Borrowing money and investing in property

March 23, 2017

Is it lawful and, if lawful, is it prudent for the local authority to borrow money to invest in land? Alec Samuels analyses the issues.

The law

The local authority has the power to do anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or right) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions: Local Government Act 1972 s 111(1); Egan v Basildon Borough Council [2011] EWHC 2416 (QB). The local authority has a general power of competence just like individuals generally: Localism Act 2011 s 1. The local authority may borrow money for any purpose relevant to its function or for the purposes of the prudent management of its financial affairs: Local Government Act 2003 s 1. The local authority must determine and keep under review its borrowing limit, how much money it can afford to borrow: s 3. The Secretary of State may override that limit: s 2; and for national economic reasons set limits in relation to the borrowing of money by local authorities: s 4. In 2014-2015 some £33bn was invested in property: See Borrowing and Investments by Local Authorities, DCLG 2013, as updated, the office of National Statistics ONS and the Treasury. The Local Government Association LGA and the Chartered Institute of Public Finance and Accountancy CIPFA run courses on the subject. Until the Localism Act 2011 s 1, the local authority’s general power of competence, the local authority may now set up a company, the board comprising for example one elected member and three officers, for the purpose of borrowing a substantial sum of money from the bank, using the money to build a public swimming pool, recouping the money through the sale of holiday accommodation to be built on part of the site, and giving a valid guarantee to the bank cf Credit Suisse v Allerdale Borough Council [1997] QB 306, CA, pp 330G-335G. See also R v Richmond LBC ex parte McCarthy and Stone Developments Ltd [1992] 2 AC 48. The local authority now has the power to do anything that individuals generally may do, a general power of competence, a general power of well-being. All borrowed money must be spent in pursuance of the public duty of the local authority.

Where the local authority is running a commercial or trading activity then it must do them through a company: Localism Act 2011 s 4.

The advantages

The advantages for the local authority of investing in property are readily apparent. Money can be borrowed at a very low rate of interest from the Treasury through the Debt Management Office DMO (which recently replaced the old Public Works Loan Board PWLB) and then invested in property to produce a good return, thus benefiting the local authority, the council tax payers and the local people generally. The local authority may enjoy the services of officers knowledgeable, experienced and competent in property and legal matters. The local authority planners will have a fund of local property intelligence and knowledge. Specialist advice and assistance is available in the market place. Specialist companies are available to manage the entire operation. A special company can be formed by the local authority for the purpose, with staff well versed in making the business case and managing the investments. A long term investment strategy can be pursued. Specialist journals are available. The return in terms of dividends and rents and capital appreciation may be very worthwhile, wholly beneficial to the public finances, reducing the budgetary pressure on the local authority. Good well-managed property has consistently shown a better return than bank deposits and stocks and shares, especially long term.

The local authority will enhance their stake in the local area. The investment may promote very useful activities, e.g. regenerating land, acquiring land to be let to a local community group or trust, enabling a private sector leisure centre to be created, promoting a stimulus to local employment, enabling a railway or other transport scheme to become a reality. Local authority investment in modern residential blocks and thriving shopping and leisure centres must benefit the private owners and the local authority and the local community generally. Better to use UK money from Government and the UK private sector than from abroad, such as from China.

Not such a good idea

However, maybe property investment is not such a good idea. The proper function of local government is the provision of local services for the local people, a sort of trustee function, not speculative investment in property. The officers may have little knowledge, experience and competence in property matters. In going outside the normal scope of their duties they may not manage to negotiate and to obtain the best deals. The expertise of the officers lies in the provision of public services, not in investment in property for gain. The elected members are interested in politics and in local services, they are likely to be amateurs in matters of investment in property on a commercial scale.

An investment company may be formed so as to separate the investment activities. However, a company is a very different institution from a local authority. Directors of the company may find themselves in a position of conflict with regard to their other role as officers or elected members. Anything less than a controlling interest for the local authority must be dubious. So long as the UK remains in the European Union the complicated European procurement rules obtain and also the state aid rules. Accountability may be a problem. Members of the public seeking information about the performance of the company may be met by the refusal to disclose on the basis of commercial sensitivity and confidentiality. Under the Local Government Act 1972 s 123(s) the local authority is under a statutory duty not to dispose of land for a consideration less than the best that can reasonably be obtained. Ultimately the elected members are liable for the expenditure of public money entrusted to them, even if the activity has been contracted out, and the remedy against elected members tends to be political rather than compensatory. The taxpayer usually has to bear the loss.

The local authority should not gamble with public money. In the 2008 recession it emerged that some reckless local authorities had unwisely deposited public money at unrealistic rates of interest with overseas banks that turned out to be unsound. Private investors are always advised not to invest money that they cannot afford to lose. Property values can fall. Costs may increase. Rents may fall. Business rates may increase substantially. Returns may fall. Brexit may lead to economic downturn.

The local authority should not compete with the private sector, but concentrate upon the provision of public services. Council tax, business rates, Government grants, and borrowed money should be spent on the provision of public services, not on speculative investment. The local authority should not run into debt, putting all the taxpayers at risk. The taxpayers will rarely have been consulted upon proposed borrowing.

If the private sector is unwilling to lend or invest in a venture perceived by to be unviable or unsound should not the public sector get the message and keep away?

Local authority practice has varied very widely. Some investment has been plainly highly socially valuable and useful, and some dubious. No clear criteria exist. Consider the following examples:

Investment in a local care homes company providing care homes in the area: Bristol City Council.
Investment in a smartlight project for local street lighting: Doncaster Borough Council.
Investment in a guided busway for commuter traffic: Cambridgeshire County Council.
Acquiring brownfield land for social housing.
Lending money to a company developing a shopping centre: Canterbury District Council; and Guildford District Council.
Acquiring a lease on a cricket ground and hotel site and recovering the cost of the borrowed money through rent: Eastleigh Borough Council.
Lending money to a company rebuilding the town’s leisure centre: Eastleigh Borough Council.
Lending the money £3.5m to Marks and Spencer Ltd to build a new supermarket on local authority owned land in the town centre: Eastleigh Borough Council – highly controversial, allegedly unfair to other traders, and requests for information from the public refused as being “commercially sensitive”.

Alec Samuels is a barrister and formerly Reader in Law in the University of Southampton. He has also been very active in local government, retiring as leader of Southampton City Council in 2011. He can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it..