I was recently lucky enough to find myself being cc’d in a fascinating and informative discussion about legal structures for Community Land groups…
Sharon Pollitt from Land Roots wrote:
Please find attached a legal status questionaire, sound really boring and your probebly gonna consider deleting it, but it could be of great general interest to groups who are considering co-ownership of land it certainly is for land roots. www.landroots.co.uk
We would really appreciate your assistance in this, so please have a look through and add where you wish to , in a colour so we can see your comments, thankyou for your cooperation, please email back if you would like to see results of the questionaire. This will also go onto the website in due course, thankyou sharon pollitt, Land Roots
You can download the questionaire here (.rtf 96Kb)
Greg Pilley from http://www.localfood.org.uk replied with:
Hi Sharon,
Very organized getting thinking down in one questionnaire, looks good.
However to tackle the issue of which legal structure is most suitable for Land Roots you need to ask some fundamental questions of your founder members. I recommend looking at the Cultivating Co-operatives guide at www.soilassociation.org/localfood
(a 5Mb download!) go straight to section 3.9 and go through those questions.
When you have answered these you will probably have narrowed it down to one option under each of:
Legal structure
1. Trust (unincorporated)
2. Unincorporated association
3. Partnership
4. Company
5. Industrial and provident society (co-operative)
6. Industrial and provident society (society for the benefit of the
community)
Type of venture
7. Worker co-operative
8. User or service co-operative
9. Community co-operative
10. Community business
11. Voluntary-sector body or charity
Management style
12. Collective
13. Democratically elected management
Ownership
14. Common ownership
15. Co-ownership
Once you have determined the most appropriate legal structure, there is still some work to do to refine the memoranda and articles, or rules, or agreements to meet the specific needs of the Land Roots Enterprise. The Community Farm Land Trust project might be able to assist you at that point.
Hope this helps.
Cheers
Greg
Chris Cook of Open Capital jumped in with:
Hi Greg
You appear to have omitted the LLP from your list below.
Never mind, the point I am making about the “Community Land Partnership” variant of the LLP is that the “Owner” of the Land may be any entity of any type, and here I personally incline towards the new Community Interest Company because of the “Asset Lock”.
This entity is then the “Trustee” Member of the CLP alongside the other stakeholders ie:
(a) Occupier Members (formerly known as Tenants);
(b) Investor Members;
(c) (optional) Managers.
A CLP is therefore a “Co-operative of Co-operatives”.
The CLP agreement is actually quite straightforward – I’ve been involved in several. It’s an updated variant of the Community Land Trust, but with a simple CLP agreement replacing both the leases and/or tenancies agreements and the Mem and Arts etc etc .
Also, because you have “Equity” investors receiving a proportional share of rentals (if there are any) then you don’t have the issue that EVERY entity has which borrows money secured on land, which is that if things go pear-shaped you get repossessed, asset lock or not.
I acknowledge that it is possible to acquire Land without borrowing using ONLY investment through (say) an IPS, but that mechanism is:
(a) clumsy, inflexible and burdened with red tape (FSA registration/regulation!);
(b) still has the Principal/Agent conflict between owners and management of all Companies.
The problems are that the CLP is new, which seems to be what the Co-operative movement is suspicious of, and that its simplicity and consensual nature are threatening to any professionals paid by the hour rather than by the outcome, who run a mile when faced with it.
Best Regards
Chris Cook
Greg replied to Chris with:
Hi Chris,
I only left LLP off the list, because it doesn’t appear in the document I was referring to. But I feel the questions are still relevant.
I am interested to learn more about LLPs and how they will work in this context. I have to admit I have little knowledge when it comes to the legal nitty gritty of these arrangements, but what I am in a position to consider are some of the practicalities and fundamentals.
For instance, I agree a Community Interest Company might be a good owner for the land, but it also depends how you want to make decisions about the land, who has a say in it and how are they heard. I suppose you could have a co-operative CIC?
What I am not yet clear about from Land Roots – for the land ownership, vehicle is:
Who might own the land?
Who has a right to use the land?
What can be done on the land?
Who and how are these decisions made?
Where is the money to come from?
Where do surpluses go?
Etc etc
Land Roots have circulated a questionnaire asking us to comment on the pros and cons of various options. The pros and cons of most incorporation options are set out in plain English in Cultivating Co-operatives. However what is best for Land Roots I can’t comment on and this may be true for other recipients of this request, without some of this background.
Once land is secured making an agreement with the users is another issue.
Definitely keen to hear how CLP tackles this when we meet.
