What happens to development plans when a council goes ‘bankrupt’?

What happens to a local authority when it gets into deep financial trouble and its income can no longer meet its expenditure commitments?

There comes a point when local authorities in this precarious position have to issue a dreaded section 114 (s114) notice. These notices, usually referred to in the media (not accurately technically) as “bankruptcy” notices, restrict investment in non-statutory projects until the council’s finances are on a firmer footing. 

And councils are issuing these notices in growing numbers. Since 2017, a spate of local authorities have issued s114s, including Northamptonshire, Croydon, Slough, Nottingham, Northumberland and Thurrock. In June this year, Woking Borough Council issued an s114 notice, while Birmingham City Council followed suit in September.

This week, Nottingham City Council issued its second s114 notice in less than two years due to a budget shortfall of £23.4m. The council’s chief executive, Mel Barrett, was clear that the notice will result in “reductions in service provision or withdrawal in some areas, subject to decisions made by councillors”.

A recent survey by the Special Interest Group of Municipal Authorities (SIGOMA) found that one in ten councils has considered issuing an s114 notice this year, while nearly one in five (20%) said they may have to do so next year.

The potential of these notices to disrupt and halt housebuilding plans is now starting to cause serious concern.

“A section 114 notice is one of the consequences of funding pressures driving a council towards not being able to set a balanced budget, which will severely restrict how they can provide vital services and drive investment in projects, such as building houses,” Peter Marland, chair of the Local Government Association’s (LGA) resources board, says.

But why are councils in this position and how are they responding? How badly is housing development likely to be hit? Are they simply putting all housing development on hold, or are they finding ways to carry on building? 

A growing problem

In simple terms, common causes for having to issue an s114 include financial difficulties due to high debt levels, the escalating costs of providing statutory services, and unexpected expenses that cannot be covered by the allocated budget, as in the case of Birmingham City Council’s £757m equal pay claim.

The LGA says that another instance where an s114 notice could be triggered is when a council’s Housing Revenue Account (HRA) - the fund containing the local authority’s rental income - becomes unsustainable. This is because the council’s assets do not generate the income needed to fund the management of and investment in its existing housing stock. 

Research by Savills found that, in 2023/24, the cost of councils’ repairs budgets will increase by 9.2% due to inflation, while their housing management costs will increase by 16.4%. These pressures could plunge several councils’ HRA budgets into the red over the next two to three years.

When a section 114 is issued, “housebuilding generally goes to the back of the queue”, along with cuts to non-essential services such as libraries and leisure centres, an LGA spokesperson says. 

Despite this, some councils that have issued s114 notices are proceeding with their housing programmes through wholly-owned housing companies, while others are using the HRA, which is ring-fenced to maintain a council’s existing housing stock but can be used to carry out regeneration activities. 

Asset disposals

One way of responding to an s114 is to sell council-owned businesses, land and buildings on the open market in a bid to reduce the authority’s deficit. “Selling surplus land means it is not available for things such as housing development – although the buyer might still choose to do that,” Marland says.

The government expects local authorities with a financial shortfall to consider the option of selling assets. Councils will often appoint budget consultants to help them identify what assets they should sell. 

Matt Carroll, managing director at Altair Property, says that in recent years he has seen an increase in asset disposals “probably linked to financial matters within councils”. 

Although the land that councils sell may be used for housing development, it can probably be assumed that fewer homes for affordable rent will then be delivered – perhaps only the percentage needed to meet section 106 requirements set by local authorities.

On the other hand, Carroll says: “I don’t think it would necessarily follow that that land would always see less affordable homes on it, because the level of grant potentially available for affordable homes at the moment is quite high in some areas.” 

Council staffing

When councils serve an s114 notice, another way they look to make savings is through job cuts. Carroll notes that an s114 notice will therefore reduce the resources that councils have to deliver new developments, for example in their planning teams.

“The cutback of planning officers puts pressure on wider delivery of new homes, so there are all those kinds of impacts as well,” Caroll says.

According to the Royal Town Planning Institute, local authority net expenditure on planning has fallen by 43%, from £844m in 2009/10 to £480m in 2020/21. This amounts to  local authorities spending 0.45% of their budgets on planning services. With an s114 in place, spending on planning cannot increase, as new expenditure is not permitted. 

Research by the Local Government Chronicle found that Slough Borough Council’s planning department capacity was at 58% in 2022, and that low capacity within teams has a knock-on effect on councils’ ability to recruit new planners. 

Last year a RIBA future trends survey showed that nearly 80 per cent of architecture practices reported projects being put back because they were getting stuck in the planning system. 

Wholly-owned companies and HRA

Because a council’s HRA is ring-fenced, the funds can only be used to maintain existing stock. Councils are also not permitted to put up council tax, for instance, to fund housing repairs as this money must be spent on services such as rubbish collections and library services. 

