Meeting documents

Introduction

1. I am the Auditor appointed by the Audit Commission to audit the accounts of Bath & North East Somerset Council ("the Council") for the financial year 1998/99.

2. In the exercise of the right given by section 16 of the Audit Commission Act 1998 ("the 1998 Act"), Mr A Johnston ("the Objector"), a local government elector for the area of the Council, made an objection to the 1998/99 accounts of the Council.

3. By his objection, the Objector contends that, as part of the Council's large scale voluntary transfer of its housing stock to Somer Community Housing Trust Ltd ("Somer"), open space land was included in that transfer without the Council having first complied with section 123(2A) of the Local Government Act 1972 ("the 1972 Act").

4. The Objector further contends that the unlawful inclusion of the open space land in the sale reduced the price that Somer had to pay to the Council by £6,026,361. The Objector invites me to take action under section 17 of the 1998 Act. He further submits that the unlawful inclusion of open space land in the sale has given rise to a loss in the Council's accounts caused by the wilful misconduct of Mr Vernon Hitchman (the Solicitor to the Council); Mr John Everitt (the Council's Chief Executive) and Mrs Annie Shepperd (the Council's former Director of Housing and Social Services). In respect of that alleged wilful misconduct, the Objector invites me to take action under section 18 of the 1998 Act. The Objector has withdrawn allegations of wilful misconduct against a number of Members and other officers of the Council.

5. I have had regard to the submissions made by the Objector and the Council. On 25 April 2002, I issued a note of provisional views in relation to the section 17 objection and invited representations on those provisional views. I have taken into account the representations received from the Objector and the Council in response to my note of provisional views.

6. The legislative provisions relating to the surcharge in sections 17 and 18 of the 1998 Act have been repealed pursuant to section 90 of the Local Government Act 2000. Those sections, however, remain in full force and effect for the purposes of the Council's 1998/99 accounts.

Statutory provisions

7. Section 17(1)-(3) of the 1998 Act provides that:

8. Section 18 of the 1998 Act states:

9. Section 123(1) of the Local Government Act 1972 provides that:

10. By section 123(2A) of the Local Government Act 1972:

11. Section 128(2)(a) and (b) of the Local Government Act 1972 provides that:

12. By section 32 of the Housing Act 1985:

The section 17 objection

13. An item of account is "contrary to law" within the meaning of that phrase in section 17(1) of the 1998 Act if:

(a) it records expenditure or income which a local authority had no power to incur or receive or which was otherwise 'ultra vires' (Robert v Hopwood [1925] AC 578; Beecham v Metropolitan District Auditor (1976) 75 LGR 79);

(b) it records expenditure which was incurred or income which was received without authority (Beecham v Metropolitan District Auditor);

(c) it records expenditure or income which is debited or credited to the wrong statutory fund or account (Stockdale v Haringey LBC (1990) 88 LGR 7; Wilkinson v Doncaster MBC (1985) 84 LGR 257).

14. The above is not intended necessarily to be exhaustive of the circumstances in which an item of account might be contrary to law. An auditor is entitled to seek, and the Court is entitled to grant, relief under section 17(1) of the 1998 Act if an item of account is for any reason unlawful or improper : see Hazell v Hammersmith and Fulham LBC and Others [1990] 2 QB 697, 768.

15. I first consider the Objector's contention that open space land was included in the transfer to Somer without the Council having first complied with section 123(2A) of the 1972 Act.

16. At one stage, the Council contended that amenity land on housing estates included in the transfer to Somer was not open space as it was provided as part of the housing estates for use by residents. I regard that argument as untenable and it is, as I understand it, no longer maintained by the Council.

17. The question, therefore, is whether the open space land included in the transfer to Somer was subject to the requirement to advertise in accordance with section 123(2A) of the 1972 Act. If there is such a requirement, it is common ground that the Council breached that section as it did not place the requisite advertisements. If the Council acted in breach of section 123(2A) of the 1972 Act, further questions arise as to the consequences of that breach.

18. The Objector contends that there was a requirement on the Council to advertise its proposed disposal of all open space land included in the transfer to Somer. I do not agree.

