Development agreements and procurement

In R (on the application of Faraday Development Ltd) v West Berkshire Council [2018] EWCA Civ 2532; [2018] PLSCS 200, the Court of Appeal considered the vexed question of whether a development agreement (DA) imposing binding works obligations on a developer should have been tendered under the public procurement rules. Although this case is the first-ever time an English court has declared such a contract to be ineffective, this does not sound the death knell for non-procured joint ventures with the public sector. The judgment does, however, mean developers need to be more careful about the legal justification their public sector partners are relying on to justify not tendering under Official Journal of the European Union (OJEU) rules, if they want to ensure their contract will be secure enough to withstand procurement challenges. The dispute West Berkshire Council entered into a DA for the disposal of land on an industrial estate to St Modwen Developments. The DA contained an option for the developer to acquire the land at its sole discretion. If the developer did not exercise its option, it was not required to undertake the development works. A rival developer, Faraday Development Ltd (Faraday), challenged the council in the High Court. Faraday argued that because the DA was a “public works contract” it should have been advertised in the OJEU and competitively tendered. The High Court concluded that, as there were no binding obligations on St Modwen to undertake works at the time the DA was entered into, the deal should not be treated as a “public works contract” and, therefore, a direct award to the developer did not breach public procurement rules. Faraday appealed to the Court of Appeal, which reversed the High Court’s judgment, holding that the particular DA in question had been entered into by the council in breach of the procurement rules. The Court of Appeal’s decision The Court of Appeal agreed with the High Court that the DA was not a “public works contract” at the time it was entered into, as it did not impose binding works obligations on the developer at the commencement of the contract. However, the court concluded that the DA would become a public works contract at the point when St Modwen exercised its option to acquire the land. The court reasoned that, once the public works contract came into existence, it was impossible for the council to act in accordance with the procurement rules, since, under the terms of the DA, the works could only be awarded to St Modwen. In reaching its decision, the court considered the overall substance and purpose of the transaction rather than its form, concluding that the main purpose of the DA was to commit the parties to undertaking development works at some point in the future. The judgment suggests a “whole-life” assessment of obligations in a contract for the purpose of deciding if the procurement rules apply or not, rather than looking at whether obligations exist when the contract is first entered into. Exemption for planning obligations In reviewing the case law in this area, the court helpfully drew a distinction between planning agreements entered into by a local authority in its role as “local planning authority” (which are exempt from the public procurement regime) and agreements where a contracting authority chooses to specify works as a landowner or delivery partner. VEAT notices Before entering into the DA, the council published a voluntary transparency notice (or VEAT), declaring that it considered the award of the contract did not have to comply with the public procurement rules because it was a pre-property transaction, followed by the observance of a 10-day standstill period. The council argued that, as the VEAT was validly placed, Faraday’s claim for ineffectiveness was too late under court time limits. The court held that the wording in the VEAT did not give enough detail about the works obligations in the DA and, therefore, that the notice was not valid and did not time-bar Faraday’s challenge. The court’s approach was strict, given that the VEAT published by the council fulfilled its function of giving Faraday enough warning to bring a challenge. The lesson to learn is that VEATs must be carefully drafted and transparent if you want them to fulfil their function of preventing the court from declaring that your contract is ineffective. Following the judgment, the parties agreed that the Public Contracts Regulations 2015 required the court to declare the contract ineffective and order the council to pay a civil financial penalty fixed at £1. This is interesting given that the Regulations require the penalty to be “proportionate, effective and dissuasive”, but perhaps reflects the court’s acceptance of the council’s argument that it had not designed its deal with St Modwen with the aim of unlawfully avoiding the public procurement regime. What does that mean for development agreements? The Court of Appeal’s decision indicates that contracts committing a developer to undertake works obligations in the future may get caught by the public procurement rules, even where the works may not happen because the deal is subject to the developer exercising an option within its control. The judgment also reflects a return to the “purposive” approach, where courts will consider the overall purpose of a transaction and not just its specific terms. Although the judgment marks the first declaration of ineffectiveness in an English court, this does not suggest an open season for challenging DAs. There are still a number of other non-procured joint venture structures for developments which remain viable and lawful. The judgment demonstrates the importance of taking legal advice on the procurement implications of DA structures, and ensuring that VEAT notices are carefully drafted to fully disclose information about the deal and that the legal justification is appropriate if they are to be effective in protecting the contract. Helen Randall and Rebecca Rees are partners at Trowers & Hamlins LLP Photo: Voisin/Phanie/REX/Shutterstock