LGSS Law

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Borough council dismisses claim its commercial property purchases were unlawful

Spelthorne Borough Council has moved to defend its controversial commercial property purchases after a website published leaked material that purported to show auditor KPMG thought the council had acted unlawfully.

The Bureau of Investigative Journalism said the documents showed Spelthorne had ignored rules that forbid councils borrowing purely to make a profit on subsequent investments and that KPMG could seek a court ruling that the council acted unlawfully.

A ‘frequently asked questions’ sheet issued by Spelthorne said the council has since 2016 invested £914m in commercial assets from which it receives around £50m a year in rental income.

It said that after deductions, this left the council £10m a year to spend on local services. Spelthorne’s overall budget is some £22m.

Spelthorne said in a statement: “There is [a] suggestion that auditor KPMG will deem that Spelthorne has acted unlawfully by not following rules and regulations relating to financial borrowing and the proportion of borrowing and investments in pursuing this council's commercial property acquisition strategy.

“However the council remains confident in the legal advice it has been given and can state it has fully complied with all legislation and guidance.”

The council said KPMG had not yet issued its 2017-18 accounts statement nor stated its conclusions on any actions it might pursue.

Spelthorne said it had complied with all relevant guidance, had regard to the Prudential Code, and denied that it had been forced to repay the Public Works Loan Board early or been required to sell any investment properties

Despite the economic downturn, the council's assets had “continued to perform well with successful collection of more than 96% of the commercial rent due for first six months of current financial year”, with the rest covered by short term rent deferrals.

The council said it expected to write off only 0.02% of rent due in the first six months of the year and was not considering issuing a Section 114 notice or an emergency halt to spending.

Portfolio for finance Sati Buttar, said: “This is still an on-going matter between the council and KPMG and no conclusions have been reached by either side.

“However this council has taken all necessary steps to ensure that it abides by the law in all its actions and we absolutely refute any suggestion that the council has acted unlawfully. Our legal advice sets out clearly we have strong legal grounds to support our approach.”

The Public Accounts Committee last summer expressed concern as to whether governance arrangements were robust enough over local authority commercial property investments in general, and concluded MHCLG had been “complacent while £7.6bn of taxpayers’ money….has been poured into risky commercial property investments”.

It said some councils had taken on “extreme levels of debt which is both risky and sends a mixed message to the sector” and said that where a local authority uses prudential borrowing, it must set aside money each year to repay the debt.

Spelthorne’s neighbour Surrey Heath Borough Council has also faced controversy over its property investments.

Surrey Heath was due this week to approve spending of £40,000 towards a review by an external consultant of its acquisitions, after concerns that councillors had had insufficient information when these were made.

Officer time equivalent to £50,000 would also be needed for this exercise, a council report said.

Mark Smulian

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