Middlesborough Council has decided against selling artwork from its £32.5m collection to help avoid bankruptcy after research into the legalities of the process concluded it could result in the "threat of significant legal challenges".
Director of Regeneration Richard Horniman said it could also affect future grant funding for the town.
Horniman told councillors: “Following some joint work between ourselves and Mima (Middlesbrough Institute of Modern Art), it is clear that the ownership of the artworks is legally open to interpretation and therefore a challenge.
"For example, the LS Lowry painting was donated by the artist to the council for the people of Middlesbrough."
“The council technically own [the Lowry painting] but wouldn’t be able to try and sell it without the threat of significant legal challenge.
"Recent examples have shown it is very easy to prevent such sales and cause huge reputational damage in the process.”
Middlesbrough Council is one of at least 19 local authorities to receive exceptional financial support from the government, to help it avoid effective bankruptcy.
A spokesperson for ACE told the BBC that although they understood the financial difficulties faced by local authorities, selling off art should not be used to cover short-term gaps in funding as it would “erode the long-held and hard-won trust that the public have in museums and will cause irreversible damage to the UK’s cultural inheritance.”