Local authorities have a duty not to dispose of an interest in land for less than the best consideration reasonably obtainable, other than in the case of short tenancies, without the consent of the Secretary of State. State aid issues can arise even if consent is obtained.

The advice of a professionally qualified valuer applying the RICS Valuation professional standards ("the Red Book") for determining market value and taking into account any special purchaser, is normally decisive about what is "best" consideration. In the case of Whitstable Society v Canterbury City Council [2017] EWHC 254 (Admin), however, Mr Justice Dove held the City Council had entered into a contract for the disposal of land at less than the best consideration, even after following their valuer's report.

How did this come about and what lessons are to be learned by authorities and developers from this case?

On 11 December 2014 the Council's Executive resolved to authorise its head of property to conclude a sale of the Oval Chalet, a former outdoor roller skating rink. On 21 January 2015 a conditional contract for sale was entered into with a developer of adjoining land for £165,000, together with an overage provision. The developer subsequently sought planning permission for a residential-led mixed-use scheme initially comprising seven self-contained holiday lets, eight town houses, two apartments and one duplex apartment together with a commercial/community building and open space.

On 21 April 2016 permission to apply for judicial review was refused but later granted on 8 June 2016 following an oral hearing. Mr Justice Dove gave judgement on 15 February 2017 finding for the claimant on the issue of best consideration but refusing relief on the grounds of delay, prejudice to the developer and good administration being the need for certainty in the decision-making of local authorities, especially where a commercial transaction is in issue.

The case is nonetheless a timely reminder that engaging a qualified professional valuer and relying on their report does not always mean that best consideration is achieved.

The duty not to dispose of an interest in land, save for tenancies of not more than seven years, for less than the best consideration reasonably obtainable is found in s123 (2) of the Local Government Act 1972 and for land acquired or held by the local authority for planning purposes in s 233 (3) of the Town and Country Planning Act 1990. Mr Justice Dove took as his starting point for analysing this duty the principles set out in the case of Faraday Development Limited v West Berkshire [2016] EWHC 2166:

  1. The Court is not entitled to substitute its own view on the facts and merits for that of the local authority. The Court may only interfere if there was no material upon which the authority's decision could have been reached, or if in reaching that decision, the authority disregarded matters it ought to have taken into consideration, or if it took into account matters which were irrelevant, or if its decision was irrational.
  2. In the case of the best consideration duty the Court is only likely to find a breach where has failed to take proper advice, or (b) failed to follow proper advice for reasons which cannot be justified, or (c) although following advice, it followed advice which was so plainly erroneous that in accepting it the authority must have known, or at least ought to have known, that it was acting unreasonably.
  3. That duty does not mandate the authority to have regard to any particular factors nor is there any need for the authority's decision-making process to refer to it explicitly, provided that the Court is able to see that the duty has in substance been performed. The duty is not to conduct a particular process, but to achieve a particular outcome. However, process may have an important or even determinative, evidential role in deciding whether the authority has complied with that duty.
  4. "Consideration" is confined to those elements of a transaction which are of commercial or monetary value. Therefore the Court will quash a decision to sell property where the authority has taken into account an irrelevant factor, eg. job creation, when assessing whether it is obtaining the best "consideration" reasonably obtainable.
  5. The deliverability or credibility of a bid, or the care with which it has been prepared, are commercial factors which are relevant to an assessment of whether the "consideration" offered is the best reasonably obtainable. Likewise, the highest offer on the table need not represent the best "consideration", because an authority may conclude that "a bird in the hand is worth two in the bush".
  6. There is no absolute requirement to market the land being disposed of, or to obtain an independent valuation.

Here the decision turned on the allegation that the Council, through its valuer and the report of its Director of Resources underpinning the decision to dispose, fundamentally misunderstood the requirement for affordable housing.

