Any developer involved in regeneration deals with local authorities knows they need to be aware of the law around public procurement. A recent Court of Appeal case – Faraday Development Ltd v West Berkshire Council [2018] EWCA Civ 2532; [2018] PLSCS 200 – serves as a stark reminder of this, given that the result was what all contracting parties dread: their agreement being metaphorically torn up.
The facts in Faraday
When lawyers bring up procurement issues on development deals, it is usually met with a groan or an eye roll. But with the right legal input, the issue usually fades into the background and does not rear its head again. This was not the outcome in this case. Here, a developer and local authority had entered into a development agreement relating to the regeneration of a large site in Newbury. However, the contracting parties were stopped in their tracks by another developer (Faraday) which brought a judicial review and a legal challenge under the procurement regulations.
The development agreement the parties had entered into contained an option. If the developer exercised the option by serving a valid acquisition notice, the local authority would grant a long lease (for a commercial building) or transfer the freehold (for a residential development), and the developer would then be obliged to carry out that development. Faraday claimed that because the obligations to carry out works, which had previously been contingent, would then have been triggered, the arrangement constituted a “public works contract” – and so a particular procurement process should have been undertaken before the parties entered into the development agreement.
At first instance the High Court held that the procurement regulations did not apply. However, the Court of Appeal held that even though the development agreement contained only contingent obligations to build out, if the option was exercised the developer would be required to carry out the works. It would then be too late to follow the correct procurement process, and so the whole arrangement had breached the procurement regulations.
By including the obligations to build, the parties had inadvertently created a “public works contract”. By not having gone through the formal procurement process before entering into that contract (which parties are often keen to avoid), the whole arrangement was subject to challenge under the procurement regulations.
As a result, the Court of Appeal issued its first “declaration of ineffectiveness”. This is a term familiar to procurement specialists, which effectively means the agreement is void. This is a draconian step for any transaction, but particularly one involving the long-term regeneration of a town centre.
Formal process
The formal procedure that should have been followed is often referred to as the “OJEU process” (which stands for Official Journal of the European Union) and requires the proposed development to be advertised publicly in an EU publication. This can be onerous for local authorities, so they prefer to select developers using a less formal process. This also helps to keep more bidders interested, particularly as some smaller developers do not have the resources to go through the OJEU process. Defenders of the OJEU process would say it ensures fairness across the market and encourages objective and rigorous testing of potential bidders so that local authorities are picking the best parties with which to contract.
Where does this case leave local authorities and developers that want to continue structuring deals that legitimately avoid the OJEU process? The procurement regulations are complex, and apply to a wide range of circumstances, from IT outsourcing to city centre regeneration. Therefore, it is sometimes difficult to predict which arrangements will fall within the regulations and which will not. This case demonstrates the importance of considering the question carefully at the outset and taking expert advice.
Incidentally, it is unlikely that the issue will disappear following Brexit, if any withdrawal agreement is signed with the EU. Although at this stage it is, of course, impossible to be definite about what happens after Brexit, any withdrawal agreement may well include “level playing field” provisions that will closely follow the procurement regulations.
Voluntary transparency notices
One thing local authorities can do to mitigate the risk of challenge under procurement regulations is to issue a “voluntary transparency notice” (sometimes called a VEAT notice, which stands for “voluntary ex ante transparency”). This is a fairly simple notice to the market, setting out what the local authority intends to do with the land in question, to demonstrate that it is being transparent about its proposals. This crucially allows it to avoid going through the extensive OJEU process, although this case has demonstrated that it can only be effective where it contains certain required information. In this instance a VEAT notice had been issued, but the court held that it was not sufficiently clear as to what was proposed – which indicates that these notices cannot be viewed as a cure-all for tricky procurement arrangements.
It will take some time for the ramifications of this decision to be understood within the legal and regeneration communities. However, with the right advice, for those currently negotiating or implementing transactions between local authorities and developers, it should still be possible to keep regeneration projects alive without falling foul of these tricky procurement regulations.
Kellie Hatton is a partner in the real estate division and Jennifer Clarke is a senior associate in the procurement team at Shoosmiths LLP
