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Ready, steady… build!

On April Fool’s Day, we suggested – with a perfectly straight face – that the conditions may be in place for a return to the glory days of local authority house building.

Less than four months on, we find ourselves with:

  • a new Prime Minister;
  • a new Secretary of State for Communities and Local Government;
  • a new Minister for Housing and Planning,
  • a new London Mayor; and
  • a newly created Secretary of State for Exiting the European Union.

If a week is a long time in politics, a few months is a lifetime.

man building a brick wallAgainst a background of political instability, one thing has remained – the pressing need for more houses. It is an imperative which no amount of Ministerial reshuffles can dilute. Indeed, our new Prime Minister recognised the importance of addressing the “housing deficit” as part of her recent – and ultimately successful – leadership campaign.

Building sufficient homes to meet a growing need is a challenge that rests not only with the private sector. Local Authorities can – and must – play their part. In some cases, they may choose to go it alone, in others by working together with private sector partners.

With that in mind, we recently held a client seminar with Local Partnerships looking at barriers to local authority housing delivery and how these can be overcome in practice.

The central themes included:

Structures and approaches

From wholly-owned Local Development Companies to Local Asset Backed Vehicles, a multitude of options exist for Local Authorities answering the call to build. A wide menu of legal powers are available, with the chef’s speciality being the general power of competence in s.1 Localism Act 2011.

Naturally, given the nature of Local Authorities as creatures of statute, there are some inherent limitations on the use of those powers. Matters of vires, additional regulatory requirements and governance must all be addressed.

Nevertheless, successful innovation and housing delivery is certainly possible. Indeed it is happening in practice, with some notable examples.

Traps for the unwary

In what is a uniquely high risk environment for local authorities, legal challenges can come from several angles. The use of statutory powers, procurement processes and state aid issues all require careful consideration. The extent to which potential challenges can be anticipated – and mitigated – will be critical to avoiding costly legal roadblocks which could derail best laid plans.

Maximising the chances of success

Not all delivery vehicles will succeed. Clear objectives are essential from inception, allied to the capacity and commitment to deliver outputs over a sustained period of time. That commitment, in particular, must be secured at both officer and member level. Scale is also important – examples to date have seen relatively modest numbers delivered.

State aid risks

gavel-with-e_20131112140210365A recent case in the EU General Court serves as a reminder that all parties involved in the development of public sector land need to be aware of the risks associated with State aid.

The case the Netherlands v the European Commission (30 June 2015) involved an appeal against a Commission Decision that the renegotiation of a PPP agreement involved unlawful State aid by reason of the price of the land value being reduced considerably (as compared to the contractual agreed position) and certain agreed fees being waived.

The Court found that the Commission’s analysis of the land valuation was deficient insofar that it had failed to take account of the actual value of the land at the point at which the renegotiation occurred (the actual land value had declined considerably).  The Court also decided that the Commission had not adequately assessed the legal position of the municipality involved in the transaction correctly.  In assessing whether there was aid the Commission applied the usual approach of considering how a hypothetical private market investor would have conducted itself in the same circumstances.  The Court ruled that a private market investor would have had regard to issues such as the complexity of the scheme, the strong contractual position enjoyed by the PPP partner, the risk associated with litigation, and the potential return from delivering the scheme sooner (albeit with some waived fees).  It was also significant that if the opportunity was to be retendered, the lower land value may have meant that no better commercial offer was available in the market place anyway.  As a consequence the Court found that there was no unlawful State aid.

How to ensure that a transaction is compliant with the State aid rules

The first point of reference should always be the Commission’s “Communication on State aid elements in sales of land and buildings by public authorities”.  This document provides general guidance about how public authorities can ensure that their disposals of land comply with the State aid rules.  In general the communication provides two mechanisms to ensure compliance.  Firstly, through holding a well publicised and unconditional bidding procedure.  Secondly, market value can be established by means of an independent expert’s report.  In practice most local authorities will obtain a valuation prior to any disposal in order to be certain that they have obtained “best consideration” in accordance with their Section 123 duty (under the Local Government Act 1972).

Where the parties are contemplating a renegotiation, an important lesson from the case is that (A) the State aid rules should be carefully considered before proceeding with any change and (B) that the actual valuation in the market of the land concerned, at the point in time that the change is made is likely to be a highly relevant factor when considering the risk associated with the change.

A further consideration, where the arrangement in question has been procured in accordance with the Public Contracts Regulations 2015, is whether the change is “material” for the purposes of procurement law (see the recent Winchester case).

What are the risks?

If a transaction is found to be unlawful as a result of State aid there is the possibility that it could be challenged in the UK Courts by way of judicial review.  A low-cost option for parties aggrieved by the transaction is to alert the Commission to the possibility of there being unlawful aid and request that they investigate.  If the Commission determines that there has been unlawful aid, then it can require the Member State to recover any unlawful aid from the recipient.  In the context of a land transaction at a below market price, this could mean that a local authority seeks to recover a sum equal to the amount by which the disposal was undervalue.

A Repealing Prospect

There are many parts of the planning and related processes that we could do without – we will look at something else each week that could be eliminated.

Let’s start from the ground up.  Development requires land.  The public sector is a significant land owner and there is far more that could be done to release public sector land.  A perceived constraint on the public sector is Section 123 Local Government Act 1972.  This requires local authorities to obtain best consideration for the disposal of property unless they get the approval of the Secretary of State.

The principle is sensible but why does it need to be a legislative requirement?  Even with permitted exceptions and general consents from CLG it is burdensome.  And in some cases local authorities want to use their land more imaginatively than the cash value would suggest is appropriate.  Why not abolish the section and allow local authorities the freedom to dispose on the terms that they think sensible?  In many instances they will want to maximise value (and as tax-payers we should hope that they will).  But they may decide that there are good reasons for being adventurous – and we should also encourage that where the authority is transparent about the reasons for doing so.

Useful nuggets

The National Planning Policy Guidance has some useful nuggets.  There has always been a question about how planning obligations should be secured where the local authority is the main land owner. People have played games with unilateral obligations, with allowing the general public to enforce via “third party rights” clauses and having agreements with Counties in two tier areas.

The NPPG now makes it clear that it is acceptable for planning conditions to prevent development unless a planning agreement has been entered into.  The condition must meet the Newbury tests and, importantly, must be precise.  In practice this means that the terms must have been largely settled by the grant of permission.  Now that DCLG have endorsed this approach it will make it far easier to deal with regeneration schemes and strategic sites where not all of the land can be bound at the outset.

Less helpfully, the NPPG repeats the advice that conditions should not require the payment of contributions.  This seems to be hair-splitting given the acceptance that planning agreements can, effectively, be required by condition. It would also be far more transparent in terms of the requirements of a consent.  Such conditions are used in Ireland and Scotland – why not in England?