation opportunity. Local authorities should apply their income generation strategy when developing particular initiatives for income generation and should keep them under review.

2.2 It is important that income generation strategies and individual initiatives for income generation take account of the impact that particular arrangements will have on the democratic control of a local authority. For example, if a local authority decides to set up a company which will deliver services, it may decide to keep the extent of shareholding and representation on the board relatively low, in order to avoid the company being controlled or influenced for the purposes of Part V of the Local Government and Housing Act 1989. Local authority members need to be aware that in practice that will give them a lower level of control than they would have over services which are directly delivered by the local authority. Before deciding on an appropriate model for service delivery in a particular income generation initiative, a local authority needs to ensure that members realise the implications for their control and that they will accept these. Expectations need to be managed from the start and throughout the process.

3. Powers

3.1 A local authority needs to ensure that every action it takes is within its powers or it will be unlawful. This means that the local authority must be able to identify a relevant power and act reasonably in the exercise of the power.

3.2 It is important that there should be a clear audit trail, showing that a local authority has acted within its powers. Minutes of meetings and records of decisions should clearly show the decisions taken and show that these were compliant with the provisions of the local authority’s constitution and any relevant legal requirements. There should be evidence of the information that has been considered by decision makers, which has enabled them to make reasonable decisions.

Charging Powers

3.3 Section 93 of the Local Government Act 2003

(a) Section 93 of the Local Government Act 2003 allows a “relevant authority”, as defined in that Act, to charge for discretionary services. The power allows an authority to charge for providing a service to someone if the local authority has a power but not a duty to provide a service and the person has agreed to receive that service. An authority cannot use this power if another statute provides power to charge for the service or contains an express prohibition on charging. Section 93 requires that the income received from charging for a service should not exceed the costs of provision. However, it does not specify how the cost of provision must be calculated, which means that an authority has some discretion to take account of the cost of infrastructure and support that it puts in place in order to be able to provide a service. Section 93 makes provision for differential charging. The UK Government and the National Assembly for Wales have published guidance on the charging power in section 93 of the Local Government Act 2003: “General Power for Best Value Authorities to Charge for Discretionary Services – Guidance on the Power in the Local Government Act 2003” (available at: https://www.gov.uk/government/publications/general-power-for-best-value-authorities-to-charge-for-discretionary-services-guidance) and “General Power for Best Value Authorities in Wales to Charge for Discretionary Services – Guidance on the Power in the Local Government Act 2003” (available at: http://gov.wales/topics/localgovernment/publications/generalpower/?lang=en).

3.4 Section 38 of the Local Government (Miscellaneous Provisions) Act 1976

(a) Another relevant power is section 38 of the Local Government (Miscellaneous Provisions) Act 1976, which allows a local authority to use the spare capacity of the computers it is using to perform its own functions to provide computer facilities and services to other

persons. An agreement for the provision of such services may contain the terms which the parties consider appropriate, including terms as to payment. A local authority has a duty to ensure that the terms of such an agreement are terms on which the local authority considers that a person other than a local authority could reasonably be expected to provide the facilities or services.

3.5 Section 150 of the Local Government and Housing Act 1989

(a) Section 150 of the Local Government and Housing Act 1989 gives the Secretary of State and the Welsh Ministers power to make regulations to provide for charges to be imposed in respect of things done by relevant authorities. For example, the Local Authorities (Recovery of Costs for Public Path Orders) Regulations 1993 were made under that power. These regulations allow local authorities to charge persons who request the authorities to make public path orders.

Trading Powers

3.6 Section 1 of the Local Authorities (Goods and Services) Act 1970

(a) Section 1 of the Local Authorities (Goods and Services) Act 1970 makes provision for local authorities to enter into agreements with public bodies for the local authority to provide the body with goods or materials; administrative, professional or technical services; use of vehicle, plant or apparatus belonging to the authority and works of maintenance in connection with land or buildings. Such agreements may contain such terms as the parties consider appropriate, including terms as to payment.

3.7 Section 95 of the Local Government Act 2003

(a) Section 95 of the Local Government Act 2003 gives power to the Secretary of State in England and the Welsh Ministers in Wales to make an order to authorise relevant authorities to do for a commercial purpose anything which they are authorised to do for the purpose of carrying on any of their ordinary functions. Section 95(4) of the Local Government Act 2003 requires that this power must only be exercised through a company within the meaning of Part 5 of the Local Government and Housing Act 1989. This means:

(i) A company limited by shares.

(ii) A company limited by guarantee.

(iii) An unlimited company.

(iv) A registered society within the meaning of the Co-operative and Community Benefit Societies Act 2014.

