Out-Law / Your Daily Need-To-Know

This guide was last updated in August 2011.

When planning a development or scheme involving community or public assets one aspect that is often overlooked is the arrangements for holding and managing that asset and ensuring that the initial objectives – its 'legacy' – continue to be pursued after it has been delivered. The right structure will depend on the asset and the drivers and objectives behind the scheme. This guide looks at the options available and how to choose the best one for your scheme.

Community land trusts

A community land trust (CLT) will own land and use it for the benefit of the community. Each CLT will engage in different activities but these will usually include granting long and short leases over land to commercial developers, providing private and social housing and community facilities.

CLTs can be either charitable or non-charitable entities. If the CLT is a charitable entity it is likely that it will take the form of a company limited by guarantee, a trust or an industrial and provident society (IPS). Non-charitable CLTs could take the form of a non-charitable IPS, a company limited by guarantee or a community interest company. For the advantages and disadvantages of each type of vehicle, see below.

Community development trust

A community development trust (CDT) is an enterprise created by a community to enable sustainable development in that community's area. They may be set up as the result of a community planning exercise, or as a positive reaction to local closures or loss of services. CDTs undertake a mixture of economic, environmental and social initiatives such as property development, managing workspaces, community businesses, arts programmes, sports and leisure facilities or retail and market space. As independent not for profit organisations, they are committed to involving and being accountable to local people. A CDT, unlike a CLT, will not necessarily hold land as this is not integral to its role.

There is no standard organisational form for a development trust. Most are charitable and will register as a company limited by guarantee or an IPS. Alternatively they could opt for community interest company registration.

Commonhold association

Commonhold is a form of land ownership where the proprietors of houses, flats or commercial units in a defined area hold an interest in a commonhold association (CA) which manages shared common areas. Having this involvement means that those proprietors can take ownership of common areas within a development and make joint decisions in relation to the management of those assets.

The commonhold is divided into freehold units, each held by a freehold registered proprietor. The rest of the building or estate is held by the CA. The commonhold community statement will define the extent of each unit and the common parts and percentages each unit will contribute to the running costs of the building. It will also set out the duties and obligations of the commonhold association and of each unit holder.

The developer can apply for registration of a new-build commonhold and appoint directors of his choice. Following sale of the first unit all directors must resign and a new board must be appointed. While the developer remains the unit-holder of more than a quarter of the unsold units he usually has the right to appoint one quarter of the directors. This allows the developer to influence, but not to control, the management of the commonhold while he still holds a significant financial interest in it.

Parks trust

This is a body set up specifically to hold land such as a park or other large estate. It is usually a company limited by guarantee (which may be charitable) or a community interest company. Normally the land will be endowed to the trust to manage. It is open for the trust to exploit the land and assets to generate an income to maintain that asset, in accordance with the aims of the trust. By giving management responsibility for the open land to the trust, case studies have shown a higher level of maintenance than would possibly have been achieved if the local authority alone had been entrusted with the upkeep of the land.

Management company

The traditional approach to managing assets, including legacy assets, has been through a management company. These will usually be companies limited by shares or guarantee, or community interest companies. The developer and all occupiers (where relevant) will be members. The developer will usually retain control of the voting rights and grant occupiers non-voting interests until a particular proportion of the development has been completed or occupied. Once this trigger point has been reached, control will transfer to the occupiers. Management companies range from those which manage a single building or premises to more complex multi-party structures managing community assets.

Energy service companies

An increasing number of new structures are emerging to focus on particular aspects of management, particularly in the energy sector given the low carbon agenda. An energy service company (ESCO) is an entity that delivers 'energy services'. There is no strict definition of 'energy services' but these companies generally involve the supply of energy as an outcome – heat and power - rather than outputs, such as fuel and electricity. However the sector is seeing a huge amount of diversity due to the growth and incentives in the renewable energy arena and ESCOs are becoming more involved in or influencing how energy is supplied directly to consumers.

ESCOs will usually be companies limited by shares or guarantee, or community interest companies. The defining feature of an ESCO is its focus on energy management as opposed to just supply. In a regeneration context an ESCO would normally operate as a public private partnership, potentially involving the community, to deliver energy services such as community heating or a combined heat and power solution or a solar PV panel scheme.

Multi utility service companies

A multi utility service company (MUSCO) is similar to an ESCO, but is a 'one-stop shop' providing services such as gas, water, electricity and telecommunications to certain projects. It will usually be a company limited by shares or guarantee or a community interest company.