19. Where a local authority holds land, including open space land, for the purposes of Part II of the Housing Act 1985 ("the 1985 Act"), the disposal of such land is governed by section 32 of the 1985 Act. Where a local authority holds land other than under Part II of the 1985 Act, the disposal of such land is governed by section 123 of the 1972 Act. Disposals of open space land held under Part II of the 1985 Act are, therefore, not subject to the requirement to advertise the intention to dispose of that land contained in section 123(2A) of the 1972 Act as that requirement only applies to disposals "under subsection (1) above". Subsection (1) above (section 123(1) of the 1972 Act) does not apply to any disposal of land held under Part II of the 1985 Act : see the wording of section 32(1) of the 1985 Act. However, disposals of open space land held otherwise than under Part II of the 1985 Act are subject to the advertisement requirements of section 123(2A) of the 1972 Act.

20. The issue which arises, therefore, is whether any of the open space land transferred to Somer was held by the Council, immediately before the transfer, otherwise than under Part II of the 1985 Act.

21. I am satisfied that most of the open space land included in the transfer to Somer was held by the Council, immediately before transfer, under Part II of the 1985 Act. Section 123(2A) of the 1972 Act did not, therefore, apply to the disposal of that land and, to that extent, the allegation by the Objector fails.

22. However, it is accepted by the Council that certain open space land at Bath Whiteway East, Bath Whiteway West and Bath Blagdon was held by the Council, immediately before transfer, otherwise than under Part II of the 1985 Act. It follows that the requirements of section 123(2A) of the 1972 Act applied to the disposal of that open space land and that the Council did not comply with those requirements.

23. In my note of provisional views, I expressed the provisional view that the sale of open space land by the Council to Somer was unlawful to the extent that land which should have been (but was not) advertised in accordance with section 123(2A) of the 1972 Act was included in the sale. That provisional view was contested in submissions by Eversheds, Solicitors advising the Council. Eversheds disputed the statement of the law set out in paragraph 12 above. I regard their submission as erroneous and contrary to authority and principle and I do not propose to spend further time in dealing with it. However, Eversheds make a more substantial point relying on the case of Beecham v Metropolitan District Auditor.

24. The Beecham case concerned a local authority which demolished some houses without obtaining planning permission to do so. On the assumption that the demolition required planning permission, the Court nevertheless held that the failure to obtain planning permission did not render the item of account which recorded the expenditure incurred contrary to law. The Court held that, since the Council had power to demolish the houses and to expend money in so doing, a failure to obtain planning permission did not render their action ultra vires. It follows that the item of account objected to was not contrary to law. In deciding this objection, I am bound by the decision in Beecham and proceed on the basis that the case was rightly decided.

25. Relying on the Beecham decision, Eversheds submit that, if there is a breach of a legislative requirement "it does not automatically follow that expenditure on the scheme is contrary to law". I agree with that proposition but it remains for me to consider the application of that principle to the facts of the present case. Before doing so, I should, however, respond briefly to another argument raised by Eversheds although it appears not to be relevant to the present case.

26. Eversheds contend that a failure by a local authority to conform to Wednesbury principles does not make a decision taken in breach of those principles contrary to law. In my view, that submission involves a misunderstanding of the decision of the Court of Appeal in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, is misconceived in principle and is contrary to authority. That the failings referred to by Lord Greene MR in the Wednesbury case constitute unlawful action, and that they are the grounds upon which a purported decision is ultra vires and void, has often been affirmed : see, for example, Padfield v Minister of Agriculture Fisheries and Food [1968] AC 997 HL per Lord Morris at pages 1040-1, Lord Hodson at page 1046 and Lord Upjohn at page 1058; Grunwick Processing Laboratories Ltd v ACAS [1978] AC 655 HL per Lord Diplock at page 692b. More recent judgments are to the same effect : see, for example, the speech of Lord Browne-Wilkinson, with which the majority of the Appellate Committee agreed in R v Lord President of the Privy Council ex parte Page [1993] AC 682 at page 701.