(v) A society registered or deemed to be registered under the Industrial and Provident Societies Act (Northern Ireland) 1969

(b) In England the Local Government (Best Value Authorities) (Power to Trade) (England) Order 2009 has been made under section 95 of the Local Government Act 2003. This allows a best value authority to use a company to do something for a commercial purpose if it has the power to do it for the purpose of carrying out any of its ordinary functions. However, before exercising that power, the authority must prepare and approve a business case. A business case for this purpose means a comprehensive statement as to the objectives of the business, the investment and other resources required to achieve those objectives, any risks the business might face, the expected financial results and any other relevant outcomes that the business is expected to achieve. If the authority provides any resources to the trading company, such as accommodation, goods, services or staff, it must recover the full costs of doing so.

(c) In Wales there is a technical difficulty in that the order which has been made in Wales under section 95 of the Local Government Act 2003 is the Local Government (Best Value Authorities) Power to Trade (Wales) Order 2006. That order says that it applies in relation to best value authorities in Wales which are (a) county councils or county borough councils; (b) National Park authorities; and (c) fire and rescue authorities. There are no longer best value authorities in Wales, as authorities now pursue continuous improvement under the Local Government (Wales) Measure 2009 in which they are “Welsh improvement authorities”. Section 95 of the Local Government Act 2003 has been updated to refer to Welsh improvement authorities but the order made under it has not. So, until this order is updated or a new one made by the Welsh Ministers, there could be scope to question whether local authorities in Wales have the power to trade in function-related activities through a company.

3.8 Section 1 Localism Act 2011

(a) In England, local authorities have a general power of competence under section 1 of the Localism Act 2011. This gives a local authority power to do anything that individuals generally may do. However, it does not enable a local authority to do anything which it is prevented from doing by a limitation in another statute. If a local authority uses the general power of competence to charge for services other than for a commercial purpose, the income received from the charges must not exceed the cost of provision of the services. If a local authority uses the general power to do something for a commercial purpose, section 4 of the Localism Act 2011 requires that it must do so through a company. This means:

(i) A company within the meaning of section 1(1) of the Companies Act 2006.

(ii) 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.

Other relevant powers

3.9 Section 111 of the Local Government Act 1972

(a) Section 111 of the Local Government Act 1972 gives a local authority power to do anything which is calculated to facilitate, or is conducive or incidental to, the discharge of any of its functions. Subsection 111(3) says that a local authority shall not by virtue of section 111 raise money, whether by means of rates, precepts or borrowing, or lend money except in accordance with the enactments relating to this matter. Section 111 of the Local Government Act 1972 is not therefore itself an income generating power. However, it can be helpful in enabling a local authority to do things which are incidental to the discharge of its functions as part of an income generation strategy.

3.10 Section 2 of the Local Government Act 2000

(a) Local authorities in Wales have a power in section 2 of the Local Government Act 2000, which allows them to do anything which they consider is likely to achieve the promotion or improvement of the economic, social or environmental well-being of their area. Local authorities in Wales do not currently have a general power of competence but the Welsh Government has consulted on a draft Bill which would introduce such a power. The Welsh Government proposed that if a general power of competence were to be introduced in Wales, the general power of competence would be repealed.

4. Land disposal

4.1 Section 123 of the Local Government Act 1972 provides a power for local authorities to dispose of land (but note that different powers may apply if land is held for particular purposes, for example housing).

4.2 If the power in section 123 of the Local Government Act 1972 is used by a local authority to dispose of land, section 123(2) requires the local authority to obtain the best consideration that can reasonably be obtained, unless the disposal is for a short tenancy or the local authority has the consent of the Secretary of State, or in Wales the Welsh Ministers, to dispose of land for less. Case law has shown that when local authorities assess what amounts to best consideration, they are expected to regard “consideration” as meaning things with an economic value. Relevant cases include: R v Middlesbrough Borough Council ex parte Frostree Limited (CO/383/88 16 December 1988), R v Essex County Council ex parte Clearbrook Contractors Limited (3 April 1981), R v Pembrokeshire County Council ex parte Coker and Another [1999] All ER (D) 713, R (on the application of Lemon Land) v Hackney London Borough Council [2001] All ER (D) 150 (May), R (on the application of Faraday Development Ltd) v West Berkshire Council [2016] EWHC 2166 (Admin).

4.3 General disposal consents have been issued by the Secretary of State (Local Government Act 1972 General Disposal Consent (England) 2003 – disposal of land for less than the best consideration that can reasonably be obtained: available at: https://www.gov.uk/government/publications/disposal-of-land-for-less-than-the-best-consideration-that-can-reasonably-be-obtained-circular-06-2003) and the Welsh Ministers (NAFWC 41/2003 Local Government Act 1972: General Disposal Consent (Wales) 2003: Disposal Of Land In Wales By Authorities For Less Than Best Consideration: available at: http://gov.wales/about/foi/publications-catalogue/circular/circulars03/NAFWC412003?lang=en). These allow a local authority to dispose of land for less than best consideration without the need for individual consent from the Secretary of State or the Welsh Ministers if the local authority considers that the disposal will contribute to the promotion or improvement of the economic, social or environmental well-being of its area and the extent of the undervalue is no more than £2million. The local authority would need to ensure that its disposal is compliant with State aid rules and would need to have regard to its fiduciary duty.