Cheers
Greg
To which Chris responed:
Hi Greg
I don’t particularly want to pre-empt what promises to be an interesting workshop but perhaps a couple of points of clarification might be helpful.
> For instance, I agree a Community Interest Company might be a good owner
> for the land, but it also depends how you want to make decisions about the
> land, who has a say in it and how are they heard. I suppose you could have a
> co-operative CIC?
I am not sure how easily Companies (the CIC comes in both flavours – with and without shares) can comply with all of the Co-operative Principles.
But in fact that is not an issue since the ONLY role the CIC would have in a CLP is of “bare” freehold ownership. It’s pretty much a “bare” trustee holding the Land in trust in accordance with the CLP agreement.
But it would have no say over rights of “ownership” (ie the fruits of use of the land) and “use” (ie occupation), which would be set out within the CLP agreement, as is the “Capital Rental” relationship between “Owner/Investor” and “Occupier/User”.
It sounds crazy, but what the CLP enables is essentially a new form of indefinite “property right” ie for as long as I use the Land I pay a “Capital Rental”. Neither freehold nor leasehold.
> What I am not yet clear about from Land Roots – for the land ownership,
> vehicle is:
What we are doing is putting land freehold “ownership” into trust and THEN setting out the following rights you refer to ……
> Who might own the land?
> Who has a right to use the land?
> What can be done on the land?
> Who and how are these decisions made?
> Where is the money to come from?
> Where do surpluses go?
in a suitably drafted CLP agreement.
> Once land is secured making an agreement with the users is another issue.
> Definitely keen to hear how CLP tackles this when we meet.
One of the interesting facets about securing the land is that it is not even necessary to BUY the land if you can convince the existing land-owner to INVEST some or all of the Value of the land in the CLP and transfer the freehold to the CIC.
The CLP really does “change the game” entirely: it takes a bit of getting used to.
Best Regards
Chris
Alex Lawrie from Upstart joined the conversation:
I’ve been following this very interesting discussion (I hope everyone on the list above is happy to continue receiving these emails, by the way) and I had a few observations to add.
Firstly, LLPs. I understand Chris’s frustration with the co-op movement’s reluctance to embrace LLPs. I don’t think this is to do with overpriced consultants (in my experience, no one is making much money on registering legal structures, with the possible exception of the FSA), but rather:
- LLPs are profit distributing entities – it is their whole raison d’etre. That is never going to sit comfortably with a movement founded on the idea of building indivisible reserves.
- When you speak of open membership as though it were an advantage, we hear a potential source of confusion over who is a member and who isn’t, and hence a potential loss of democratic control
- A lot of the promised advantages of LLPs (limited liability, ability to write your own rules) are no less true of CLGs.
- The requirement of the partners to deal with their own taxation is highly unwelcome, unless you were going to be paid by dividend from profits, which members of co-ops almost never are (see above).
- Co-ops do have the ability to raise investment (loanstock, or even shares at a pinch) but have succeeded in separating the issue of investment from that of control. In other words, you can be a member of a co-op without necessarily having to be an investor, and becoming an investor in a co-op doesn’t necessarily mean you are going to be a voting member. LLPs do often (though I accept not necessarily) seem to erase that precious distinction.
- Any belief that LLPs will enable people to avoid laws on deposit taking and promoting investment is simply the result of no one have spotted it going on yet. When they do, LLPs will get into trouble just the same as everyone else.
- The suggestion that a single partnership agreement can cover a number of different relationships (tenant, investor, employee, etc) is also not reassuring. The suspicion is that it will do none of these things well.
- With no body to register or hold rules, the potential for one very active partner to manipulate or deceive other partners is always there; or more likely, that everyone will sink into confusion together. What will work for a firm of accountants will not necessarily work for a bunch of community activists.
In short, although I can imagine some very specialised circumstances where an LLP will be helpful, they are never going to be part of the mainstream of co-operative development. Sorry Chris. (All that having been said, I’d be very interested to see a copy of the proposed partnership agreement – I could still be persuaded that a Community Land Trust might be one of those special cases)
Next, Community Interest Companies. Yes, CICs do work as co-ops – we’ve just registered a community Car Pool with a Co-op CIC, and we are considering turning UpStart itself into one. There are a few issues:
- You can’t be political, which some people we work with feel may cramp their style.
- You must report each year on how you have been working in the interest of the community, which is a bit more work and could in theory lead to the regulator taking control of the business if you can’t explain yourself. On balance, I think it’s quite good to be accountable in this way.