27. Notwithstanding the acceptance by the Council that the open space land held by the Council immediately before transfer otherwise than under Part II of the 1985 Act should have been advertised, Eversheds argue that the sale is not unlawful and does not give rise to an item of account which is contrary to law. For that submission, Eversheds rely on the decision in Beecham. They argue that the failure to obtain planning permission in Beecham did not render ultra vires what was otherwise intra vires expenditure on demolishing the houses and, by analogy, argue that the principle established by the Beecham case is applicable and that the failure to advertise did not affect the Council's ability (lawfully) to dispose of the open space land.

28. I do not accept that submission. The power of the local authority in Beecham to demolish the houses was not expressed to be subject to the Council obtaining planning permission. The Court, therefore, took the view that the failure to obtain planning permission was a "collateral infringement" which did not make the expenditure on demolishing the houses unlawful. However, in this case, the power of the Council to dispose of the open space land in question is derived from section 123(1) of the 1972 Act. That section is expressly stated to be "subject to the following provisions of this section". The following provisions of that section include the requirement to advertise imposed on the Council by section 123(2A) of the 1972 Act. It follows, therefore, that the Council was not entitled to dispose of the open space land in question without having complied with the requirement to advertise. I hold, therefore, that the Council was not authorised to dispose of the open space land in question to Somer and acted unlawfully in doing so.

29. For completeness, I mention that the sale to Somer of the open space land in question is not invalidated by the unlawfulness on the part of the Council. Section 128(2)(a) of the 1972 Act provides protection to a purchaser of land in circumstances where, amongst other things, the requirement imposed by section 123(2A) of the 1972 Act has not been complied with.

30. It remains for consideration whether what I have held to be the unlawful disposal of the open space land in question gives rise to an item of account which is contrary to law.

31. In my note of provisional views, I expressed the provisional view that the (unlawful) inclusion of the open space land in question in the transfer to Somer had the effect, in view of the maintenance obligations associated with the land, of depressing (to a strictly limited extent) the price paid by Somer to the Council. On that basis, it appeared to me that the Council received less than it should have received and, in consequence, the entry in the Council's accounts recording the receipt from Somer of the consideration for the sale was contrary to law.

32. That provisional view is contested by Eversheds on the basis that I was wrong to make an assumption that there had been a reduction in the price paid by Somer in consequence of the unlawful inclusion of the open space land in question in the transfer to Somer. It is submitted that the burden of maintenance and management could be "cost neutral" and that it is not for me to substitute my view of valuation for that relied on by the Council.

33. The difficulty, as I see it, with that submission is that the advice to the Council, set out in Annex 1 to a report to the Housing Transfer Sub Committee on 30 November 1998, was that the exclusion from the transfer of landscaped areas and open spaces within housing estates would increase the valuation by £6,026,361. The Sub Committee was informed that the annual maintenance cost of the landscaped areas and open spaces proposed for inclusion in the transfer was £444,800 at then current prices. It follows that the inclusion of the said land in the sale to Somer was not cost neutral; it did have a substantial impact on the purchase price.

34. I accept, however, that the 3 areas of open space land which were unlawfully included in the sale to Somer had only a strictly limited effect on the purchase price. I nevertheless, conclude that the Council received less than it should have done if that land had been excluded from the sale and, in consequence, it appears to me that the entry in the Council's accounts recording the receipt from Somer of the consideration for the sale is contrary to law to that extent.

35. I must, therefore, consider how I should exercise the discretion conferred on me by section 17(1) of the 1998 Act. However, before doing so, I turn to consider the section 18 objection.

The section 18 objection

36. Wilful misconduct means deliberately doing something which is wrong or wrongly omitting to do something, knowing it to be wrong or with reckless indifference as to whether it is wrong or not (Graham v Teesdale (1983) 81 LGR 117). This definition, which must be read so as to include wrongful omissions to act, was cited with approval in Lloyd & Others v McMahon [1987] 1 AC 625 and Porter v Magill [2002] 2 WLR 37. Misconduct occasioned by imprudence, negligence, excess of zeal, misplaced enthusiasm, error or lack of judgement falls short of wilful misconduct.

