Aaron Boyle: Where land development meets public procurement – the plot thickens
Arthur Cox partner Aaron Boyle and associate solicitor Sinéad Flanagan examine a complex area of the law on public procurement.
If a public authority wishes to enter into a land development transaction, is it required to tender the contract under public procurement rules? That depends.
Contracts let by a public body for the acquisition or rental of land do not engage public procurement rules. However, if the counterparty is also undertaking some element of works or services, the public procurement regime may be engaged, requiring contracts in excess of prescribed values to be offered for tender through the Official Journal of the EU.
This has been a closely watched topic and it has significant practical implications. A public body may have land to develop and developers who are willing to develop it, but valid reasons to seek to structure the deal so that it sits outside the scope of the public procurement rules (for example risk of increased costs, delay, and even loss of the development opportunity).
The 2016 judgment in the case of Faraday Development Ltd v West Berkshire Council  EWHC 2166 (Admin) was viewed as confirming that there are workable structures whereby agreements between developers and public sector authorities can sit outside the public procurement regime. However, recent appeals have provided further nuance on the available guidance when structuring agreements in this area.
Faraday Development Ltd v West Berkshire Council
West Berkshire Council owned land comprised of plots (an industrial estate) that it wished to develop. The redevelopment risks, said to have the potential to affect the viability of the scheme as it unfolded, were to be borne by a development partner. Following a competitive process the Council entered into a development agreement appointing St Modwen as a “master and plot developer and estate management adviser”.
The development agreement required a Steering Group to be established and St Modwen to prepare for the Steering Group’s approval project plans, infrastructure costs, an application for outline planning permission and, later, an estate management strategy, development strategy and plot appraisals. The key point to note is that St Modwen was entitled to serve a notice to itself acquire and develop plots. Service of a valid notice would constitute a binding contract between the Council and St Modwen for the transfer of a plot to St Modwen, whereby St Modwen would then be obliged to develop the plot.
The Council published a transparency notice stating that the development agreement fell outside the scope of the Public Procurement Directive (2004/18/EC and 2014/24/EU). Faraday challenged the appointment on the basis that the development agreement was a “public works contract” or “public services contract”. The High Court dismissed Faraday’s challenge on the following grounds.
- When the development agreement was entered into, St Modwen did not come under any obligation to take a transfer of any part of the site. Whether any such disposal took place in the future was a matter for St Modwen to decide.
- When the development agreement was entered into, St Modwen did not become subject to an obligation enforceable by the Council to carry out “works”. Any such obligation was confined to any land transfer St Modwen might opt to take.
- The redevelopment of the site depended instead on the commercial experience, aptitude and commitment of St Modwen to deliver such a scheme.
- Redevelopment of the site was going to be a long and complex process, which would depend on relocating existing occupiers, market & best value testing and planning approvals.
- Whether, and to what extent, St Modwen exercised its future right to draw down land for redevelopment would depend on future market conditions and circumstances.
In summary, St Modwen was free to walk away: it could choose not to come under an obligation to acquire and carry out works. The development agreement did not contain any artificial measures or devices to avoid the procurement regime.
Faraday appealed this decision and was successful (see  EWCA Civ 2532). The Court of Appeal agreed that the development agreement was not a “public works contract” but considered that, by entering into the development agreement, the Council had committed itself to entering into a public works contract in the future which would be done without it having followed the appropriate public procurement procedure. The development agreement constituted a procurement in its result, which would crystallise when the land was drawn down.
It should be noted that, even in reaching the conclusion that the development agreement was not a public works contract, the Court of Appeal considered that it had to read into the authorities the notion that a contingent obligation is generally not a relevant obligation for the purposes of the definition of “a public works contract”. The Court considered it to be the correct conclusion in this case and to be “not inconsistent” with the European authorities, but it is worth bearing in mind the potential for argument in this territory in any future case that may come before the courts.
Ocean Outdoor UK Ltd v Hammersmith and Fulham LBC
In this case the Council leased land to Ocean on which there were large digital advertising structures. When the leases came up for renewal, Ocean were outbid by another company.
Ocean complained that the procurement exercise was unlawful on the basis that the Council should have recognised that the Concessions Directive (2014/23/EU) and UK Concessions Contracts Regulations 2016 were engaged, and applied the relevant procedure. Ocean failed in  EWHC 2508 (TCC): the leases were not services concession contracts. Ocean appealed and, in  EWCA Civ 1642, the Court of Appeal dismissed the appeal on the following grounds.
Issue 1: the nature of a services concession contracts under the Directive and UK Regulations.
- To fall within the definition of “services concession contracts” the services must be for the benefit of the contracting authority “in respect of its public obligations”. The services had to be services provided to, or for, the public, which the contracting authority would otherwise have been legally required to provide itself. The lower court had correctly concluded that: the Council had no statutory obligation to provide advertising services for its residents; the advertising services were not required by the Council or provided on its behalf; and the leases did not provide a service for the benefit of the Council or its residents.
Issue 2: were the leases a contract for pecuniary interest by means of which the contracting authority entrusts the provision and the management of services to the economic operator (as required by the definition of “services concession contract” under Regulation 3)?
- In a typical concession contract, the third parties are members of the public for whom the contracting authority is obliged to provide services (such as parking facilities). Here the third parties were advertisers with no connection the Council. The money they paid had no connection with the Council. The Council had a separate entitlement to rent. The leases were not concession contracts but rather authorisations to exercise an economic activity.
- To fulfil the concept of “pecuniary interest”, there was a requirement for a legally enforceable commitment by the contractor to perform services in the contract. In this case, there was no direct and immediately enforceable obligation for the successful tenderer to provide advertising services. The lease did not require the lessee to procure or carry out a particular service or any particular scope, volume or value of advertising.
- Accordingly the leases did not fall within the definition of “services concession contract”.
Issue 3: even if the leases were contracts for the provision or management of services, did the exemption relating to the acquisition or rental of land apply?
- The lease fell squarely within the land exemption provided pursuant to the Concessions Direction and the UK Regulations. The nature of the underlying transaction was an agreement for the rental of land.
The Court of Appeal judgments in these cases are a reminder of the close scrutiny that courts will pay, when determining whether the public procurement regime has been triggered, to the intricacies of the substantive commercial and legal arrangements between parties.
A key takeaway from the Faraday appeal is that, particularly when structuring complex development transactions, parties should apply a rigorous analysis of how the procurement rules sit with each successive stage of the project, particularly where options or contingent obligations are a component of the deal that has been struck.
A key takeaway from the Ocean appeal is that not all contracts a public authority enters into come within the scope of public procurement rules. Sometimes it will be quite clear, based on fundamental legal principles, that your contract sits outside the scope of the public procurement rules.