The Planning Court’s decision in R (on the application of Gottlieb) v Winchester City Council [2015] EWHC 231 (Admin); [2015] PLSCS 53 makes sobering reading for developers and authorities looking to change stalled redevelopment schemes in order to regain, or improve, viability.
Sobering reading
First, the source of the claim is an interesting one for a public procurement challenge. It was brought by unhappy resident and city councillor, Mr Gottlieb, rather than a rival developer upset at the outcome of a hard-fought tender process, or a missed contract opportunity. Mr Gottlieb was also a leading light of the “Winchester Deserves Better Campaign” – a prominent opponent of the proposed changes to the existing redevelopment scheme. The courts are generally reluctant to allow individuals to seek judicial review on public procurement grounds, unless they can demonstrate an interest in ensuring that the public procurement rules are followed, rather than an ulterior political motive, for example.
The court decided that Mr Gottlieb could bring the claim because, as a local resident, council tax-payer, city councillor and active opponent of the scheme, he had an interest in ensuring that the council complied with procurement law and spent public money wisely. While rival developers may take a commercial view as to whether to go to the trouble and expense of “biting the hand that feeds”, the Winchester decision highlights the risks for authorities of the “principled” claim, where the drivers are very different to those in the commercial development arena.
Second, the court took a stringent view of the relevant public procurement test; did the proposed variations materially change the original deal? Many of the changes that the developer sought are typical of those looking to kick-start a stalled scheme and return it to viability. These included:
- increasing the potential profit to make the scheme viable, by achieving more than the 10% threshold return;
- removing the requirement for 35% affordable housing and civic amenities;
- removing the requirement for a bus station (even though it was a third party, Stagecoach, which decided that it no longer wanted to run the bus station);
- increasing retail space by 50%;
- extending the site by adding in another property; and
- removing the requirement to subcontract to listed building contractors using competitive tendering.
What did the court hold?
The court held that the most significant difference was that overall a contract that both parties agreed was not viable would now be viable as a result of the changes.
Overall, the subject matter of the contract was the same, but because of the reduced costs and increased opportunity for profit, the deal was “a significantly more attractive commercial proposition for a potential bidder”, according to the court. As such the more favourable terms of the “new” scheme would have enabled other parties to bid, and so should have been put out to tender.
The court also held that it was immaterial whether or not any other bidder would offer more favourable terms to the council than the existing developer, the purpose of the procurement rules being “to ensure open competition, not to secure the most favourable terms for the public authority”.
The council argued that a variation clause in the agreement dispensed with the need for a tender process. The court disagreed. The clause was broad and unspecific, and lacked the transparency required by the procurement rules, so could not be relied on.
The court also seemed to regard the fact that the original agreement from 2004 had been directly awarded and not put out to an EU-compliant competition as an aggravating factor (albeit that any challenge to the original agreement would be well out of time). Unlawfully varying the agreement was a second “serious breach… in the lifetime of one contract” and, so said the court, it would be “an exceptional course” to allow that unlawful decision to stand.
The council must now review its options for complying with the court’s decision. These could range from an appeal to abandoning the existing scheme and starting again, this time holding an EU-compliant tender process to appoint a developer. In the meantime, the heat has been turned up even further with the resignation of council leader Robert Humby in the wake of the court’s decision (but not before instigating an internal inquiry into the decision-making process for the scheme), and the secretary of state for communities and local government’s decision to issue an Article 25 holding direction while he decides whether to call in the planning application.
What now?
What about developers or authorities faced with similar difficult decisions on whether, and if so how, to move stalled development schemes forward? The Public Contracts Regulations 2015 (“the 2015 Regulations”) came into force on 26 February and provide detailed rules on when changes will be “material”. For the most part these reflect the law that was already in place, as considered in Gottlieb. There is, however, a new “safe-harbour” provision that may prove useful, under which a change will not be material if:
- the value of the change is below both the applicable works procurement threshold (currently £4,322,012) and 15% of the original contract value; and
- the change does not alter the overall nature of the agreement.
This safe harbour currently applies only to public works contracts caught by the 2015 Regulations, and not public works concessions (like the Winchester deal). Works concessions will continue to be regulated by the old Public Contracts Regulations 2006 until such time as the new EU Concessions Directive 2014/23/EU is implemented into national law (which must be before April 2016).
To mitigate the risk of a judicial review or other procurement challenge, developers and authorities should try to keep changes to a minimum, but the Winchester decision means that any change that moves the deal from unviable to viable risks being deemed “material”. They should also consider entering into a procurement challenge deed which covers challenges under the 2015 Regulations and for judicial review. The amended contract should also contain an express right for the authority to terminate the contract in the event of a material change being made, including notice periods and how consequential matters that may arise from termination will be dealt with. Under the 2015 Regulations, if such a term is not included, one will be implied, leading to uncertainty for both parties.
Kathrine Eddon is legal director at Pinsent Masons
