Models of building control provision

Helen Randall discusses legal issues related to alternative models of building control provision.

Local authorities faced with increasingly severe cuts to government funding are having to be more enterprising to raise revenue in order to survive and provide essential services.

Building control is typically regarded by the public and many politicians as less interesting than other council services – that is, until a structure causes injury or damage, at which point public interest in building inspection is piqued again. Those who saw the exhibition by the Chinese artist Ai Weiwei at London’s Royal Academy of Arts last year – which included a display of the original defective building reinforcements that had resulted in the deaths of thousands of Chinese schoolchildren during an earthquake because of allegedly corrupt municipal practices – will not fail to have been moved.

Commercialising building control

Building control therefore remains an essential, if often under-appreciated municipal service, but it faces mounting financial pressures. What, then, are local authorities to do?

Councils are increasingly commercialising a number of different services, and charging where they have discretion over whether to supply that service. However, the legal position for commercialising building control is different, because such services involve the exercise of discretion in a way that potentially affects lives or livelihoods.

Local authorities are under a duty to provide an at-cost building control service to the public under the Building Act 1984. This includes a duty to enforce the act in their jurisdiction and retain ultimate responsibility for decision-making with regard to enforcement action.

There are other statutory controls on local authority building control departments that do not apply to private practice building surveyors such as approved inspectors. For example, when exercising their chargeable functions under the 1984 Act and the Building Regulations, local authorities must charge fees regulated by the Building (Local Authority Charges) Regulations 2010 in compliance with the “overriding objective” that means they must neither profit from nor subsidise those functions.

Alternative solutions

Alternatives open to a local authority that wishes to make savings and generate income include:

• outsourcing such functions as can be delegated to an external party
• establishing a joint venture with a partner
• establishing a building control company, wholly owned by the local authority
• merging its service with another like-minded local authority and establishing shared building control provision.

An authority wishing to outsource its building control service will first have to identify those statutory functions that cannot be delegated, such as exercising discretion over whether or not to bring enforcement action, and exclude these from the outsourcing.

Although there are, in my experience, typical functions that cannot be delegated by any local authority, most building control departments perform services unique to that locality. Hence, it is always vital to carry out an analysis of legal powers – a “vires audit” – before drafting the specification to the contract in legally binding terms, if the authority wishes to protect itself from vulnerability to judicial review – both with regard to its decision to outsource and enter into the contract, and to the enforceability of subsequent building control decisions. Ultimately, one needs a robust legal foundation to withstand potential challenges by hostile parties.

Authorities that have not carried out a vires audit of externalised functions would be well advised to undertake one as soon as possible. Even though a court will not usually allow a judicial review application unless it is made within three months of the original decision to outsource and in any event “promptly”, vulnerability to challenge can arise again with every fresh “ultra vires” decision – that is, outside the legal powers of the body that makes it. A court finding to this effect can result in void contracts and awards of damages.

Approved inspectors

Approved inspectors considering the potential business opportunities offered when authorities outsource their building control functions will need to bear in mind that such contracts will be publicly advertised and competitively tendered to comply with EU public procurement rules in the Public Contracts Regulations 2015, if the transaction is structured as a public services contract, or in the Public Concessions Contracts Regulations 2016, if the deal involves the risk of revenue being borne mainly by the concessionaire.

Nowadays, outsourcing of contracts usually involves provisions for ensuring that the price remains “on market” and represents value for money by including benchmarking or “market testing” provisions. Increasingly, contractors are asked to provide a fixed service level against a diminishing contract payment in order to secure efficiency savings and help the authority meet its best-value obligations.

The Barnet approach

A more modern approach to outsourcing is for a local authority to establish a joint venture. The London Borough of Barnet implemented a commissioning council approach, which externalised many of its functions to a variety of providers under its “One Barnet” initiative.

This included the procurement of a contractor to participate in the shareholding of a joint venture development and regulatory services company, RE Limited, responsible for providing building control alongside regulatory services such as development control, environmental health, strategic highway management, trading standards, land charges, regeneration and other functions. The transaction consisted of a service delivery contract with key performance indicators and a profit share under a shareholders’ agreement.

This joint venture was one component of the “One Barnet” initiative, and sat alongside outsourced customer services and council trading companies.

Beyond outsourcing

However, some local authorities either have limited political appetite for externalising services to the private sector, or the size and value of the service is not of the critical mass to attract a private-sector partner to invest and take on staff under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) and pensions liabilities.

The local authority may achieve economies of scale by merging with another council’s building control service to increase service resilience and enhance staff retention. There may also be opportunities for the authority’s surveyors to carry out consultancy in addition to “chargeable functions” to generate income for ploughing back into council services.

In such cases, there are four principal options.

1. Two or more authorities’ building control departments can be merged into a single, multi-authority shared service, as has been undertaken, for example, by Gravesham Borough Council, Medway Council and Swale Borough Council under the South Thames Gateway shared service arrangement.

2. Establishing a local authority trading company allows the authority to generate a profit from discretionary services and has the advantage that the local authority, as a shareholder, generally enjoys limited liability.

3. If the employees are sufficiently motivated and entrepreneurial, the company can allot shares to employees as a mutual.

4. There is also an option for a multi-authority building control trading company. In this case, it can sometimes be beneficial to set up a holding company with different subsidiaries, such as one dedicated to achieving best value for the authorities in carrying out statutory building control functions in their own areas, and a separate consultancy trading company working as an approved inspector to provide services to other customers, which might include local authorities outside the areas of the parent authority, shareholders and developers.

Teckal

Each of these options has different public procurement implications. For example, wholly owned local authority trading companies that provide services to shareholding parent authorities can be exempt from public procurement under the in-house company exemption referred to as Teckal, after the well-known European case which decided that such a municipal company need not tender for a contract to supply services to its owner, which is now codified in the Public Contracts Regulations 2015

Authorities that merge building control functions into a shared service, usually involving an inter-authority agreement and delegation of statutory functions, can operate under another procurement exemption (known as Hamburg Waste and now also codified in the Public Contracts Regulations) available for contracts that establish or implement cooperation between authorities.

In either case, the amount of outside trading that the exempt arrangement enjoys is limited to less than 20% of its overall turnover, nor can it involve participation by the private sector under Regulation 12 of the Public Contracts Regulations 2016.

There is a plethora of further legal and commercial issues to address when establishing these arrangements. Typically, these include:

• public consultation
• business planning
• access to finance
• compliance with the EU Services Directive
• avoidance of unlawful state aid
• employment, whether under TUPE, secondment or more innovative models such as joint and dual employment
• public-sector pensions
• novating contracts and IT licences
• branding and intellectual property rights
• formulating an appropriate, affordable and safe exit strategy if the parties change their minds or the unexpected happens;
• obtaining registration with the CIC before practising as an approved inspector.

There are now solutions for addressing these issues, but they require a full understanding of the interplay between public procurement, company and contract law, employment and pensions and the unique legislative position of building control.

Continuing public-sector austerity means that we will see a mixed economy of diverse legal structures providing building control. This can pose opportunities or threats – or perhaps even both – for the public and private sectors so as the readers of Local Government Lawyer will appreciate it is important that the complex legal issues are properly and sensitively addressed to prevent vulnerability to challenge.

Helen Randall is a partner at Trowers & Hamlins LLP. She can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..