Property companies – a way forward for local authorities?

projects portrait1A number of councils are looking to develop free-standing organisations to develop their property interests through what is sometimes known as a ‘prop co’. Is this a good idea, and how should they go about it? Nathan Holden and Stephen Pearson explain.

Traditionally local authorities own extensive parts of their boroughs/counties - up to 50% in some areas and often for largely historic reasons such as old slum clearance CPOs or open space.

Frequently this has not been run on a ‘commercial’ basis, i.e. maximising rentals and exploiting development opportunities. The democratic process can slow any decision to develop or plan the use of key sites. With the current need to supplement cuts in central government support, this is a gap that needs to be filled.

Creating a ‘prop co’ can leverage in a number of benefits. In particular:

  • It can create a more focussed organisation able to concentrate on key priorities.
  • Decisions on developments and site disposals can be made quickly and effectively.
  • It provides a structure which can partner with private sector developers enabling, for example, the creation of joint venture vehicles into which the private sector can invest and leverage in loan capital.
  • Valuable investment and job opportunities can be accessed.

From a lawyer’s perspective there are some issues to be considered. In particular, these include:

  • What structure should be employed? For example, a Limited Liability Partnership (LLP) offers substantial tax advantages (it does not pay Corporation Tax, in particular), but the Localism Act 2011 indicates that all local authority trading should be carried out by a limited company.
  • Creation of a company is subject to the restrictions imposed through ss95/96 Local Government Act 2003, i.e. a business case for the company needs to be prepared and approved by the authority before pressing ahead.
  • Who will sit on the board? If council members, they need to clearly understand their rights and duties under company law and when a conflict arises – the legal duties of a company and a local authority are very different.
  • What about democratic accountability? There is an issue over what powers the council grants to the company (after all, it will be either the only or the principal shareholder).
  • If land is being ‘given’ to the company, where does this leave the council’s duties under s123 Local Government Act 1972 to realise ‘best value’. There are General Disposal consents which may apply, but these will need to be considered fully. There would also potentially be state aid issues to consider.
  • Is the company a ‘Teckal’ entity, i.e. is it owned and controlled by the council? If it is, then the council can contract with it without needing to follow an OJEU-compliant procedure to procure services from it, but the ‘prop co’ in turn will need to follow the procurement regime when entering into contracts itself.
  • Will the private sector be involved, for example by taking shares in the ‘prop co’ or by having seats on the board? This may help the company to behave commercially and maximise returns, but will also give the private sector access to the council’s property portfolio perhaps without paying proper value for it!
  • Will ‘prop co’ be seen as an organisation (for example by private sector partners) that can short-circuit the planning process and speed up permissions for those environmentally-sensitive sites? Clearly, any attempt to fetter the council’s discretion as the local planning authority needs to be resisted carefully.

Nathan Holden is a partner and Head of Local Authorities and Stephen Pearson is a partner at Freeth Cartwright. Nathan can be contacted on 0845 077 9646 or by email, while Stephen can be reached on 0845 274 6900 or by This email address is being protected from spambots. You need JavaScript enabled to view it..