4.4 Section 233 of the Town and Country Planning Act 1990 gives a local authority power to dispose of land which is held by it for planning purposes. A local authority using this power must obtain the best consideration which can reasonably be obtained unless the disposal is for a short tenancy or the local authority has the consent of the Secretary of State or in Wales the Welsh Ministers. A local authority that uses this power can determine the best use in planning terms and then consider best consideration so as to secure the best consideration reasonably obtainable from a disposal that brings about that use.

4.5 Section 32 of the Housing Act 1985 gives a local authority power to dispose of land held by it for the purpose of Part II of the Housing Act 1985 (ie provision of housing accommodation). The consent of the Secretary of State or in Wales the Welsh Ministers is required for the use of this power unless the disposal is for the letting of land under a secure tenancy or an introductory tenancy.

4.6 If a disposal of land is made under section 32 of the Housing Act 1985 for which consent is required and the consent does not provide otherwise, section 133 of the Housing Act 1988 requires that the person who acquires the land must have the consent of the appropriate authority in order to make a further disposal. Some types of disposals are specified in section 81(8) of the Housing Act 1988 as exempt from this requirement. In relation to a disposal of land in England by a private registered provider of social housing, the appropriate authority is the Regulator of Social Housing. In relation to other disposals of land in England, the appropriate authority is the Secretary of State. In relation to a disposal of land in Wales, the appropriate authority is the Welsh Ministers.

4.7 The Secretary of State has issued some general consents for the disposal of

housing land (The General Housing Consents 2013: available at: https://www.gov.uk/government/publications/general-housing-consents-2012.) General Consent A provides, subject to specified exceptions, consent for the disposal of land held for the purposes of Part II of the Housing Act 1985 if the disposal is for consideration equal to the market value of the land. General Consent A also provides that the further consent of the Secretary of State shall not be required under section 133 of the Housing Act 1988 for subsequent disposals of such land.

4.8 The disposal of some particular types of land is subject to particular

requirements.

Open Space

4.9 If a local authority intends to use section 123 of the Local Government Act 1972 to dispose of land which consists of or forms part of open space, section 123(2A) requires that it must first advertise this intention for two consecutive weeks in a local newspaper and must consider any objections which it receives to the proposed disposal. These obligations do not apply to a disposal to which the requirements of the Playing Fields (Community Involvement in Disposal Decisions) (Wales) Regulations 2015 apply (see below)

Playing Fields in Wales

4.10 A disposal of playing fields in Wales must be compliant with the Playing Fields (Community Involvement in Disposal Decisions) (Wales) Regulations 2015, which were made under the provisions of the Playing Fields (Community Involvement in Disposal Decisions) (Wales) Measure

2010. These impose requirements relating to: impact assessment; notice and consultation; consideration of representations; and decision.

4.11 These regulations prohibit a local authority from disposing of a playing field or any part of a playing field which has been used as a sports or recreational facility by the public in the previous five years, unless the local authority has first complied with requirements set out in the regulations. The regulations define “playing field” as the whole of an open space which encompasses at least one playing pitch. The regulations define “playing pitch” as a delineated area which, together with any run-off area, is of:

(a) 0.2 hectares or more and which is used for sport including, but not limited to, association football, American football, rugby, cricket, hockey, lacrosse, rounders, baseball, softball, Australian football, Gaelic football, shinty, hurling, polo, cycle polo, athletics, or golf, or

(b) 0.1 hectares or more and which is used for playing bowls or

(c) 0.04 hectares or more and which is used for playing basketball, netball or tennis.

4.12 The requirements of the regulations do not apply in the following circumstances:

(a) The grant of an interest in a playing field which does not have an adverse impact on its use as a sports or recreational facility by the public.

(b) A disposal to another local authority or a body whose aims or objectives include the promotion of sporting or recreational activities and the other local authority or body retains the playing field as a sports or recreational facility for use by the public.

(c) A county or county borough council has consulted on the proposed decision to dispose of the playing field under section 48(2) of the School Standards and Organisation (Wales) Act 2013 (school organisation proposals).

(d) The Welsh Ministers have consulted on the proposed decision to dispose of the playing field under section 72(1) of the School Standards and Organisation (Wales) Act 2013 (proposals for restructuring sixth-form education).

4.13 Impact assessment: The requlations require a local authority to publish information about the effect that a proposed disposal of a playing field would have on the following:

(a) The local development plan required under section 62 of the Planning and Compulsory Purchase Act 2004.

(b) The play sufficiency assessment required under section 11 of the Children and Families (Wales) Measure 2010.