- Although ‘light touch’ regulation is promised, a lot of people are waiting to see what that means in practice.
- It costs an extra £35.
- Many people think the version with shares is useless, as investors will be too put off by the cap on dividends and the asset lock. I’m not persuaded by this, but its all speculation at this stage as no one has yet tried it.
- The model rules so far provided require tweaking to be suitable for, say, a workers co-op. But such tweaking is not too hard.
- If you deviate from the model rules to any great degree, registration takes ages.
I await with interest the promised CIC model rules from Co-ops UK. In the meantime, it isn’t hard to come up with rules for both share and guarantee co-operative CICs for a wide range of purposes. If anyone would like to see the rules we’re coming up with (so far, only for CLG CICs), I’m happy to share.
Finally, a legal structure for Land Roots. My feeling is that there are two things you are trying to do here: manage land together, and raise investment to buy land. I think that requires two legal structures: an I&PS to raise the investment, which buys non-voting shares in a co-operative CIC. Dull, bureaucratic, perhaps; a little pricey at £450ish, you may feel; but I can look you in the eye and promise you it will work.
Alex
Then Chris Cook responds to Alex:
Hi
Just a few comments in relation to Alex’s points.
> – LLPs are profit distributing entities – it is their whole raison d’etre. That is
> never going to sit comfortably with a movement founded on the idea of
> building indivisible reserves.
True. Which is why the assets are held in trust by an entity specifically intended for that purpose.
> – When you speak of open membership as though it were an advantage, we
> hear a potential source of confusion over who is a member and who isn’t, and
> hence a potential loss of democratic control
When I say “Open” I mean of course “Open” to anyone who subscribes to the agreement and the membership requirements set out in it: which would of course be as democratic as the members wish them to be…….
> – A lot of the promised advantages of LLPs (limited liability, ability to write
> your own rules) are no less true of CLGs.
CLG’s are in fact a sub-set of an LLP. Since an LLP is “open” it is possible to literally “clone” any form of limited liability entity you wish. But why would you want all of the conflicts and inflexibility of Company forms?
CLG’s come with a “Company” structure and:
(a) cannot raise Capital other than by borrowing, thereby conflicting a conflict with the lender and potentially putting the CLG at risk:
(b) very often (particularly larger ones) tending to end up being run by the management in their own interests – the “Principal/Agency” problem.
> – The requirement of the partners to deal with their own taxation is highly
> unwelcome, unless you were going to be paid by dividend from profits, which
> members of co-ops almost never are (see above).
I actually thought that the “Divi” was a mainstay of the Co-operative movement: perhaps that’s changed. And there are ways of aggregating membership quite simply. Taxation is not a big deal.
> – Co-ops do have the ability to raise investment (loanstock, or even shares at a
> pinch) but have succeeded in separating the issue of investment from that of
> control. In other words, you can be a member of a co-op without necessarily
> having to be an investor, and becoming an investor in a co-op doesn’t
> necessarily mean you are going to be a voting member. LLPs do often (though
> I accept not necessarily) seem to erase that precious distinction.
LLP’s can be anything you want them to be: nasty or nice.
A “Capital Partnership” LLP does exactly what you describe above, but without the flaws of IPS’s and CLG’s and their “two tier” governance. More importantly, it enables the raising of Capital in entirely new ways.
> – Any belief that LLPs will enable people to avoid laws on deposit taking and
> promoting investment is simply the result of no one have spotted it going on
> yet. When they do, LLPs will get into trouble just the same as everyone else.
Revenue-sharing is not deposit taking and never will be. As for regulation and promoting investment, the last job I had was as Director of Compliance and Market Supervision of the International Petroleum Exchange so I guess that if I have a “core competence” the FSA regulatory area is it.
It is a simple matter for CIC CLG rules to be structured to transcend most of the FSA burden. That is what Opromark (www.opromark.com) has done (though not with a CIC), and was the whole raison d’etre for the Renewable Energy Investment Club to name two.
> – The suggestion that a single partnership agreement can cover a number of
> different relationships (tenant, investor, employee, etc) is also not reassuring.
> The suspicion is that it will do none of these things well.
The Capital Partnership agreement:
(a) sets out the relationship between the stakeholders;
(b) then sets out between each stakehloder group the matters that concern them.
It really is not rocket science. You might ask Tony Crofts: he and I came up with quite a nice one..
> – With no body to register or hold rules, the potential for one very active
> partner to manipulate or deceive other partners is always there; or more
> likely, that everyone will sink into confusion together. What will work for a firm
> of accountants will not necessarily work for a bunch of community activists.
