Out-Law News 2 min. read

High Court clarifies ability of local authorities to enter into limited liability partnerships

A local authority acted within its powers when it set up a limited liability partnership (LLP) to deliver a new housing and community scheme, the High Court has ruled.

Mr Justice Ousley dismissed a judicial review application (59-page / 478KB PF) brought against the London Borough of Haringey over its creation of the Haringey Development Vehicle (HDV).

"Local authorities will now be able to better understand the parameters around the use of this legal vehicle and when it can most appropriately be used as a structure for delivery of regeneration and housing," said public-private partnerships expert Scot Morrison of Pinsent Masons, the law firm behind Out-Law.com, who was part of the team advising Haringey Council on the case.

"In the current political climate where there is a drive from government and increasing pressure on local authorities to build more houses, this is a significant case in terms of the legal powers that are available for councils to use," he said.

The case turned on the correct interpretation of the general power of competence (GEPOC) set out in section 1 of the 2011 Localism Act. This power allows councils to do anything that individuals generally may do, giving flexibility and the chance to innovate, which is particularly important for those who are looking at new ways of meeting their objectives in light of reduced funding.

The Localism Act requires that where a local authority is exercising its GEPOC but is doing things for a commercial purpose, it must do them through a company. The judge therefore had to establish the circumstances in which an authority can be said to be acting for a 'commercial purpose'.

Mr Justice Ousley found that the dominant purpose behind Haringey's decision to set up the HDV could not be categorised as commercial. Rather, in the circumstances, any commercial component was merely incidental or ancillary. As a result, it was lawful for Haringey to use an LLP structure in these circumstances.

"We have been on the cutting edge of developing legal structures for councils and their partners, but this was an area that had not been tested previously by the courts," said Morrison. "The judgment confirms the approach that we have been developing with our clients, and upholds the use of LLPs as a flexible, appropriate solution in the right circumstances."

"There are a number of councils who have used the GEPOC in similar ways, and they will have been watching this with interest. For private sector partners too, this ruling brings clarity and certainty. Some partners will be still in the process of setting up their joint ventures and will want to know whether their options should be restricted when relying on the GEPOC or whether LLPs are available to them," he said.

"Those involved in joint ventures through LLPs may want to review their position, and assess their purposes in entering the LLP. Those in the process of setting up this kind of joint venture should make sure that they are clear about their purposes in participating in the LLP, and that they have a robust audit trail for their decision-making process," he said.

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