(c) The community strategy required under section 39 of the Local Government (Wales) Measure 2009.

(d) The health and well-being strategy required under section 40 of the National Health Service (Wales) Act 2006.

(e) Such other strategies, plans or assessments as the local authority considers appropriate.

The local authority must publish this information when it carries out the consultation required under the regulations.

4.14 Notice and Consultation: The regulations require a local authority that proposes to dispose of a playing field to:

(a) Publish a notice in a local newspaper on two consecutive weeks, giving details of the proposal; when and where the proposal can be viewed; the right to make representations, and the means and deadlines for doing so.

(b) Make its proposal available for inspection during normal office hours for a period of at least six weeks at the local authority’s principal office and, if reasonably practicable, at one or more places in the local authority’s area.

(c) Allow a minimum of six weeks for the receipt of representations.

(d) Display a copy of the notice in at least one place on or near the playing field and at each official entrance for not less than six weeks.

(e) Send a copy of the notice to any owner or occupier of land adjoining the playing field.

(f) Publish a copy of the notice on its website if it has one and display it there for at least six weeks.

(g) Send a copy of the notice and details of the proposed disposal to:

(i) Any local authority whose area includes any part of, or shares a boundary with any part of, the playing field to which the proposed disposal relates.

(ii) The Sports Council for Wales.

(iii) The National Playing Fields Association.

(iv) Persons or bodies which appear to represent the interests of persons or bodies within the authority’s area, or of an authority which shares a boundary with any part of the playing field, and who make use of the playing field.

(v) Any body whose main aims include preserving open spaces throughout Wales; or play opportunities for children throughout Wales;

(vi) Such other persons or bodies as the local authority considers appropriate.

(h) Provide a copy of the details of the proposed disposal to anyone who requests it during the consultation period, subject to the payment of a reasonable charge.

4.15 Consideration of representations: The regulations require a local authority to consider any representations it receives about the proposed disposal during the consultation period. It also has discretion to consider representations received after the end of the consultation period.

4.16 Decision: A local authority must consider any representations it receives and prepare a report summarising the representations received and the reasons for its decision to proceed or not to proceed with the disposal. It must send a copy of the report to anyone from whom the local authority received a substantive representation.

4.17 If a local authority decides to proceed with a disposal, it must give notice in a local newspaper on two consecutive weeks. The notice must inform the public of the local authority’s decision and the place or places and times when the report on the decision may be inspected. The notice must also be published on the local authority’s website and must be displayed in at least one place on or near the playing field and at each official entrance for at least six weeks.

4.18 The decision report must be available for inspection during office hours for at least six weeks at the local authority’s principal office and, if reasonably practicable, at one or more other places in the area. The local authority must send a copy of the decision notice and decision report to any person or body from whom it received a substantive representation. The local authority must provide a copy of the decision report to any person or body requesting a copy, subject to payment of a reasonable charge.

4.19 A local authority must wait for at least 12 weeks from the day on which its decision notice is first published before proceeding with a disposal of a playing field.

4.20 If a local authority decides not to proceed with a proposed disposal, it must prepare a report of that decision, including a summary of the representations received and considered by the local authority and the reasons for the local authority’s decision. As soon as reasonably practicable after making the decision, the local authority must send a copy of the report to any person or body from whom it received a substantive representation.

4.21 The regulations say that in exercising its functions under the regulations a local authority must have regard to any guidance issued by the Welsh Ministers. The Welsh Government has published guidance on the Playing Fields (Community Involvement in Disposal Decisions) (Wales) Regulations 2015 (Statutory Guidance to County and County Borough Councils, Community and Town Councils and National Park Authorities in Wales: The Playing Fields (Community Involvement in Disposal Decisions) (Wales) Regulations 2015: available at: http://gov.wales/topics/localgovernment/publications/playing-fields-regulations-2015/?lang=en)

School Playing Fields in England

4.22 Section 77 of the School Standards and Framework Act 1998 prohibits a local authority, the governing body of a maintained school, a foundation body, and the trustees of a foundation, voluntary or foundation special school from disposing of playing fields which immediately before the date of the disposal are used by a maintained school for the purposes of the school or have been so used at any time within the period of 10 years ending with that date. Section 77 sets out some exceptions to this prohibition, by reference to provisions in Schedule 22 to the School Standards and Framework Act 1998 (disposal of land in case of certain schools and disposals on discontinuance) and disposals in pursuance of transfer schemes under the Academies Act 2010.

4.23 The Department for Education has published guidance on disposal of school playing fields (Disposal or change of use of playing field and school land: Departmental advice for local authorities, maintained schools, special schools, academies and free schools: available at: https://www.gov.uk/government/publications/protection-of-school-playing-fields-and-public-land-advice

Allotments

4.24 Section 8 of the Allotments Act 1925 requires that if a local authority has purchased or appropriated land for use as allotments, the local authority must not dispose of the land for any purpose other than for use for allotments without the consent of the Secretary of State or in Wales the Welsh Ministers. Consent shall not be given unless the Secretary of State or the Welsh Ministers are satisfied that adequate provision will be made for allotment holders displaced by the action of the local authority or that such provision is unnecessary or not reasonably practicable.

