Insight Local Government Lawyer Insight February 2018 5 source of money. They can borrow on a prudential basis from the Public Works Loan Board (PWLB) - effectively from the government - which looks only at a council’s ability to repay the loan involved, not the viability of any specific property purchase. PWLB lending is at very competitive rates, usually 2-2.5% and thus councils can access cheap finance limited only by the PWLB’s view of how ‘prudential’ they are overall and the availability of suitable properties. An indication of the scale of such purchases is shown by Mansfield District Council having bought Travelodge hotels in Doncaster and Edinburgh, and Luton Borough Council an office building in Chatham. Spelthorne Borough Council (see box) has spent £385.5m to buy BP’s 620,000 square feet research complex in Sunbury- on-Thames, together with a host of other commercial properties, while the London Borough of Sutton now owns Oxford Business Park, Canterbury City Council has bought part of the Whitefriars shopping centre and Stockport Metropolitan Borough Council has purchased the local Merseyway retail complex. Research by property firm CBRE shows the largest council property investor by value in 2016 and the first quarter of this year was Spelthorne at £394m - largely the BP deal - followed by Barnsley Metropolitan Borough Council with its £120m purchase of the local Glass Works retail centre. Altogether, 16 councils invested £20m or more in property in that period, with Nottingham City Council having the highest number of transactions at eight. We’ve got the power For lawyers, the consequences of this buying boom are not so much issues of powers as whether councils know what they are doing in the property market and can cope with the consequences of things going wrong. Freeths' partner Nathan Holden says: “A lot of local authorities are investing in property as a commercial matter because they are desperate to have a source of money after 2020 when government grant will disappear and they have to become self-financing.” A succession of legislation has allowed them to do this, Holden says, starting with the 1972 Local Government Act, which allowed them to do things incidental to their functions but not to use that to generate income, although Section 120 (1) (b) of that Act allows councils to buy land including land outside their area for the benefit of their area. The Local Government Act 2000 included a power to do anything to promote the wellbeing of the area, while the 2003 Local Government Act said that anything that generated income must be done through a company as otherwise councils would be at an unfair advantage over private companies by not being liable for corporation tax. Powers were widened still further by the Localism Act 2011 which allowed councils to do anything not specifically forbidden though it retained the requirement to use a company for trading purposes. Holden says: “Some councils take the view that they should buy property through a company while others are investing directly, which is a bit less certain in terms of their powers, as they argue that buying property is not trading because they are holding an asset long term.” Chris Brain, senior property adviser to the Chartered Institute of Public Finance & Accountancy, says: “The legality question has come up a few times and councils tend to cite all the powers they have with any bearing on this rather than focus on one, and there are quite a few.” Trowers and Hamlins partner Chris Plumley also sees few issues over powers, but says: “There isn’t a specific legal risk, its more what type of vehicle are they creating and what type of property do they want? “Loads of councils do it now as they need the money with the budget cuts and they see building a portfolio of property as a revenue stream. But it is a big cultural change, they get a strategic vision of what they would like to do but do not know how to go about implementation.” Buying property successfully requires an options appraisal of commercial and legal issues and assembling the advisory team to get that done instead of drawing piecemeal advice from different professions, Plumley recommends. “There are brilliant councils trying to do something new but you have to have the advice in place,” he says. “You need to know the timescale and what return you are after over what period as returns fluctuate a lot in the property market. “It involves a cultural shift because councils have built-in short-termism as Many councils are investing in property as they need the money with the budget cuts and they see building a portfolio of property as a revenue stream. But it is a big cultural change, they get a strategic vision of what they would like to do but do not know how to go about implementation. The biggest buyer Spelthorne has been the largest player in the property market, even dissolving its partnership for legal services with Reigate & Banstead Borough Council as it needed its own legal team to deal with the volume of transactions. The council declined to discuss its investment strategy but in earlier statements has said it bought the BP campus having “borrowed money at a very competitive rate of interest from the (PWLB)”. Leader Ian Harvey says: “After exploring several options and taking advice from a number of independent experts, we are confident that this forward-thinking agreement represents a very sound investment for Spelthorne.” Its other acquisitions include a 43,110 square feet office building on the Stockley Park business park in the London Borough of Hillingdon and the £7m Elmbrook House office building in Sunbury-on-Thames. The Public Works Loan Board (PWLB) will lend 100% of the value and that is different from a bank that would only lend 50-60% and carry out a lot of due diligence on the property itself. The PWLB just looks at the council as a whole so it leaves it up to the local authority to do due diligence.