David Conn: Forest's City Ground future under threat as taxpayers foot the bill

Nottingham City Council has moved to take possession of the City Ground after Nottingham Forest, in the week they appointed Joe Kinnear as their new manager, failed to make a £200,000 interest payment on a long-standing £4.3m loan which the council guaranteed. Forest have also said they will not be paying a further £200,000, and, most spectacularly, the £4.3m capital, which is due for repayment in June, because they do not have the money.

Lawyers, instructed by the council, have given Forest 14 days to pay the currently outstanding £200,000; if they do not, the council is promising winding-up proceedings. Irrespective of that, the original agreement - made in 1994 to help Forest build the new Trent End Stand and create a stadium fit for Euro '96 matches - provides that if the council, which owns the City Ground and rents it to Forest for £30,000 a year, has to step in with any payments under the guarantee, "The club shall surrender the lease of the ground".

"Obviously," the council leader, Jon Collins, said, picking his words carefully and stressing the council's support for the club, "we are disappointed that Forest seem to have decided not to honour their debts and to shift this responsibility to city council tax payers." Privately, councillors are said to be furious at Forest landing them with the £200,000 bill, plus £9,000 costs.

The council says the agreement gives neither side room for manoeuvre: the lease has to be given up. They would not then plan to evict Forest but, charged with a legal duty to protect public money, failing which councillors can become personally liable - the Dame Shirley Porter scenario - the council could renegotiate the club's rent at painfully high levels or be forced, extremely reluctantly, to sell the ground as an investment to a property company, which would no doubt prove a rather more demanding landlord for Forest.

The club appears to believe it has room to delay, because the agreement requires it to "surrender" the lease, rather than allow the council to "repossess" it, but this seems a flaky point of wording which might get lawyers all excited, rather than a life-saving stroke of luck.

Forest are laden with debts of around £20m, despite having cashed in relatively recently on three of their prized graduates - Jermaine Jenas, for £5m to Newcastle, David Prutton, £2.3m to Southampton, and Marlon Harewood, signed by West Ham for £500,000. Yet there is more to this development than the obvious tale of a once-great football club, which has never recovered from dropping out of the Premier League five seasons ago, and can't pay, won't pay.

It is true that, despite £17m ladled in since 1999 by its owner and chairman, the corporate financier Nigel Doughty, the club cannot pay. The first £6m of his investment was spent originally providing Forest's then manager, David Platt, with money for players intended to bounce the club immediately back to the Premiership promised land. Forest finished 14th. Doughty put in another £6m in loan guarantees, to keep the squad for another push. In 2001, they finished 11th. Platt left, Forest announced they were losing £100,000 a week; Platt's obscure Italian signings were released, along with favourites like Chris Bart-Williams; Forest, overall, lost £15m.

Doughty put another £5m in, buying new shares this time, giving him 85 per cent of the club, to mop up some of the debts and losses. With Paul Hart the manager and a new strategy to give young players a chance - and sell them whenever they could - in 2002 Forest lost £4m. Promotion to the Premier League, where the vast bulk of football's money is concentrated, can magically transport clubs from penury; last season Forest made the play-offs. This time, perched just one off the bottom, they cannot bear to face the financial blow of relegation to the Second Division, which was why they appointed Kinnear a fortnight ago and sacked Hart, whose settlement they are now negotiating.

Throughout the turmoil, in which time gates have risen to 24,000 as Forest have been forced back to the basics of working with their community, they did keep up the £200,000 interest payments required twice yearly under the original loan from Prudential. However, they never managed to set aside any cash to repay the capital, despite that having been a term of their agreement with the council. With June approaching and £4.3m owing, they have no chance of paying it unless Doughty stumps up again.

He does not want to do that unless the club can reorganise - reschedule, to use the jargon - all its £20m debts. More than half is understood to be short-term; a bank overdraft, guaranteed substantially by Doughty, which is expensive for the club and no longer popular with banks, who have woken up rather disturbed from living the football club dream.

According to the council, which has been at pains to open its dealings to the public, Forest approached them some time ago to ask for help with the refinancing. The club was apparently trying to complete a 20-year, £20m bond with the American bank Bear Sterns, who have done similar long-term deals, secured on future gate receipts and other income, with Manchester City and other clubs.

Since the public agonies of Leeds United, who financed their Euro-dream with a £60m bond from Prudential and others, such deals have become less seductive. Now, instead, Forest are seeking from Bear Sterns £20m as a five-year bridging loan, to be replaced by the 20-year bond when that deal can more comfortably be done. Bear Sterns would have a mortgage over the City Ground lease, training ground, future income, everything solid.

That still leaves a gap, so Forest asked the council to guarantee the bond's first five years. Annual payments, interest plus capital, would be £2.8m, making the council's guarantee, over five years, a whacking £14m. Doughty offered to guarantee £4m of that, while the council assessed that £5m could, albeit with some risk, be earned from building a development of apartments on some adjoining canalside land. However, that still leaves £5m, of the £14m, not backed by any security.

The council has not only said it will not do it, but that legally it cannot; public money cannot be risked simply to back a football club whose future is shaky - however supportive they would like to be. Councils in other towns and cities have discovered that limit to their ability to help when their local clubs have been in trouble; Nottingham City Council, in fact, has stood out for actively supporting both Forest and Notts County for many years.

Here is where the strange angle to the £200,000 default comes in. Forest issued a statement this week, in effect blaming the council for delays in agreeing guarantees for the £20m facility. Mark Arthur, Forest's chief executive, said: "The club has always made it clear we would be unable to repay the Trent End Bond in June ... It is only prudent for the club and its directors to understand what the position of the council will be in this inevitable event."

That will not win plain English awards, but talking to both sides, it becomes clear that Forest are playing who-blinks-first. If they cannot persuade the council to agree a new guarantee, Forest will not get the new £20m loan; June will come, Forest will not have £4.3m, and so the council, as the guarantor, will have to pay the Prudential. The council would then be faced with repossessing the ground and suing the club, which the council has never wanted to do. Forest have therefore defaulted on their £200,000 now as a warning shot, facing the council with the reality of June's D-day. Their idea is that faced with such discomfort, the council will be bounced into agreeing the £14m guarantee.

One problem with this is that it is not the textbook way to win friends and influence people. Forest, after all, are the ones in the mire, desperately seeking help. The council says the tactic cannot work anyway; it is not a financial institution which can play poker, take a view, be bounced, hardball, from one bad loan to a larger one. They have pernickety District Auditors, assessing the safety of all public money, and the spectre of personal liability if councillors risk it. Here, the security is not there and they cannot do the deal Forest want from them.

Even at this stage, the council says its hands are tied; it has a legal duty, under the signed agreement with the club, to take the ground back. Some serious talking is required; call-my-bluff is not working.