4.25 As well as considering the statutory criteria when receiving an application for consent for the disposal of allotment land, the Secretary of State will consider the following policy criteria:

(a) The allotment is not necessary and is surplus to requirement;

(b) The number of people on the waiting list has been effectively taken into account;

(c) The local authority has actively promoted and publicised the availability of sites and has consulted the National Allotment Society; and

(d) The implications of disposal for other relevant policies, in particular local plan policies, have been taken into account.

4.26 The Department for Communities and Local Government has published guidance on disposal of allotment land (Allotment disposal guidance: Safeguards and alternatives: available at: https://www.gov.uk/government/publications/allotment-disposal-guidance-safeguards-and-alternatives

4.27 The Welsh Government has published guidance on allotments and community gardens (Guidance for Traditional Allotments and Community Led Gardening Projects: available at http://gov.wales/topics/environmentcountryside/foodanddrink/foodpolicyandstrategy/comgrownfoodactionplan1/allotments-community-gardens/?lang=en

Assets of community value in England

4.28 If a local authority owns land which is included on its list of assets of community value, disposal of such land would be subject to notice and moratorium requirements imposed by section 95 of the Localism Act 2011 and the Assets of Community Value (England) Regulations 2012.

4.29 Chapter 3 of Part 5 of the Localism Act 2011 requires a local authority in England to maintain a list of assets of community value and a list of unsuccessful nominations for inclusion on that list. Land in a local authority’s area is land of community value if a current non-ancillary use of the land furthers the social wellbeing or social interests of the local community and it is realistic to think there can continue to be non-ancillary use which will do so. Land in the local authority’s area is also land of community value if a non-ancillary use in the recent past furthered the social wellbeing or interests of the local community and it is realistic to think a non-ancillary use could do so in the next five years.

4.30 Community nominations to include land on a local authority’s list may be made by a parish council in the area or a voluntary or community body with a local connection. If a community nomination is made of land which is in a local authority’s area and is of community value, the local authority must include it on the list. This is subject to exceptions specified in the Assets of Community Value (England) Regulations 2012, such as residences. If land is included or removed from a local authority’s list of assets of community value, the local authority must give written notice to the owner of the land; the occupier of the land; the person who nominated the land for inclusion on the list; the holder of the freehold estate and the holder of any leasehold estate in the land where these are not the owner; and a parish council if any of the land is in that parish council’s area. A landowner has the right under section 92 of the Localism Act 2011 to ask a

local authority to review its decision to include the landowner’s land on the list of assets of community value. A local authority must publish its list of assets of community value and its list of unsuccessful nominations. It must also provide one free copy of each list to any person who asks for this.

4.31 If a landowner intends to dispose of an asset of community value, it must notify the local authority. There is then an interim moratorium period of six weeks when a community interest group, as defined in the Regulations, can request to be treated as a potential bidder. If a community interest group does this, a full moratorium period of sixth months applies, during which the owner cannot dispose of the land other than to a community interest group.

4.32 Therefore, a local authority could find that, as well as being required to maintain a list of assets of community value and having associated responsibilities, its own intentions to dispose of land may be delayed because of the need to comply with the requirements of the Localism Act 2011 and the Assets of Community Value (England) Regulations 2012.

Public Procurement

4.33 Public procurement legislation does not apply to a straightforward land disposal. However, where the requirements of a land transaction include, in a contract for pecuniary interest concluded in writing, an obligation for the developer to construct works to the contracting authority’s specification, there will be a public works contract and public procurement legislation will apply. The case of Jean Auroux and Others v Commune de Roanne (C-220/05) took a wide interpretation of what might amount to a public works contract. Later cases have further clarified the requirements for a public works contract and indicated the circumstances in which a development agreement might not involve one.

4.34 The following mechanisms have been used in the past and have been held by the European Commission not to engage public procurement legislation:

(a) An obligation by a developer to fund works, which are then separately carried out or procured by the authority.

(b) A negative condition which prevent works being undertaken or from proceeding beyond a certain point until other works have been provided.

(c) The Flensburg principle, which was established by infringement proceedings which the European Commission commenced against Germany but closed, concerning a land sale for urban development purposes by a public utility company of the city of Flensburg (IP/08/867). This involves the parties having a statement of intent in the documentation but placing no legally binding obligations on the developer. This is combined with a right for the authority to repurchase the land in the event of the development not being

constructed by a certain date. In effect, the positive obligations one would normally see in a development agreement are inverted.

