S114 Notices – impact from a Real Estate and Regeneration perspective
Birmingham City Council recently hit the headlines for issuing a s114 notice and joins several local authorities that have done so in recent years.
These include Croydon, Slough, Thurrock, and Woking. Each issued s114 notices in the wake of debt-financed investments or property transactions which didn't work out, but in Birmingham's case it issued a s114 notice to meet its financial liabilities relating to equal pay claims (an outlay of approximately £750m) and the spiralling cost of an IT project causing an anticipated gap of £87 million between income and expenditure for the 2024/25 financial year.
Unfortunately, it is likely that more councils will follow suit. A recent survey by SIGOMA, (the Special Interest Group of Municipal Authorities representing 47 urban authorities in the northern, midlands and south-coast regions of England) looked at the state of their local councils’ finances and found that 10% of members were considering making a s114 this year, while close to 20% said it could be possible in the next year. The Birmingham case can point to specific line items, but the under-funding of councils has been in the making for years.
What is a s114 notice?
S114 Local Government Finance Act 1988 places a statutory duty on a council’s chief financial officer (CFO) to make a report if they believe the council will be unable to meet its expenditure commitments from its income, or is likely to be, unlawful expenditure or an unbalanced budget – this is widely referred to as a s114 notice. The CFO prepares the report made in consultation (so far as practicable) with the Monitoring Officer and Head Paid of Service.
A s114 notice means the council cannot make new spending commitments which may involve incurring expenditure unless the CFO authorises and must meet within 21 days to discuss what to do next.
What happens when a s114 notice is issued?
Unless the CFO authorises, no new expenditure is permitted, except for funding statutory services, including safeguarding vulnerable people with existing commitments and contracts continuing to be honoured. Council officers must therefore carry out their duties in line with contractual obligations and to acceptable standards, while being aware of the financial situation. Any spending that is not essential or which can be postponed should not take place and essential spend will be monitored.
Going forward, councils will have to find a way to close the gap in its budget, likely through a combination of further reductions in spending, increased council tax, and the selling of assets.
Real Estate and Regeneration Impact
Councils must resist the temptation to dispose of assets under what they perceive to be 'fire sale' conditions. Disposals maybe subject to s123 Local Government Act 1972 (best consideration duty) and issue of a s114 notice does not suspend this duty. Council officers should ensure they have a joint up approach and carefully consider the impact of disposing of assets that are earmarked for future development. Making property assets work harder to generate revenue or capital remains a very viable option to trade out of trouble. Their role is shaping the built environment is still vital and retaining control of the property portfolio makes that so much easier.
Councils may also wish to give serious thought to repurposing existing assets. Repurpose regeneration is the reuse and repurposing of existing assets. Councils can breathe new life into assets without incurring the significant costs associated with other types of regeneration. Councils should also ensure they clearly scope projects and understand their financial obligations – are there financial aspects of a project that now need to sit with a development partner to get the project underway such as funding the planning application?
In relation to existing projects, councils may need to undertake a strategic review involving assessments pertaining to financial viability and deliverability. It is possible that councils may not be able to borrow to deliver future phases of an existing project and may need to consider exit strategies and/or varying development agreements and collaboration agreements to reflect new approaches in delivery phasing etc.
In all cases, whether a council has issued a s114 notice or not, it is likely that going forward developers will want to include 's114 clauses' in agreements to create a position of priority in the event of a perceived bankruptcy (noting that councils cannot go bankrupt in any event).
What is clear is that there are challenging times ahead for councils and they should seek specialist legal advice.