> In short, although I can imagine some very specialised circumstances where
> an LLP will be helpful, they are never going to be part of the mainstream of
> co-operative development.
I really don’t think you understand what is being proposed here. The whole point of having a “Trustee” member of a CLP is to ensure that:
(a) assets are held in perpetuity on behalf of the community: and
(b) to be custodian of the aims and objectives of the CLP gives them certain over-riding rights within the agreement to stop exactly what you are talking about.
I find your last statement extraordinary. LLP’s are capable of being the future of the Co-operative movement if they can tear themselves away from fundamentally flawed Victorian relics like IPS’s.
To me the optimal enterprise model is an LLP which is a co-operative of service providers on the one hand and service users on the other, with any necessary capital coming from investment in forward revenues.
Sorry Alex, but you are defending the indefensible.
> Next, Community Interest Companies. Yes, CICs do work as co-ops -
> – Although ‘light touch’ regulation is promised, a lot of people are waiting to
> see what that means in practice.
> – It costs an extra £35.
> – Many people think the version with shares is useless, as investors will be too
> put off by the cap on dividends and the asset lock. I’m not persuaded by this,
> but its all speculation at this stage as no one has yet tried it.
This is useful experience. I think the CIC CLG is useful as an asset-holding entity, potentially. But not for anything else.
> Finally, a legal structure for Land Roots. My feeling is that there are two
> things you are trying to do here: manage land together, and raise investment
> to buy land. I think that requires two legal structures: an I&PS to raise the
> investment, which buys non-voting shares in a co-operative CIC. Dull,
> bureaucratic, perhaps; a little pricey at £450ish, you may feel; but I can look
> you in the eye and promise you it will work.
If it DID work, Alex, the Garden Cities would still be occupied by the people they were intended for. The structure you advocate is costly, inflexible and will not “scale”.
I guess we’ll have to agree to disagree. But I look forward to discussing the pro’s and con’s of different models at the forthcoming seminar.
Best Regards
Chris Cook
Finally, Simon Hallion replied on behalf of Land Roots:
Hi
I’m writing as someone involved in the land roots group… For me Alex and Chris have hit the nail on the head regarding:
1. There are clearly three (albeit linked) objectives. Firstly to raise finance, secondly to hold land in trust and thirdly to provide opportunities for people to enjoy that land (ranging from visiting rights to occupation
2. The mechanism which then holds the land exists solely to do that but needs to be part of a (larger?) organisation that is flexible enough to embrace a wide number of activities / organisations, but retains an accountable structure that members can subscribe to (and influence)
3. There will almost certainly be different types of member – some purely investing, some investing and contributing and so on
What I am equally interested in is developing some form of initial incorporated / limited liability organisation that will give us further credibilty and allow us to develop organisationally (i.e. recruit active members) and financilally (i.e. accountable finances / limited liability) without being too rigid as to limit the development of a wider body, which incorporates the land trust / democratic membership / stewardship and land use aspirations suggested above. Is that asking too much?
I’d initially thought setting up as a CLG would give us that initial ‘credibility’ and a framework to work to as this could be converted to a CIC to lock the capital / land – although I am still uncertain about CLG’s usefulness for raising capital. We have talked about doing this as a membership scheme (would the fees be taxable income?)
Alternatively a CLS would possibly get round the raising capital issue – and I agree Alex, I don’t think a dividend cap or the asset lock would put people off.
I have to say I know even less about I&PS – but they just ’sound’a bit unwieldy!! – so although it appears to be a ‘proven’ vehicle (I’ll continue my research)I have been leaning towards the LLP model put forward by Chris…
My concern here is actually being able to formulate a structured mem and arts etc. which would guarantee the accountability of Land Roots. I have been told that the beauty of LLPs is that you can write your own rules but I think we need to be able to follow some established principles. And there is clearly a co-operative-ish ethos to the Land Roots
My idea to this end was to develop mem n arts along the lines of a CLG (enshrining the accountability, holding assets in trust aspects) with the option that once the principles were set out we might opt to register as an LLP… we could then agree to cherry pick the best of the CIC etc models whilst retaining the flexibility of the LLP is that a bit unrealistic? The picture Chriss paints see to fit that bill. I would certainly be interested to see the CLP agreements and more so to know who drafted them – it doesn’t sound like work for enthusiastic amateurs!
I’d appreciate your further thoughts and look forward to meeting any of you who attend our workshop on May 20th. In the meantime have a good easter break if your taking one.
regards
Simon
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