4.35 The case of Helmut Müller GmbH v Bundesanstalt für Immobilienaufgaben (C-451/08) confirmed that the concept of a public works contract requires that the contractor assume a direct or indirect obligation to carry out the works which are the subject of the contract and that obligation must be legally enforceable in accordance with the procedural rules laid down by national law. The High Court provided further clarification on when a development agreement would be subject to procurement rules in R (on the application of Midlands Co-operative Society Ltd) v Birmingham City Council [2012] EWHC 620. It confirmed that a legally enforceable commitment from, for example, a developer to carry out works for a contracting authority in a development agreement is a necessary ingredient to trigger the application of public procurement legislation.

4.36 The reasoning of the court in the Midlands Co-Operative Society Ltd case was based on the following:

(a) When considering if the public procurement regime applies it is necessary to look at the whole of the arrangements between the contracting authority and the contractor to establish if there is a multi-stage award procedure including an obligation to perform works.

(b) Where a sale of land is accompanied by a binding contractual obligation to carry out works on the land, the hiving-off of the obligation to carry out a development into a separate agreement does not defeat the application of the public procurement rules.

(c) At the time of the transaction if there is no formal legally enforceable commitment to enter into a works contract then the public procurement rules do not apply.

4.37 In 2016, in the case of (R (on the application of Faraday Development Ltd) v West Berkshire Council [2016] EWHC 2166 (Admin), the court found that a development agreement between a local authority and a contractor was not a public works contract. In order for a contract to fall within the scope of the relevant procurement legislation its main object needed to correspond to the definition of one of the types of public contract covered by the legislation. In this case, the development agreement was a contract to facilitate regeneration by the carrying out of works of redevelopment and to maximise the authority's financial receipts from the land. The provision of services and land assembly had not represented a main purpose in themselves, but had simply facilitated the authority's regeneration and financial objectives. The authority had lawfully decided that the development agreement itself should not impose upon the developer an enforceable obligation to carry out the redevelopment. Therefore, it was not a public works contract.

5. Asset-backed delivery vehicles

5.1 The use of asset-backed delivery vehicles allows local authorities to make effective use of their properties, whilst facilitating effective delivery of services and providing opportunities for income generation. An asset-backed delivery vehicle involves a local authority and a private sector partner establishing a corporate entity into which the local authority transfers 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 which they expect from the local authority asset-backed vehicle. They would also need to agree budgets and procedures for approving projects for the local authority asset-backed vehicle.

5.2 Local authority asset-backed vehicles might be used to achieve the regeneration of particular sites or to manage a portfolio of investment properties. By going through a process to identify a partner or partners and setting up a local authority asset-backed vehicle to provide for long term arrangements with that partner, a local authority can put in place an arrangement which can deliver financial and regeneration outcomes and help the local authority and the private sector partner involved in the vehicle to achieve time and cost savings. Returns from the vehicle could be used for further regeneration and development or for other purposes, so providing the local authority with a potential new income stream.

5.3 If a local authority is considering setting up an asset-backed vehicle, it would be appropriate for it to go through the following processes before taking a decision to proceed:

(a) Identify what the local authority expects to achieve and how it expects the use of a local authority asset-backed vehicle to help achieve that.

(b) Identify the assets which the local authority could contribute to a local authority asset-backed vehicle.

(c) Identify the type of partner which the local authority will need to attract in order for the local authority asset-backed vehicle to be successful. This should include considering the types of skills which the local authority is expecting a partner to bring to the vehicle, the level of risk which the local authority is expecting the partner to take on, and any particular sectors which the local authority considers would be particularly well suited to the proposed arrangement.

(d) Form a view on the most appropriate governance structure for the vehicle. The structure which is used on each occasion should be the most appropriate for the particular local authority in the particular circumstances. A local authority is likely to need to work with its partner or partners in reaching a final decision on the appropriate structure but it may be helpful if it has an initial view when it seeks a partner.

(e) Establish whether the local authority in principle supports the idea of participating in a local authority asset-backed vehicle and is willing to provide authorisation for particular proposals to be progressed.

State aid considerations

5.4 A local authority which proposes to invest in an asset-backed vehicle with a private sector partner should carry out a full State aid assessment.

5.5 The starting point in determining whether there is State aid is to consider whether the local authority is behaving in a way which satisfies the ‘market economy operator principle’ or ‘MEOP’. The purpose of the exercise is to establish that the local authority is investing in the asset-backed vehicle on terms which would be acceptable to a private market operator. In other words, you are trying to show that the investment is on market terms, meaning that there is no State aid.

5.6 If the public sector investment in the asset-backed vehicle takes place pari passu with the private sector investment, then this will be enough to demonstrate that the investment is on market terms and so does not involve State aid.

5.7 What does pari passu mean? In broad terms, it means that the public sector investor invests on the same terms, particularly that the risks it accepts, and the return it receives, are the same as those which the private sector investor receives.