Coordinating all utilities to one service provider enables developers to concentrate on their core business of development and construction. One company, and one point of contact, is generally more cost-efficient than the traditional single utility approach. Multiple pipes and cables can be put in one single trench at the same time and passed on to the developers so that there is less site disruption.

Which legal vehicle should be used?

As can be seen from the above, there is more than one possible legal vehicle which can be used for each legacy structure depending on what you are trying to achieve.

Limited company: often used as the basis for other legal vehicles such as trusts, community interest companies or commonhold associations. They are good for managing elements of the public realm, off-street car parking, communal buildings and communication infrastructure. Companies limited by guarantee rather than by shares may be more suitable for a not for profit venture where the members do not need to take out a return.

The advantages of using a limited company are:

  • members' liabilities are limited to an agreed amount;
  • it can enter into contracts, borrow money and hold property in its own name as a separate legal entity to its members;
  • companies limited by guarantee are easy for members to enter or exit and are often more appropriate for public sector involvement;
  • companies limited by shares are well-recognised by developers for single building or small estate management companies;
  • regulation and reporting requirements create transparency;
  • it is possible to create automatic trigger points for exit and voting thresholds.

However, the disadvantages are:

  • companies are subject to statutory regulation
  • directors will have personal duties and may be subject to personal liability for breach of those responsibilities in certain circumstances.

Community interest company (CIC): this is an appropriate vehicle for managing assets where there is a direct benefit to the community. The CIC was established as a new form of company in 2004. It offers members or shareholders the assurance that company profits and assets will only be used for the public good by way of an 'asset lock'. A CIC must pass a community interest test in order to be registered, and must produce an annual community interest report.

The advantages of using a CIC are:

  • it has a clear status for the benefit of the community;
  • the regulation and disclosure requirements provide transparency;
  • any surplus funds must be reinvested for the benefit of the organisation.

The disadvantages are:

  • the 'asset lock', which ensures funds can only be used for the public good, may operate rigidly;
  • regulation and reporting requirements may be burdensome.

Trusts: these can be useful where it is necessary to protect the underlying assets. Community Development Trusts are commonly set up to manage assets for the community.

However, some disadvantages of the vehicle are:

  • decision making can be onerous, and trustees can be personally liable for decisions in certain circumstances;
  • trustees are unable to delegate powers – this restricts meaningful use of subcommittees;
  • unless formed as a company a trust is not a separate legal entity and cannot own property in its own right.

Industrial and Provident Society (IPS): an incorporated body with limited liability regulated by the Industrial and Provident Societies Act. The business of an IPS must be conducted for the benefit of the local community. It will have objects - what it is formed to do - and a constitution, and must have at least three members or two registered societies. On termination its assets should be transferred to a body with similar objectives.

An IPS will usually be the most appropriate vehicle for a housing association or leisure trust. Its advantages are:

  • as a separate legal entity it may be a contracting body which can hold land, sue etc;
  • it can undertake a range of activities including those for general trading;
  • it provides limited liability for its members.

Its disadvantages are:

  • proving that the main benefit of the IPS is to the community at large rather than specific members may be difficult and may prevent the private sector from participating;
  • no member may invest more than £20,000;
  • it has a less flexible makeup, particularly when the business is terminated.

Unincorporated association or contractual relationship: a contractual relationship between the individual members of the organisation. The duties, powers and responsibilities of those appointed and elected are set out in the constitution, with rules governing membership. It may be appropriate for a residents' association or community forum. It is good for managing community facilities and community initiatives such as maintaining open spaces, allotments and community buildings.

The disadvantages are:

  • it has no separate legal entity, so cannot own its own property or contract with third parties – designated members must undertake these activities in their own names on behalf of the others;
  • it is easy to inadvertently create a partnership, which would mean members would be personally liable for the debts of the partnership and actions of other parties;
  • a contractual relationship is not a suitable vehicle for seeking charitable status or certain types of funding.

Commonhold association (CA): used where a commonhold is being created (see above). The CA will be a company limited by guarantee registered at Companies House and governed by its memorandum and articles of association. The corporate vehicle will enable the entity to own and manage the land it is responsible for and ensure that the unit holders will not be directly liable.

However, a CA will be subject to strict Companies Act regulation in addition to further commonhold-specific laws,

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