Local Government Restructuring – Legal Implications

The speed of upcoming local government reorganisation seems to have caught many people by surprise following Angela Rayner’s announcements late in 2024. According to recent reports, at the time of writing this note, as many as half of County Councils have asked to suspend their elections due in May on account of local government reorganisation. Authorities wishing to be within the First Tier of restructuring were asked to signify their intentions to MHCLG by 10 January 2025, and a large number have done so. At the same time, it should be noted that the financial settlement to District Councils has been substantially smaller than that being made available to Unitary Authorities and County Councils, and of course much of the grant funding made available for specific schemes by the previous government, including “Levelling-Up” and “Towns Fund” has come to an end, perhaps moving monies away from favoured districts with influential MPs towards big city authorities.

Both Local Authorities and organisations working with them are naturally concerned about the effect of these restructurings on their relationships with suppliers, third parties and employees.

It is sometimes assumed that when a Council transfers its operations to a new body on restructuring that this requires a formal contract, assignment or novation document to be entered into, and we have certainly seen many suppliers seeking to take this view. However, this is not correct. In order to avoid the need to go through the process of assigning or novating contracts or rights over property (which will be difficult, time-consuming and, in some cases, would be a breach of the non-transfer provisions within a contract) the situation is typically dealt with by a form of Statutory Vesting. By way of example, concerning the recent creation of a Combined Authority, the Statutory Instrument states “All property, rights and liabilities, including rights and liabilities in relation to contracts of employment, which immediately before [x] and all property, rights and liabilities of the [x] are to transfer to, and by virtue of this paragraph vest in the Combined Authority on [x]”. We would envisage that the Government would make the equivalent Statutory Orders with respect to each individual Council, whose property and other rights are transferring over with effect from the relevant date. As this transfer is neither an assignment nor a novation, the relevant contractual provisions allowing a challenge for such a transfer would not be relevant.

Of course the relevant “new” Local Authority (where there is one) as a creature of statute will need to be created by Statutory Instrument. Interestingly Section 2 of the Local Government Act 1972 provides that every Non-Metropolitan area must have a County Council and that will be specifically disapplied in practice for each place where a County is replaced by 2 or more unitary bodies.

Beyond that, the enabling power to transfer is contained within Section 15 of the Cities and Local Government Devolution Act 2016 which enables the transfer of functions and, by virtue of 15.2 “Provision for making of a scheme to transfer property, rights and liabilities…from the public authority to the relevant local authority”.

In Practice

By way of example, I reviewed what happened when my local City Council became a Unitary. Whilst MHCLG may not follow precisely the same model this time around, the SIs passed pursuant to the 2016 Act included:

• A Staff Transfer Order (which transferred all staff via a list who had more than 2 years’ service) which specifically was stated to be without prejudice to TUPE Regulations.
• A “Structural Change” Order which provided specifically for:
  • Transfer of Planning Functions under TCPA 1990
  • Retirement and suspension of Councillors
  • Suspension of Elections and treatment of casual vacancies
• A Transfer of Property Order in line with Section 15 above.

In our view, communication with third parties will be key, notwithstanding the fact that no formal assignment of contracts is required. Suppliers for example will need to understand the effect on them, whist their contracts will be transferred by Law, they will need to understand this – and where invoices need to go and be addressed to in future. Some amendments to terms may need to be made – for example a software contract with 50 users will need to be renegotiated if the new “super-council” has 150 staff requiring to access the system concerned. A major change to contract terms can still lead to issues under Procurement Law.

Employment Issues

Another frequent issue is whether employment rights have transferred under TUPE. Certainly, a Local Government reorganisation is a transfer of undertaking, but is also arguably a service provision change, whereby activities cease to be carried out by one organisation which are now carried out by another. Generally speaking, TUPE relates to economic entities. However, care should be taken with regard to paragraph 3(5) of the TUPE Regulations 2006 which states that “An administrative reorganisation of public administrative authorities or the transfer of administrative functions between public and administrative authorities is not a relevant transfer”. What is the reason for this? It seems to be to avoid issues in terms of employees or their representatives claiming that proper consultations did not take place. However, it is interesting to note, that the Secretary of State has exercised discretion to impose “TUPE like” consultation obligations in various transfers including for example, when public health functions were transferred from the NHS to Local Authorities. 

What does not transfer?

This has been an interesting issue. When for example, Metropolitan County Councils were abolished there were some liabilities and contracts which were not carried over, and residual bodies were set up in order to administer these onerous contracts and associated debts.

Conclusion

The ability of Central Government to make Statutory Property Transfer Orders and to follow TUPE only to a limited extent means that, from a legal perspective, the transfer process with regard to local government reorganisation is comparatively straightforward – particularly when Councils are transferring to larger units as contracts do not need to be sub-divided.  Having said that, MHCLG are likely to be kept busy!