5.8 In order to be able to rely on a pari passu argument to demonstrate market terms, the investment made by the private sector investor must be big enough to be ‘economically significant’. There is no hard and fast rule as to what level of investment is economically significant, but a 30% private sector investment is a good rule of thumb.

5.9 It is important that the capital inputs which the public and private sector investors put into the asset-backed vehicle are valued at market value for the purpose of determining their percentage ownership share of the asset-backed vehicle. Similarly, any ongoing inputs should be valued at market value. The key point here is that if the public sector investor is getting less credit than it should for its input, or if the private sector investor is getting more credit than it should for its input, then State aid could be present.

5.10 If the terms of the public sector investment and the private sector investment are not pari passu, and this means that the private sector investor is getting a better deal than the public sector investor, then there will be State aid and it will be necessary to consider what State aid cover is available.

6. Use of companies

6.1 This guide has noted that if a local authority intends to use its powers to act for a commercial purpose it is required to do so through a company. There may be other circumstances in which a local authority considers that it would be helpful to set up a company. For example, the local authority may find it useful to have the benefit of a company’s limited liability. If the local authority is joining with another body for a joint venture, it may find that establishing a new legal entity such as a company, which can enter into contracts in its own right, may help with the practical arrangements of running a joint venture arrangement.

6.2 The practicalities of setting up and running a company include:

(a) Preparing a business plan

(b) Preparing the constitutional documents

(c) Preparing a shareholders’ agreement

(d) Appointing directors for the company

(e) Incorporating the company

(f) Complying with accounting requirements

(g) Holding board meetings and general meetings of the company

6.3 A limited company will require a memorandum and articles of association as its constitutional documents. Other types of corporate entities will have other documents. For example, a limited liability partnership will have a limited liability partnership agreement. Community benefit societies and

co-operatives will have governing documents. Charitable incorporated organisations will have constitutions.

6.4 Arrangements need to be made to appoint directors to the company. If a local authority intends to nominate its members or officers to be directors of a company, it is important that they are able to manage their distinct positions as members/officers of the local authority and directors of the company and are able to avoid conflicts of interests between the two.

6.5 Arrangements need to be made to incorporate a company and register it with the Registrar of Companies at Companies House. Community benefit societies and co-operatives register with the Financial Conduct Authority. Charitable incorporated organisations register with the Charity Commission.

6.6 If a local authority is to participate in a company, it will need to establish whether its proposed level of involvement will mean that the company would be local authority controlled or influenced for the purposes of Part V of the Local Government and Housing Act 1989. That could have implications for the propriety and publicity controls imposed on the company and the accounts which the local authority is required to prepare.

6.7 If a company is a “regulated” company as defined in the Local Authorities (Companies) Order 1995, it will be subject to the propriety and publicity controls set out in that Order. A company is “regulated” if it is a local authority controlled company or a company which is subject to local authority influence and either the company is unlimited or the local authority’s influence is such that if the local authority were itself a company it would be regarded as having a dominant influence or would be required to prepare group accounts in respect of the company. The main propriety and publicity controls in the Local Authorities (Companies) Order 1995 are:

(a) A regulated company must mention on all “relevant documents” (business letters, notices, official publications, websites, bills of exchange, promissory notes, endorsements, cheques, orders for money or goods purporting to be signed by or on behalf of the company, all bills of parcels, invoices, receipts and letters of credit) the fact that it is controlled or influenced by a local authority and the name of the relevant local authority.

(b) A regulated company must not pay to a director who is also a member of the local authority which controls or influences the company remuneration or expenses in excess of the maximum amount that the local authority could pay in respect of a comparable duty performed on behalf of the local authority.

(c) A regulated company must not publish any material which the local authority would be prohibited from publishing by section 2 of the Local Government Act 1986 (material which appears to be designed to affect support for a political party).

(d) If a director becomes disqualified for membership of a local authority otherwise than by being employed by a local authority or a controlled company, a regulated company must make arrangements for a resolution to be moved for the director’s removal.

(e) A regulated company must provide information to the local authority’s auditor for the purposes of audit of the local authority’s accounts.

(f) A regulated company must provide information to members of the local authority which they reasonably require for the discharge of their duties (but not if this would involve breach of an enactment or an obligation owed to any person).

(g) A controlled company which is not an arm’s length company must make available for inspection by any member of the public a copy of the minutes of any general meeting of the company for four years after the meeting (but not if this would involve breach of an enactment or an obligation owed to any person).

6.8 A local authority would also need to decide if its involvement in a local authority controlled or influenced company is sufficiently material that, in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom, the local authority would need to prepare group accounts including the accounts of the company.

6.9 A company will be controlled by a local authority for the purposes of Part V of the Local Government and Housing Act 1989 if:

(a) The company is a subsidiary (as defined in section 1159 of the Companies Act 2006) of the local authority; or

(b) The local authority has power to control a majority of votes at a general meeting of the company; or

(c) The local authority has power to appoint or remove a majority of the board of directors of the company; or

(d) The company is under the control of another company which is under the control of the local authority.

