Local government reorganisation: the impact on procurement and contracts

The wheels are now well and truly in motion for Local Government Reorganisation (LGR) which will see councils in two-tier areas replaced with one or more new unitary authorities. Councils across 21 two-tier areas, including Hertfordshire, have now submitted interim proposals for re-organisation and Government has provided feedback on those proposals (see Here). LGR throws up many and varied difficult and complex challenges, as well as opportunities, for the affected Councils.

In this article we focus on some of the likely impacts of LGR on public procurement and commercial contracts, and suggest (from our own experience) what councils can and should be doing now to prepare to mitigate against potential risks, and take advantage of the new opportunities presented. Certainly, from our own experience, we are receiving more queries on this issue from commissioning council officers and, in some circumstances, suppliers bidding in procurement exercises.

We are not considering implications for council-owned companies which merits separate consideration.

The statutory process

One of the questions we have been asked the most recently is what will happen to existing contracts. That’s a good question.

The legal process governing local authority restructuring is set out in the Local Government and Public Involvement in Health Act 2007 (the “Act”). The starting point for the transfer of contracts (and other assets) is The Local Government (Structural Changes) (Transfer of Functions, Property, Rights and Liabilities) Regulations 2008 (the “Regulations”), which apply “subject to any provision for the transfer of functions, property, rights or liabilities….” in Chapter 1 of Part 1 of the Act, and subject to any agreements made under section 16 of the Act between any public bodies affected by an order made under the Act with respect to any property, income, rights, liabilities and expenses affected by the order, and any financial relations between the parties to the agreement.

In a nutshell, this means that the Regulations apply unless the transfer is covered by a Statutory Instrument or by an agreement between the affected councils. The explanatory notes to the Regulations say that usually the transfer of most assets and liabilities, including contracts, will be made under an agreement between affected councils under section 16 of the Act.

If there is no agreement and the transfer is not covered by a Statutory Instrument, all “property, rights and liabilities” transfer in accordance with the Regulations. This covers the transfer of commercial contracts. The ultimate destination of contracts will depend on whether the re-organisation is to a single successor council (regulation 7) or to more than one successor council (regulations 8, 11 and 12). However, the key takeaway is that commercial contracts will not automatically terminate or become ineffective on LGR. They will transfer to the newly formed unitary authorities.

Opportunities, risks and challenges

One key rationale for LGR is that in moving away from the two-tier system, unitary councils are believed to achieve greater efficiencies and cost savings by consolidating services and reducing administrative overheads. Government criteria for LGR include unitary local government being structured to achieve efficiencies, and to prioritise the delivery of high quality and sustainable public services to citizens. Clearly, council commissioning, procurement and contracting have an important part to play in realising these ambitions.

LGR therefore presents a unique opportunity for affected councils to rethink, recommission and redesign services, but it also creates financial and legal challenges for alignment, aggregation and disaggregation, integration and cost. Challenges include the potential for new authorities to inherit a number of service contracts with suppliers across merging councils for the same or substantially similar services that need to be aligned to the geographies of the new unitary councils.

Take IT software contracts as a good example. Let’s say, for simplicity’s sake, that all councils in a two-tier area operate a particular type of software and the re-organisation ultimately results in one single unitary authority. You can see the potential here for the newly formed unitary authority to end up with multiple contracts for the same or similar software (or even different software solutions). The new unitary authority will want the ability to integrate IT architecture and move to common IT platforms across the new council. The new authority will then have to consider its options very carefully – for example, can the existing contract(s) be ended, varied or renegotiated? Is there a need to re-procure?

These issues will involve commercial and legal considerations, including in relation to contract rights and liabilities, governance and public procurement law. Careful planning at this stage could be key to managing and mitigating risk.

Things we can do now

Final proposals from affected councils need to be submitted to Government by 28 November for a decision by Ministers. The Government has indicated it intends for the new unitary councils to be implemented on 1 April 2028. Whatever the new structures are, our services will still need to be provided and remain essential to our residents and businesses.  So, we do have time to take proactive action between now and then.

Some of the things we are doing at Herts Legal include:

• Engaging with our Procurement Teams

Proactive contract and supplier management is essential for councils to leverage opportunities for improved efficiency and enhanced tailored services across the new organisations during and following LGR.

A Grant Thornton Report in 2024, Learning from the new unitary councils, notes proactive and strategic supplier and contract management through reorganisation as perennial themes in their conversations with stakeholders. This starts from knowing what you have, and what you’ve agreed. Early planning and engagement with stakeholders to understand existing contracts is fundamental to success. 

Robust contract registers and the like can help here. New unitary councils will inherit contract registers. Therefore comprehensive and up to date contract registers are important especially when legacy contract owners have often left, and multiple contracts exist across legacy arrangements, or in some cases contracts do not even exist.

• Drafting Tender and Contract Provisions

Although contracts are likely to transfer to any new unitary authorities by statutory instrument or by agreement on LGR, those contracts may need to be amended to reflect the new geographical, financial and contract scope. Therefore we are reviewing opportunities to engage with our biggest suppliers to discuss the implications of LGR on those contracts and how we might agree appropriate express provisions to permit variations to allow for novation, changes to the contract value, scope and term, and even termination triggered by LGR. We are developing suitable contract clauses to cover this, and making sure that they are included in any new significant contracts we enter into.

Of course, we are mindful of the requirements in regulation 72 of The Public Contracts Regulations 2015 , and sections 74 to 80 and Schedule 8 of the Procurement Act 2023 , as appropriate, when negotiating and agreeing contract modifications or termination. However, for contracts procured under The Public Contracts Regulations 2015, the ‘additional works, services or supplies’ and ‘unforeseen circumstances’ permitted modification grounds in regulation 72 may apply, and for new contracts the ‘materialisation of a known risk’ and ‘additional goods, services or works’ permitted modification grounds in Schedule 8 of the Procurement Act 2023 may permit subsequent modifications on LGR.

Modifications to contracts are also possible under The Health Care Services (Provider Selection Regime) Regulations 2023 which regulate relevant health care contracts.

It’s also worth adding that we should be careful about agreeing permitted contract extensions to existing contracts to ensure that any agreed extensions meet current needs but do not restrict our flexibility on LGR, while not creating ‘cliff edges’ by timing all contracts to end shortly after vesting day.

• Some things councils can do corporately

• • Identify their significant contracts which must be prioritised.
  • Establish a Procurement and Contracts workstream as part of the LGR preparatory work.
  • Procurement and Legal teams across two tier councils should be talking to each other and planning strategically for current and future procurement, jointly procuring where appropriate.

Conclusion

To complement the statutory process and any agreements between affected councils, due diligence and a review of existing contracting arrangements is a key part of planning for what contractual arrangements will be appropriate in the newly established unitary authorities.

Current and future procurement should take full account of LGR, including how the contract term and timelines for re-procurement can be aligned with the anticipated vesting day timeline.

Procurement teams from across affected councils should collaborate on procurement in the run up to LGR, starting now, to help ensure that contracts being awarded don’t duplicate and can operate across the new geography both before and after LGR.

LGR presents opportunities for the new authority to focus on savings driven by a reduction in duplication and joining up of services. Detailed knowledge of existing contracts, and early planning for anticipated outcomes of LGR, will help councils be on the front foot to achieve beneficial commercial and legal arrangements when vesting day finally arrives. Better that than wake up on vesting day like a rabbit in headlights and ask, ‘What are we going to do about all these contracts we’ve inherited”?!

Craig Athorn is Principal Lawyer - Commercial Law and Stephen Dorrian is Assistant Chief Legal Officer at Herts Legal Services.