Long arm of the law

On the face of it, the process of setting up an ALMO appears little different from that of a stock transfer: stock condition survey followed by council appraisal report; apply to the Office of the Deputy Prime Minister to be included in programme; set up shadow board; consult tenants; promotion; tenant ballot; draft legal documentation; apply to the ODPM for consent. Job done.

However, this form disguises a very different legal substance. While the registered social landlord in a stock transfer walks away with the council's property (subject to some more or less binding obligations to the council and tenants), when an ALMO is set up, ownership of its stock remains with the council. Tenants do not transfer but remain tenants of the council with all their statutory rights intact. If a tenant sues for disrepair, they sue the council – their landlord – although the council will seek an indemnity from the ALMO.

Where the transfer document is key to the stock transfer process, it is the management contract between the ALMO and the council that governs the relationship between the parties. And it is the management contract that defines just how "arm's-length" the ALMO is from the council.

Although the ALMO itself will be a separate company, it is nonetheless controlled by the council, which will always be the majority shareholder. It must be, because the council has to retain control of its strategic housing functions. But that control will be tempered by the scale of the transfer of functions under the management contract.

Insufficient delegation of functions to the ALMO will restrict its operational ability and lead to duplication with council activities. Excessive delegation and the ALMO may run off with the council's housing functions altogether. On the one hand, the ALMO must have sufficient independence to develop and win the eye of the ODPM and thereby more funding. On the other hand, the council owns the ALMO and must control its aims and direction.

Top of the legal issues therefore is negotiation of the management contract. Although there is "template" documentation in circulation, the precise extent of the rights and obligations of the parties will have to be hammered out. The contract must cover, among other things, the functions to be delegated and the standards they are to be carried out to, involvement of tenants in decision-making, the financial relationship (including liability for claims from events predating the contract), liaison and consultation arrangements between the parties, warranties, remedies for breach and arrangements for termination. The contract will usually be for five or 10 years and renewable by agreement.

Next is the establishment of the company, usually a not-for-profit company limited by guarantee with a board of directors comprising equal numbers of tenants, independents and council representatives.

Tenants do not transfer but remain tenants of the council with all their statutory rights intact. If a tenant sues for disrepair, they sue the council – their landlord

As in a stock transfer, consultation remains key. Under section 105 of the 1985 Housing Act, the council must consult tenants. A ballot is not a legal prerequisite but the ODPM must see "clear evidence" of tenant support for the ALMO. In practice, a ballot is the most effective way to demonstrate this (assuming it is won). Tenants must be consulted on the reasons for choosing the ALMO route, the functions to be transferred, the continuing role of the council, the status of the ALMO and its performance standards. Leaseholder interests must also be taken into account.

There are TUPE issues in relation to those council staff who will transfer to the ALMO. Since the ALMO will be exercising council functions, there will also be continuity of employment for the purposes of redundancy payments. Unions will insist on new employees coming in on the same terms to avoid a two-tier workforce. Pension rights will have to be safeguarded.

To be cost-effective, the ALMO will want to share some of the council's services (for instance finance, IT and administration support) and service level agreements will be needed for the purpose.

There will also be tax issues to address. Councils can reclaim VAT on repairs but ALMOs cannot. This potential liability means the management contract needs to be structured to ensure a neutral VAT impact.

Finally, there's the council's application to the ODPM for approval under section 27 of the 1985 Housing Act. The ODPM must be satisfied that the decision to set up the ALMO has taken account of best value; that the business is sustainable; that tenants have been consulted and their rights to future consultation protected; that the council has retained control of its strategic housing objectives and that the contractual arrangements between the parties are acceptable.