Carroll says that, due to the difference between the council’s general fund and the HRA, a council they are working with has been able to proceed with regeneration activities despite having issued a s114. In these cases, it is possible to keep developing because regeneration is considered to be a means of maintaining existing stock.

Since 2010, more and more councils have formed wholly-owned housing companies to find a way around borrowing limits on their HRAs.The borrowing cap was subsequently lifted by the then prime minister Theresa May in 2018, yet many councils continue to deliver homes through separate housing arms.

Wholly-owned housing companies enable councils to build and acquire homes for private rent, which creates an additional revenue stream for them.

As revenue from homes built by wholly-owned companies is separate from the council’s HRA, the government rent cap does not apply and councils can set rents according to local demand.

Despite council housing companies being an autonomous means of delivering development, they are not immune to the impact of councils hitting black holes in their budgets, however.

Wholly-owned companies have different funding models. Some receive developer contributions in section 106 planning agreements. Others, like Thurrock Regeneration Limited, are funded through loans from the council. Those receiving funding from the local council are more likely to see investment put on hold if an s114 is issued. 

Councils in trouble

Thurrock Council

Since issuing an s114 notice in December 2022, Thurrock Council has delivered just four new homes. In September 2022, the authority had a development pipeline of 505 homes. That has now been reduced to 338 homes. 

The council said that the delivery of the 338 homes is subject to availability of borrowing or increased flexibility over right to buy receipts. Currently councils can only use RTB receipts to fund 40% of the cost of a new home. 

The council has said that its housing arm, Thurrock Regeneration Limited, will not be delivering any new homes in 2023. A council spokesperson said this is due to market conditions and not due to the council’s financial position. 

Thurrock is also selling off sites earmarked for council development, including Culver Centre and Field which had been cleared and had planning consent for 173 homes. Two car parks identified for the development of 54 homes will also be sold, for an estimated £2m. 

Slough Borough Council

Slough issued an s114 notice in July 2021. It is another authority where government commissioners have been appointed. Slough reported that the financial viability of the council is dependent on the sale of between £400m and £600m of assets.

The first assets sold were out of borough, including a hardware shop and cinema, but now Slough is progressing with sales of in-borough assets. An industrial site purchased for a potential housing development was sold for £100m. 

Several development sites secured by Slough Urban Renewal (SUR), a joint venture between Slough council and Muse, will also be sold. The council will sell the Montem Lane site, which was set to deliver 212 new homes.

Earlier this year, Slough council sold North West Quadrant, a regeneration scheme at the former Thames Valley University site which was set to deliver 1,340 homes, to Homes England. It has been planning to deliver it jointly with SUR. 

Croydon Council

When Croydon London Borough Council (LBC) initially issued an s114 notice in November 2020, £196.3m in outstanding loans paid to its wholly-owned housing company Brick by Brick were identified as a significant factor in the council’s ailing financial situation. 

Despite this, Brick by Brick continued to work on its 29-site development pipeline. By July 2021, LBC scrapped six of the sites, which were set to deliver 156 homes, as Brick by Brick had not started construction on them. 

>>See also: How Westminster council is rewriting the rules for council housing and urban regeneration

>>See also: Inside the council planning department resource crisis

The sites were approved for disposal, however the LBC was also considering buying them back off Brick by Brick. 

Brick by Brick was also appointed as the developer of a £30m regeneration scheme at Fairfield Halls, an arts and conference centre in Croydon. The council had planned for the development to be paid for by delivering and selling 2,000 new residential units and leasing retail spaces. 

Brick by Brick was granted planning permission to deliver 421 homes at the site.  

However, a public interest report into the council by Grant Thornton found that the LBC had not drawn up written loan agreements with Brick by Brick and that the scheme had gone over budget, costing £67.5m.

The LBC wiped the loan, but Brick by Brick did not deliver the 421 homes. This ultimately led to the council winding down the loss-making Brick by Brick. 

Developer Delta Properties has since put forward plans to deliver 775 homes at Fairfield Halls. 

S114s and the future of council housing delivery

Despite the creativity seen among these councils in their efforts to find ways of building homes, there is nevertheless increasing concern about the impact of this flurry of s114s. Carroll says that, if more councils issue notices, the government will either need to provide more housing grant, or councils will need to use alternative models for development.

He notes that they are already seeing positive examples of longer-term public-private partnerships, such as one between Cambridge City Council and Hill Investments. 

He also says that funding bodies are responding. “There has been recognition of some of the financial challenges councils and other providers are facing,” Carroll says, adding that Greater London Authority and Homes England funding has now been expanded and can be applied more widely across different regeneration projects. 

The LGA has called for the government to provide multi-year funding settlements, as the current year-by-year arrangements make it harder for councils to plan and execute bigger capital expenditures such as on housing.

Additionally, the LGA has emphasised that councils require more autonomy to decide how they spend one-off government funding pots.

In the meantime, however, the number of section 114s is only expected to grow. All eyes will be on how local authorities respond in the midst of a housing crisis.