37. I am mindful of the seriousness of a charge of wilful misconduct. I remind myself that, although a section 18 enquiry is not a criminal proceeding, it should take a lot of evidence to tip the balance in favour of a positive finding of wilful misconduct because the accusation is serious and the consequences of such a finding are grave (see Lawton LJ in Lloyd v McMahon [1987] 1 AC 625, 647).

38. The substance of the allegation of wilful misconduct is that the named officers were aware of the requirements of section 123(2A) of the 1972 Act but, nevertheless, permitted the disposal to proceed without complying with those requirements.

39. Even if the allegation was well founded, the objection cannot succeed unless any wilful misconduct on the part of the named officers has caused a loss to the Council. In my view, the unlawful disposal of the 3 areas of open space land without complying with the requirements of section 123(2A) of the 1972 Act has not caused a loss to the Council.

40. As indicated above, in my view, the unlawful inclusion of the said areas of open space in the sale meant that the Council received a lower sale price than it otherwise would have received. That is because the said areas of open space had a negative value because of the cost of maintaining them. Although the Council obtained a lower sale price, at the same time it transferred the responsibility for maintaining the said areas of open space to Somer. In consequence, the Council disposed of a liability. In my view, and there is no evidence to the contrary, the financial disadvantage to the Council receiving a lower sale price was off set by the financial advantage of losing the responsibility for maintaining the said areas of open space.

41. It therefore follows that the section 18 objection fails. However, I express my concern that the failure to advertise took place against the background where the Council had received advice that it should comply with the requirements of section 123(2A) of the 1972 Act. Mr Hitchman and Mrs Shepperd were aware of that advice.

42. The advice to that effect came from Counsel instructed by Lawrence Graham, who were the Solicitors advising the Council on the transfer to Somer, and from Lawrence Graham. However, the force of that advice was somewhat diminished by the apparent omission by Counsel to recognise that the disposal of land held under Part II of the 1985 Act was not governed by section 123 of the 1972 Act. A copy of that advice was sent to the Council by Lawrence Graham who gave further advice, this time to the effect that if the Council did not "advertise the proposal" they believed that once transfer had taken place, it would be "difficult for a private individual to mount a successful judicial review". Notwithstanding Counsel's advice, Lawrence Graham stated that there were 3 options, the first of which was to proceed to transfer "without advertising". The Council decided to follow that option.

43. While Mr Hitchman clearly did have concerns as to whether the Council should proceed without advertising the proposed disposal of open space, he was reassured by the advice from Lawrence Graham. In my view, neither Mr Hitchman nor Mr Shepperd can individually be criticised for having proceeded in accordance with an option (not to advertise) which Lawrence Graham advised was open to the Council. I am satisfied that Mr Hitchman, Mrs Shepperd and Mr Everitt were not guilty of misconduct, even less wilful misconduct.

44. I am, nevertheless, critical of the way that the Council, influenced by pressure to complete the sale to Somer by 31 March 1999, failed to identify which open space was subject to the requirement to advertise the proposed disposal of open space land held, by the Council, immediately prior to transfer, otherwise than under Part II of the 1985 Act.

45. I am satisfied, however, that I have no duty to perform under section 18 of the 1998 Act.

Exercise of discretion

46. It appears to me that the item of account recording the receipt by the Council of the consideration for the sale to Somer is contrary to law to the extent that the purchase price is less than it otherwise would have been had the 3 areas of open space which were unlawfully sold (in breach of section 123(2A) of the 1972 Act) not been included in the sale.

47. I must, therefore, consider how to exercise my discretion under section 17 of the 1998 Act whether or not to make an application to the court. This is a matter on which I invited representations from the Objector and the Council, and I have considered the representations made.

48. I have decided not to make an application to the court for the following reasons:

(i) the Council now accepts that it should have advertised the proposal to dispose of the 3 areas of open space in question and that it acted unlawfully in not doing so;

(ii) I recognise, however, that the Council's Solicitors have argued that the failure to comply with the law does not make the sale of the open space land in question unlawful. I consider that that argument has no real prospect of success but I would not be justified in obtaining, at the expense of local taxpayers, a declaration in circumstances where the law appears to me to be clear;

(iii) moreover, the court would not, in any event, make an order for repayment under section 17(3) of the 1998 Act. Such an order can only be made in respect of unlawful expenditure and not, as in this case, where there is a shortfall in income;

(iv) it follows that the substantial costs of an application to the court may fall to be paid by local taxpayers without any compensating benefit;

(v) in my view, the unlawful conduct impugned by the Objector is unlikely to recur as the Council accepts the need to advertise the proposed disposal of open space land where the disposal is pursuant to section 123(1) of the 1972 Act.

