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Can local authorities team up with developers in LLPs?

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A recent High Court case (Peters v LB Haringey and Lendlease) has shed new light on whether local authorities are able to enter into joint ventures with private-sector developers using limited liability partnerships. Limited liability partnerships (LLPs) are popular choices for development joint ventures. They are flexible, allowing the parties to set out bespoke arrangements for how profits will be split. They are corporate bodies, capable of owning and charging land, allowing them to attract external funding. And LLPs are tax transparent, which means that they do not themselves pay corporation tax but instead each partner pays tax on the profit allocated to them.

It has always been unclear whether local authorities are able to join LLPs and many authorities have, perfectly prudently, taken the view that they cannot. Local authorities rely on their ‘general power of competence’ in the Localism Act 2011 to carry out developments. Section 4 of that Act requires that local authorities who use this general power to ‘do things for a commercial purpose’, they must do so through a company. LLPs are not companies.

LLPs, on the other hand, are governed by the Limited Liability Partnerships Act 2000. This contains a fundamental principle that LLPs may only be used for the carrying on of a lawful business ‘with a view to profit’.

The traditional view has been that, if a local authority joins an entity for the purpose of carrying on a lawful business with a view to profit, it surely must be acting for a commercial purpose, and thus should be using a company instead. It has always been feasible for a local authority to set up a trading company and then have that company enter into a joint venture within an LLP. But this means inserting a corporate taxpayer in the chain, whereas income passed directly to a local authority itself would be tax free. In fact, this was one of the main reasons for requiring the use of a company for commercial activities: to ensure local authorities competed on a level playing field with other businesses.

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In this latest case, the London Borough of Haringey entered into an LLP with Lendlease as part of a controversial project which became known as the Haringey Development Vehicle or HDV. The challenge was brought by a local resident who attacked the use of an LLP, alongside other complaints, principally as a method of trying to disrupt the plans. The use by residents of quite sophisticated public law points to challenge developments is becoming more and more common, with other recent cases having focused on issues such as procurement and state aid.

In the High Court, however, Haringey convinced the judge that its involvement in the development plans was primarily to obtain outcomes in the public good, consistent with its role as local authority. It argued that it sought to achieve the regeneration of its area, to increase housing supply and to promote employment and economic growth. It submitted that, although the LLP intended to generate a return (which would be re-invested by Haringey into similar schemes), this was only a side-effect of the development, and really just a consequence of Haringey following its duty to act prudently and seek best value for its assets. Therefore, despite being in a profit-seeking joint venture with Lendlease, who clearly were acting for a commercial purpose, the Court therefore held that Haringey was not doing so.

Local authorities, and those seeking to do deals with them, will see this case as a welcome development and it should certainly be considered carefully when public-private joint ventures are being structured in the future. It is worth remembering that Haringey’s arguments were fact specific, and care would need to be taken throughout the planning, decision-making and procurement stages to ensure that the approach of any future authority wishing to use an LLP is consistent with the ‘non-commercial’ arguments raised by Haringey. We must also remember that this case is only first instance, and a more definitive answer from the courts will only be available if the matter comes to appeal. However, these are potentially exciting times for local authority joint ventures.

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