With councils beginning to build homes again, Ian Doolittle examines the legal issues arising out of the use of local housing companies.
For many years local housing authorities did not "do" new build. Housing associations had a virtual monopoly on grant-funding and with access to private finance following the Housing Act 1988 they had the financial "muscle" to make the most of the development opportunities that came their way. Councils had to watch while new housing association homes cropped up throughout their areas, leaving the councils with the important but unglamorous task of discharging their statutory housing duties and managing declining numbers of stock.
This has begun to change. With the confidence and the (limited) freedom accorded by self-financing in 2012 councils started to build homes again. The numbers are not yet large and for some councils it has been sufficient to make a statement, so to speak, that they can build and that they are no longer at the mercy of the market or the passive recipients of housing association largesse. Some councils have started to build themselves but many have set up local housing companies. There is no central "register" of these companies but this firm has been involved in the establishment of many of them and by our reckoning there are 40-50 local housing companies in place, with a similar number in prospect and perhaps 20-30 with lived-in houses in their ownership.
There is every reason therefore to understand what legal issues arise for these new delivery vehicles, which have been the subject of sufficient legal analysis by now for the issues to have "shaken down". First and foremost of course councils need the power to set up a local housing company and here much turns on what the housing company is intended to achieve. Sometimes the desire to set up a housing company is more important than its objectives and so clarity on purpose is not always easily achieved. The challenge is to establish whether there is a justification for not using the "natural" power in section 9 Housing Act 1985 which gives a broad power to provide housing accommodation. The obvious alternative is section 1 Localism Act 2011 and in turn section 4, which requires that a council which has a commercial purpose must establish a company to achieve it. Some councils have relied on the earlier and similarly worded "trading" power in section 95 Local Government Act 2003.
Then there is the question of consent. Here there is an important distinction to be made between Housing Revenue Account and General Fund land. Can the disposal requirements of section 32 Housing Act 1985 for the former and section 123 Local Government Act 1972 for the latter be satisfied? This may in turn involve consideration of the terms of applicable General Consents, which particularly with regard to section 32 are far-from-straightforward. Apart from these disposal rules there is often a need for consent under section 25 Local Government Act 1988, which applies (generally speaking) to financial assistance, whether in the form of undervalued land or otherwise. Here too there is difficult General Consent wording to be wrestled with. If the General Consents do not "work" then a carefully framed application for specific consent to the Department for Communities and Local Government will be required.
Other legal issues will be more familiar to local government lawyers conversant with commercial and property work. They will be alert to the State Aid rules, but may need to remind themselves of the affordable housing 'exemption'. There may also be a need to consider how the council can properly provide a State Aid compliant loan (through PWLB on-lending) to the local housing company and the inter-relationship between the interest rate charged under that loan and HMRC transfer pricing rules. They will certainly be also familiar with the procurement rules and the new(ish) Public Contracts Regulations 2015. The tests for 'bodies governed by public law' are now being thoroughly tested and, in relation to local housing companies, much will turn on whether the company has a commercial character or not.
Tax is sometimes left to accountants but it is so integral to legal structuring that often we are asked to take responsibility for the principles, if not the computations, involved. This requires an understanding of, in particular, the application of SDLT rules, including reliefs available for grouped companies, Registered Providers and (less frequently) charities. The Corporation Tax position is usually straightforward, if the company is not a charity; but there are plenty of complications to do with trading stock and investment assets if subsequent sales could trigger a chargeable gain. And finally VAT will be irrecoverable, at least in part, if the company is making exempt supplies of rented residential accommodation. All this needs to be compared with the council's own (usually benign) tax status
All this is now becoming familiar and the challenge is now on lawyers, whether in-house or externally, to add value by understanding properly what the council is seeking to achieve and to find the best "route" through the various obstacles. Colleagues here describe it is as navigating the icebergs. And there may well be some sites and schemes already in prospect which need to be considered for their applicability for local housing company 'treatment'; and this will involve property and development expertise allied with an understanding of valuation and accounting issues, as well as the issues rehearsed above.
Provided a council is setting up the company for the right reasons – and it would be wrong to do so to avoid the Right to Buy and the HRA debt cap – it can proceed with confidence. There is a growing recognition, especially in the new Brexit policy context, that councils have an important part to play in meeting the pressing need for new homes. Even if they do not match housing associations and the private developers for scale, local housing companies are here to stay. The local government lawyer will need to play his or her part in making them work.