49. The Objector submitted to me that the issue does raise an important question of principle considering that many local authorities are pursuing large scale voluntary transfers which include open space land. The attempts by Eversheds to argue that a failure to comply with section 123(2A) of the 1972 Act does not make an ensuing disposal of open space unlawful, raises a point of principle which could justify an application to the court for a ruling. I have, nevertheless, decided not to make an application to the court for the reasons set out above.

50. The Objector has invited me, if I do not make an application to the court, to issue a report in the public interest under section 8 of the 1998 Act. I am presently not minded to do so as I have covered all relevant issues in this statement of reasons.

51. For the above reasons, while to the extent indicated above, I agree with the Objector that the Council has acted unlawfully, I decline to uphold the objection insofar as it invites me to make an application to the court under section 17 of the 1998 Act.

Other matters

52. In my note of provisional views, I expressed the view that the Council did not approach the question of the powers under which the land to be disposed of was held with the attention that might be required. It appears that the Council failed to appreciate the significance of whether open space land was held under Part II of the 1985 Act or otherwise. I commented that the Council had been unable to provide me with relevant information as to the powers under which the transferred land was held immediately prior to transfer and that this was an exercise which should have been carried out prior to the transfer.

53. On behalf of the Council, Eversheds dispute my provisional view. I found their representations unconvincing although I hope it will not be necessary for me to set out chapter and verse. The Council has been critical of the length of time that it has taken to determine this objection. In my view, however, much avoidable delay has been caused by the Council.

54. For example, it was made clear to the Council at a very early stage that the central question which the Council needed to address was the powers under which any open space land was held immediately before the transfer to Somer. The Council was unable to provide this information to me notwithstanding that such an exercise should have been carried out prior to the transfer if the Council was properly to have satisfied itself and/or those advising the Council, that any open space land to be transferred was not subject to the advertisement requirements of section 123(2A) of the 1972 Act.

55. Further, as it became clear that the Council was not able to provide the necessary information to me, my legal advisers made arrangements to review the relevant deeds which were said by the Council to be held in the Exeter offices of Trowers & Hamlins, Solicitors. After an exchange of correspondence with Trowers & Hamlins, my legal advisers decided that, in order to review the relevant deeds, they should visit the Exeter office of Trowers & Hamlins. This they did in January 2001. However, in the course of reviewing related files, my legal advisers discovered that, in relation to the open space land, the Council had requested in September 2000 the return of the relevant deeds and that Trowers & Hamlins had complied with that request. Therefore, when my legal advisers visited the Exeter office of Trowers & Hamlins in January 2001, the relevant deeds were with the Council, a fact about which the Council failed to inform me.

56. On learning that the Council held the relevant deeds, the Council was requested to provide them to my legal advisers. It was not until May 2001 that the Council completed that exercise.

57. These are but a few examples of the difficulties I encountered in seeking to establish the powers under which open space land was held before the transfer to Somer. In my view, the Council's approach to this matter led to lengthy delays which could have been avoided.

Conclusion

58. I have given careful consideration to all the evidence and submissions before me whether or not they are specifically referred to in this statement of reasons.

59. I have concluded that the item of account recording the consideration for the sale to Somer is contrary to law but, in the exercise of my discretion, I have decided not to make an application to the court under section 17 of the 1998 Act. I decline to uphold the section 17 objection.

60. I am satisfied that I have no duty to perform under section 18 of the 1998 Act. I dismiss the section 18 objection.

61. This document sets out my statement of reasons for my decisions.

62. The Objector has a right of appeal to the High Court against my decisions not to apply to the court under section 17 of the 1998 Act and that I have no duty to perform under section 18 of the 1998 Act.

Richard Lott
District Auditor
September 2002