6.10 A local authority can determine that a controlled company is an “arm’s length company” in relation to any financial year if, before the beginning of that year, the local authority resolved that it should be an arm’s length company and, at all times from the passing of that resolution to the end of the financial year, it meets the following conditions:

(a) Each of the directors was appointed for a fixed term of at least two years.

(b) No director has been removed by resolution under section 168 of the Companies Act 2006 (unless the Secretary of State directs that the removal of the director should be disregarded for the purposes of this condition).

(c) No more than one fifth of the directors of the company have been members or officers of the local authority.

(d) The company has not occupied any land in which the local authority has an interest other than for the best consideration reasonably obtainable.

(e) The company has entered into an agreement with the local authority that it will use its best endeavours to produce a specified positive return on its assets.

(f) Except for the purpose of enabling the company to acquire fixed assets or provide it with working capital, the local authority has not lent money to the company nor guaranteed any sum borrowed by the company nor subscribed for any securities in the company.

(g) The local authority has not made any grant to the company except in pursuance of an agreement or undertaking entered into before the financial year of the company in which the grant was made.

(h) The local authority has not made any grant to the company the amount of which is in any way related to the financial results of the company in any period.

6.11 A company will be influenced by a local authority for the purposes of Part V of the Local Government and Housing Act 1989 if: there is a business relationship between the company and the local authority and:

(a) At least 20% of the total voting rights of members having the right to vote at a general meeting of the company are held by persons who are associated with the local authority; or

(b) At least 20% of the directors of the company are persons associated with the local authority.

(c) At least 20% of the total voting rights at a meeting of the directors of the company are held by persons associated with the local authority.

6.12 A person is “associated” with the local authority if he or she is a member of the local authority or has been at any time in the preceding four years; or an officer of the local authority; or both an employee of the local authority and a director, manager, secretary or other similar officer of a company which is under the control of the local authority.

6.13 There is a business relationship between a company and a local authority if:

(a) Within a period of twelve months the aggregate of payments to the company by the local authority or a company controlled by the local authority represents more than one-half of the company’s turnover.

(b) More than one-half of the company’s turnover comes from the exploitation of assets in which the local authority or a company controlled by the local authority has an interest (apart from an interest in land which is in reversion on a lease granted for more than seven years).

(c) The aggregate of grants for capital purposes made by the local authority or by a company controlled by the local authority and the nominal value of shares or stock in the company which is owned by the local authority or a company controlled by the local authority exceeds one-half of the net assets of the company.

(d) The aggregate of such grants, loans or other advances made or guaranteed by the local authority or by a company controlled by the local authority and the nominal value of shares or stock in the company which is owned by the local authority or a company controlled by the local authority exceeds one-half of the fixed and current assets of the company.

(e) The company occupies land by virtue of an interest which it obtained from the local authority or a company controlled by the local authority for less than the best consideration reasonably obtainable.

(f) The company intends to enter into a transaction and, when it has done so, there will be a business relationship between the company and the local authority by virtue of any of paragraphs (a) to (e) above.

Public Procurement

6.14 The Public Contracts Regulations 2015 set out rules on the procedures which contracting authorities are required to follow when procuring contracts for pecuniary interest in writing for external providers to carry out the execution of works, the supply of products or the provision of services. Procurement by contracting authorities is also subject to general Treaty principles such as transparency and non-discrimination. Local authorities also have rules in their own constitutions which set out the processes which they are required to follow when procuring contracts.

6.15 The process of setting up a company would not in itself be subject to public procurement legislation. However, if a contracting authority intends to set up or participate in a company and to award a contract for services to that company, that could be subject to public procurement legislation. There are thresholds and exclusions which mean that in some circumstances the

Public Contracts Regulations 2015 would not apply or would apply to a limited extent.

6.16 Before proceeding with arrangements to set up or participate in a company, a local authority should ensure that it has considered comprehensively the extent to which the proposed arrangement may be subject to public procurement legislation. It should ensure that it takes account of the requirements of public procurement legislation when it plans and implements its arrangements.

7. Conclusion

7.1 There are a range of options which a local authority can consider for income generation. This guide has taken a brief look at some of them.

7.2 In order to be effective in income generation, a local authority should produce an income generation strategy and its income generation activities should reflect the contents of the strategy. Before carrying out any income generation activity, a local authority must be sure that it is within the local authority authority’s powers and that it would be a good use of the local authority’s powers.

"They are really good and reliable. They understand the law from public sector and

private sector perspectives so they also understand who we are dealing with as well."

Chambers & Partners Directory 2017 Administrative & Public Law

SERVICES FOR THE PUBLIC & NOT-FOR-PROFIT