The valuer had assumed that affordable housing would be required as part of the grant of planning permission on the basis that the new local plan policy which required it on all small sites would be in place and adopted by March 2015. The site valuation was, therefore, reduced accordingly. However by the time of the decision to dispose and the contract was entered into that assumption was wrong. At the date of the decision the valuation report was about 8 months old and the local plan timetable had slipped. Moreover, a Written Ministerial Statement had been published which sought to preclude the requirement for affordable housing on small sites given the impact which such a requirement had upon site viability. The judge concluded:

"A planning permission unencumbered by an affordable housing requirement would have had a substantially higher value than the defendant achieved, as would a valuation of the land which included the prospect of achieving such a planning permission bearing in mind the factual position as it existed as at the 11th of December 2014. In my view there is substance therefore in the Claimant's contention that there has been a breach of s123(2) of the 1972 Act and a legal error by the defendant, in that the defendant failed to obtain best consideration for the land since the sum it accepted was based on a valuation predicated on it being inevitable that affordable housing would be required."

Although the application failed because of the claimant's delay what lessons can be learned for local authorities and developers taking interests in land from them?

1. Valuations have a limited life

Valuations are usually expressed to be valid for a limited time: often six months. The point at which the best consideration duty has to be satisfied is the point of completion and not the point of contract (see R (on the application of Structadene Ltd) v Hackney London Borough Council [2001] 2 All ER 225). Contracting on a conditional basis relying on a valuation report some nine months old carries significant risk. To mitigate such a risk valuation reports should be revisited before exchange.

2. Up to date planning information is essential

The valuer made no enquiry of the Council's planning department. The Council's decision-making process took no account of the slippage in the preparation of the local plan nor the change in Ministerial policy. It is essential that local authorities and their advisers make the most of their knowledge of relevant planning policies and decisions in valuing their land. Although Probity in Planning issued by the LGA in 2009 and still relevant on this issue points out that:

"Proposals for a council's own development should be treated with the same transparency and impartiality as those of private developers"

there is no suggestion local authorities should deny themselves information they would provide to a private landowner.

3. Planning conditions are vital

The nature of the conditional contract is not explored in the judgement. One might expect a valuation to reflect the terms of a condition requiring the developer to obtain planning permission in a certain form before a local authority becomes committed to complete the disposal. In this case that would reflect the proposed mixed-use development and the provision of a level of affordable housing consistent with assumptions about planning policy at the time.

Securing the grant of planning permission and entering into a linked section 106 agreement to deliver the assumed affordable housing does not prevent the developer making another application for planning permission for development without affordable housing if the policy position changes. To guard against such a possibility the local authority might impose:

  • a restrictive covenant preventing first development after disposal otherwise in accordance with the planning permission which reflected the valuation. If the local authority does not have suitable adjacent land which can benefit from such a covenant an appropriate title restriction can be considered,
  • an obligation to deliver the affordable housing contemplated by the valuation through a contemporaneous agreement for its sale to a registered provider,
  • a further condition precedent requiring a material start on site of the development for which planning permission has been granted before completion takes place.

S128 of the Local Government Act 1972 provides that a disposal once completed shall not be invalid because the local authority failed to obtain the consent of the Secretary of State to an undervalue disposal. Purchasers are not obliged to enquire if consent has been obtained and therefore do not have to scrutinise the process by which the local authority concluded that the best consideration duty was satisfied. Developers may rightly look to their interests in making bids and conducting negotiations. It follows that they are best advised to ensure completion follows as soon as any planning condition precedent is satisfied by the grant of planning permission and the expiry of the relevant challenge period.

Developers are however at risk during the period from exchange to completion and will often incur significant expense during this period in applying for planning permission and undertaking site surveys. They can take comfort however from the refusal of the judge to grant relief even though permission to apply for judicial review had been given notwithstanding the delay in making the initial application. Mr Justice Dove took into account the costs and expenses already incurred by the developer along with the delay to their project and in recovering capital outlay through income from the completed development. Additionally he considered the need for certainty about local authority decisions involving commercial arrangements with third parties. The judge then weighed these factors against the delay and the ability to make an application at an earlier date and refused relief.

The judge was influenced by the material in the public domain which could have alerted the claimants to the grounds for challenge well before they made their application. He found there was sufficient information to bring the case in July 2015, some nine months before the application for permission was first considered by the Court. Developers may conclude there is advantage in ensuring that decisions about disposals enter the public domain promptly and with more openness about the decision-making process than may have been the custom in times past.