Mark Bassett offers an update on the interplay between procurement law and development agreements
In the latest case on the interface between development and public procurement, R (on the application of Faraday Development Ltd) v West Berkshire Council [2016] EWHC 2166 (Admin); [2016] PLSCS 240, the High Court has given a useful judgment on the extent to which public procurement law will apply to agreements between developers and public sector bodies.
The development
The case concerned the development of the London Road Industrial Estate (LRIE), the great majority of which is owned by West Berkshire District Council. Faraday Development owned long leases from the council for a number of plots and has planning permission for a mixed-use development on its land. Faraday was seeking to consolidate and extend its long lease for the plots in its ownership, but negotiations with the council came to an end. The council held a competition to appoint a development partner to regenerate and maximise the council’s return from the LRIE. Faraday participated in the competition, but was unsuccessful, with St Modwen Developments being declared winner.
The competition to appoint the development partner for LRIE was not carried out in accordance with the Public Contracts Regulations: no OJEU advert was placed. Faraday challenged the award of the agreement on grounds including that it should have been subject to the regulations.
Legal significance
The case is significant because, for the first time, the High Court considered in detail the application of the public procurement rules to so-called “conditional land sale agreements” (CLSAs) and, to the relief of many in the industry, gave the agreement used a clean bill of health.
The use of CLSAs for transactions between developers and public sector bodies took off after the case of Helmut Müller GmbH v Bundesanstalt für Immobilienaufgaben C‑451/08, which was decided in the European Court of Justice. Helmut Müller confirmed that where an agreement lacked a “direct or indirect” obligation to carry out works, the contract would not be a public contract and would not therefore be caught by the procurement rules. In simple terms, this has meant that traditional development agreements, which contain an obligation on the developer to carry out a development (albeit conditional) to a design/specification over which the authority can exercise a “decisive influence”, are likely to be “public works contracts”. However, an agreement containing conditions which must be fulfilled prior to drawdown (eg planning permission obtained, viability established, etc) but which do not oblige the developer to actually undertake any works, or which does not allow the authority decisive influence over the design, will avoid the procurement regime.
In the Faraday case the agreement obliges St Modwen to develop out a phase if, but only if, the developer voluntarily fulfils the conditions and opts to drawdown land. In a CLSA-type arrangement the developer is, crucially, free to decide to proceed with the development or not.
In many cases local authorities are able to get comfortable that the developer is sufficiently incentivised to proceed with development, even without an explicit obligation, because of the sums invested in the schemes to date (developers are often required to buy land up front). Furthermore, such agreements usually have the backstop that, if the developer fails to develop within a specified period, the authority has an option to re-purchase the land at a pre-agreed price. There is no obligation to develop – but if no development takes place, there are consequences.
A further protection that local authorities sometimes require, and the council required of St Modwen, is an obligation on the developer to fulfil certain of the conditions. St Modwen was obliged to undertake design services and obtain a planning permission. In this situation, the local authority has a further assurance that the developer, having spent a considerable sum obtaining planning permission, is highly unlikely to walk away from the scheme without seeking to recoup through development. Up to now, this approach has been thought to carry greater risk, because of the danger that the presence of a clear obligation on the developer could drag the agreement back into territory where a OJEU procurement was deemed to be necessary.
The judgment
The court considered a number of aspects of the transaction. It weighed whether the fact that the agreement could be said to create a financial incentive on the developer to proceed with the project could amount to an “indirect” obligation or otherwise amount to means of avoiding the procurement rules. The court clearly decided that the concept of an “indirect” obligation did not extend this far. The judgment suggests that an enforceable obligation can be protected by making it subject to a pre-condition that can be triggered by the contractor, meaning that CLSAs seem safe.
The court determined that it was permissible for the council to include an obligation on St Modwen to secure a planning permission. Faraday argued that the council had obliged St Modwen to carry out design services and that “design and build” should be seen as the primary purpose of the agreement, bringing it within the procurement regime. Holgate J disagreed. He ruled that main purpose of the agreement was to seek to maximise the council’s return on the LRIE land and regenerate the area, not for St Modwen to provide design services.
The judgment also addresses the question of how much influence a local authority can have over a specification before it will be deemed to have “decisive influence”. The judgment suggests the answer is “quite a lot”. In the agreement, a significant amount of the design work was left to St Modwen, and then submitted to a joint board for consideration. If the joint board did not approve the plans (and the grounds on which they could withhold approval were limited) then there was a dispute resolution process which put the matter in the hands of independent expert or arbitrator. This did not amount to decisive influence.
A final note of caution: as a High Court judgment, this does not create binding precedent, and an appeal against this decision has been lodged by the claimant.
Mark Bassett is a public procurement partner at Dentons
