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Seven years after the Allerdale BC affair, in which bankers Credit Suisse lost£6m when a council guarantee was rul...
Seven years after the Allerdale BC affair, in which bankers Credit Suisse lost£6m when a council guarantee was ruled ultra vires, it seems councils can still use their own illegality to walk away from bad deals.

In Greenacre Properties Ltd v Tower Hamlets LBC, the council escaped having to comply with a contract requiring it to convey Tower House, Fieldgate Street, E1 to Greenacre for£1,550,000.

The former hostel was to be redeveloped into 82 homes, 24 of which would provide social housing for 10 years, with Tower Hamlets nominating occupants. Before the sale could be completed, planning permission had to be obtained.

A breakdown of communication between council departments meant planning permission was not obtained. Instead, planners demanded the 24 units be kept as social housing in perpetuity.

Following some abortive negotiations, Greenacre said it would complete its purchase on original terms, with or without planning permission. To force the council to sell, Greenacre asked the High Court to order specific performance.

Tower Hamlets argued its contract was illegal as the consent of the Secretary of State had not been obtained as required by s32 of the Housing Act 1985. Deputy Judge Strauss QC accepted this.

His decision and others like it sit uncomfortably with section 128 of the Local Government Act 1972, which states a purchaser of land from a council is not prejudiced by a lack of ministerial consent.

Section 123 requires any sale of land to be at the best price reasonably obtainable. In R v Hackney LB ex parte Lemon Land Ltd (Lawtel ,May 2001), Hackney had resolved to sell 2-10 Hertford Road to the London Development Agency for£1,650,000. In financial terms this was an undervalue but the proposed re-development would create 322 jobs. The council valued each job at£6,000. The deal was challenged by Lemon, which had made a higher offer but whose proposals would only create 200 jobs maximum. Lemon's challenge succeeded. Justice Lightman ruled notional job value could not be taken into account in considering the best deal. Surprisingly, the council could have regularised its position by obtaining ministerial consent but elected not to do so.

Such decisions destroy business confidence. It was because the Allerdale case had discouraged the private sector from working with councils that Parliament enacted the Local Government (Contracts) Act 1997 which validates long-term contracts, even if a council had acted beyond its powers in entering into them.

The scope of the act is limited, as is its actual use. The underlying problem still has to be addressed.

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