Legally, Councils have the power to dispose of land ‘in any manner they see fit’ for the ‘best price reasonably obtainable’, however in practice this has proved to be more complicated. With an increasing emphasis on regeneration and a national housing shortage, local authorities need to explore how to achieve their development aims, whilst still complying with their statutory duty under section 123.

Over the last decade there have been several judicial reviews challenging Council decisions, particularly in regard to the price that has been accepted for land that is for sale. A Council can be found in breach of section 123 if it has “(i) failed to take proper advice; (ii) failed to follow proper advice for reasons that cannot be justified; or (iii) has followed advice that was so plainly erroneous that in accepting it the local authority must have known, or at least ought to have known, that it was acting unreasonably.”

However, judicial reviews have brought other questions to light, such as the appropriateness of considering the environmental, economic and social impact of the land use, as part of the offer. While a bid may bring good socio-economic benefits to an area, a Council is obligated to its taxpayers to accept only the ‘best price’, and this might not reflect the monetary value of the land.

A useful case that explores what ‘any manner’ of disposal actually means is a dispute between Salford Estates and Salford City Council/Tesco Stores Limited. Salford Estates sought a judicial review of the Council’s decision to sell land to Tesco on the basis of an independent valuation, rather than go out to the open market. Tesco owned land in the middle of a larger site owned by the Council, and by purchasing the additional land Tesco would be able to build a large superstore. In this case the Court ruled that the method of achieving the ‘best price’ did not matter, the Council was under no obligation to follow a set process, and it had complied with its section 123 duty. To quote “there was no particular prescribed route to achieving the best price reasonably obtainable: it was not a duty to conduct a particular process, for example to have regard to particular factors.”

A crucial point regarding section 123 is that how the ‘best price’ is paid can vary. Price can be deferred as long as the payment amount is valued and captured in legally enforceable documentation. A case from earlier this year has potentially revolutionised the formula for section 123 agreements by showing that the highest ‘bid’ does not always equate to the ‘best price’. In this case, the London Jewish Girls High School applied for a judicial review of Barnet Borough Council’s decision to sell a site to another party, despite the fact that the school had offered a higher price. The successful purchaser had offered the Council a cash sum of £2.8m plus overage (‘future payments’) dependent upon a successful planning application, while the school’s offer was £3.5m up front. The school argued that the future payments were only ‘perceived benefits’, and should not form part of the Council’s decision, however they were ruled against.

Had the Barnett case consisted of the acceptance of an offer where the price was made up of a reasonable, but not the ‘best’, monetary sum plus social and/or economic benefits, the Council could have been in breach of its duty. The key to determining whether the offer accepted by the Council was the ‘best consideration’ was the fact that the deal was made up of a cash price plus overage. These payments were enforceable and tangible monetary sums, which it was reasonable for the Council to take into account, based on the future successful increase in value of the land.

On a separate point, a Council is able to sell a site for less than its market value, but it must seek statutory consent to do so. Specific consent is not needed where a Council can demonstrate the land sale will help to secure the improvement of the economic, social or environmental wellbeing of the local area, and the undervalue is only up to £2million less than market value. These are the circumstances where socio and economic benefits can be relevant. The undervalue itself still needs to comply with “normal and prudent commercial practices, including obtaining the view of a professionally qualified valuer”.

In conclusion, through case law a couple of key points become clear regarding a Council’s obligation to section 123 compliance. Firstly, the most important thing is the outcome, rather than the process. Secondly, monetary value is the best consideration in whatever the form, whether overage, upfront or deferred. However, social and economic benefits can justify a disposal at an undervalue, but only in certain circumstances.

Sarah Lines is a senior associate at Anthony Collins Solicitors.