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Local authorities are able to provide public funding for community-led housing groups that have no assets or track record, but their powers to do so are limited. This section explains the legal and financial position.

Power to Invest

  • A council has a specific power to invest under Section 12 of the Local Government Act 2003.  This power to invest is granted to councils for any purpose relevant to its functions under any enactment or for the prudent management of its financial affairs
  • The reference to the prudent management of its financial affairs is included to cover investments which are not directly linked to identifiable statutory functions, but are simply made in the course of treasury management. This would also allow the temporary investment of funds borrowed for the purpose of expenditure in the reasonably near future; however, the speculative procedure of borrowing purely in order to invest remains unlawful
  • When making investments, Section 15(1) of the 2003 Act requires an authority …to have regard (a) to such guidance as the Secretary of State [(for Communities and Local Government)] may issue, and (b) to such other guidance as the Secretary of State may by regulations specify
  • Guidance that has been specified includes the Chartered Institute of Public Finance and Accountancy (CIPFA) publication Treasury Management in the Public Services: Code of Practice and Cross-Sectoral Guidance Notes and the Code prepared by CIPFA for the new capital finance system. The Prudential Code for Capital Finance in Local Authorities, also includes guidance on treasury management.  The Secretary of State has issued Guidance on Local Government Investments
  • The main policy objective behind the Guidance is that a Council invests prudently which entails achieving first of all security (protecting the capital sum from loss) and then liquidity (keeping the money readily available for expenditure when needed)

Power to make a loan

  • A council has a specific power to make a loan under Section 24 of the Local Government Act 1988. This power to make a loan is granted to a council to provide any person with financial assistance for the purposes of, or in connection with, the acquisition, construction, conversion, rehabilitation, improvement, maintenance or management (whether by that person or by another) of any property which is or is intended to be privately let as housing accommodation

Power to borrow

  • A council has a general power to borrow under Section 1 of the Local Government Act 2003. A council could therefore borrow from the Public Works Loan Board (all borrowing from the Public Works Loan Board must only be used for capital expenditure) and make an investment under Section 12 of the Act 2003 or a loan under Section 24 of the 1988 Act
  • A council also has a general power to borrow and to make loans under the General Power of Competence in Section 1 of the Localism Act 2011. This power is not to be relied upon as a specific power to lend or invest but rather to supplement Section 12 of the 2003 Act or Section 24 of the 1988 Act when investing or lending
  • If a council is making an investment (for example by way of shares) or a loan (including bond financing) to a CLH organisation without a proven track record or assets, then the council must specifically consider the following:
    • without a proven track record or the ability to take security (if the entity has no assets) over the CLH organisation to be lent to or invested in, there is a significant amount of risk involved.  The Guidance’s objective of achieving security by protecting against capital loss would be breached by lending to organisations without assets that would be unable to provide security to the council (by for example giving a legal mortgage over property). It is through taking security that the council can reduce the risk of not receiving any of its money back for the loan or investment if the organisation being loaned to or invested in, enters financial difficulty and becomes insolvent
    • a council should always consider if it is acting prudently in providing the loan or making the investment; clearly the higher the risk involved, the less likely it will be that a council would be deemed to be acting prudently
    • if a council wishes to lend to a CLH organisation without any assets, it should consider asking if there is a related party that could provide a guarantee, and/or requiring a debenture which includes fixed and floating charges over all the organisation’s assets and undertaking at the time of the loan and in the future
    • a council should always take care to ensure that they will not be caught by state aid if they lend. Fortunately for councils there are a number of approaches and potential exemptions which they can rely on when lending. The potential exemptions include the General Block Exemption Regulation and De Minimis. If a council provides a loan on market terms, it should not be state aid because the council is acting in line with the Market Economy Investor Principle. However, the council should take advice to ensure that the loan is on market terms and when making such loans or investments, councils will need, amongst other things, to carry out prior due diligence to demonstrate that the loan is a prudent use of the council’s resources and such that any other lender (i.e. banks) would have a provided a loan on those terms
Last updated in April 2018