Local authority – Development agreement – Defendant council entering into development agreement with interested party to facilitate regeneration of industrial estate – Local Government Act 1972 – Whether defendants complying with duty under section 123 of 1972 Act to obtain best consideration reasonably obtainable for disposal of interests in land – Directive 2014/24/EU and Public Contracts Regulations 2015 – Whether agreement falling within public procurement legislation – Claim dismissed
In September 2015, the defendant council decided to enter into a development agreement (DA) with the interested party in order to facilitate the comprehensive regeneration of an area of land on an industrial estate in Newbury of which the defendants were the freehold owners. The claimant company had also bid for the DA contract in the defendants’ tender process but had been unsuccessful.
The DA was structured in such a way as to avoid imposing any directly or indirectly enforceable obligation on the interested party to carry out or procure works on the industrial estate. It was considered that such an agreement did not need to comply with the public procurement regime of Directive 2014/24/EU and the Public Contracts Regulations 2015 applicable to a “public works contract” or “public service contract” and that this might increase market interest in the DA. The DA conferred options on the interested party to acquire interests in plots on the estate as they came to be redeveloped. It also required the interested party to prepare project plans and development strategies and obtain relevant planning consents.
The claimant brought proceedings to challenge the lawfulness of the defendants’ decision to award the DA to the interested party. The claim was brought both by way of judicial review and under Part 6 of the 2015 Regulations. The claimant contended that the defendants had failed to have regard to their duty, under section 123 of the Local Government Act 1972, to obtain the best consideration reasonably obtainable for the disposal of interests in their land. It argued that, in assessing the value of the consideration, the defendants had taken into account irrelevant factors such as the ability to deliver regeneration and increased employment; moreover, their stated objective of securing an “improved return” from the industrial estate did not equate to the best consideration reasonably obtainable.
The claimant also argued that the defendants had erred in law in failing to have regard to, or comply with, the public procurement legislation.
Held: The claims were dismissed.
(1) “Consideration” in section 123(2) was confined to those elements of a transaction which were of commercial or monetary value. The court would quash a decision to sell property where the authority had taken into account an irrelevant factor when assessing whether they were obtaining the best consideration reasonably obtainable: R v Pembrokeshire County Council, ex parte Coker [1999] 4 All ER 1007; [1999] PLSCS 172 and R (on the application of Lemon Land Ltd) v Hackney London Borough Council [2001] EWHC Admin 336; [2001] LGR 555; [2002] 1 EGLR 81 applied. However, the deliverability or credibility of a bid, or the care with which it had been prepared, were commercial factors that were relevant to an assessment of whether the consideration offered was the best reasonably obtainable. The highest offer on the table need not represent the best consideration, because an authority might conclude that “a bird in the hand is worth two in the bush”: R (on the application of Lidl (UK) GmbH) v Swale Borough Council [2001] EWHC Admin 405; [2001] PLSCS 55 applied.
While it was for the court to determine whether a consideration was legally capable of being relevant, it was for the authority, as decision-maker, to decide whether to take a relevant consideration into account and, if so, how far to go in obtaining information relating to that matter. Such decisions could only be challenged on the grounds that it was irrational for the authority not to take a legally relevant consideration into account or, having done so, not to obtain particular information: CREEDNZ Inc v Governor General [1981] 1 NZLR 172, In re Findlay [1985] AC 318 and R (on the application of Khatun) v Newham London Borough Council [2004] EWCA Civ 55; [2005] QB 37; [2004] PLSCS 73 applied.
(2) It was apparent from the contemporaneous documentation that the defendants had had well in mind their obligation under section 123(2) of the 1972 Act to achieve the best price reasonably obtainable. They had not set out merely to obtain an “increase” in their return from the industrial estate but had sought to maximise the receipts that they would obtain from their landholding. They had not treated employment generation as part of the consideration that they would receive on a disposal of an interest in their land or as in some way offsetting the obligation to obtain best consideration. The defendants as landowners had to proceed on the basis that redevelopment proposals would fall to be assessed against the planning policies for the estate, which promoted regeneration primarily for business uses at a greater density that would create additional jobs. A regeneration scheme that failed to comply with those policies would be unlikely to receive planning permission. The defendants’ objectives were entirely compatible with compliance with their duty under section 123(2). Moreover, the defendants had received proper professional advice throughout on how to protect and maximise their income from the estate.
The context in which the defendants were acting was that: (i) the estate needed to be redeveloped in order to avoid the defendants’ current rental income being put at risk and to increase that income in the future; (ii) the defendants wished to retain the estate as an income-generating asset as far as possible, rather than dispose of freehold interests in return for capital receipts; (iii) redevelopment of the estate would be a long-term exercise, involving complex land assembly and relocation issues and uncertainties as to development costs and future market conditions; (iv) the defendants did not themselves have the experience or expertise to deal with those issues and were not in a position to take on the risks involved, so that they depended on entering into an agreement with a developer with the greatest expertise and a proven track record for similar projects, who would assume those risks; and (v) given those inherent uncertainties, none of the bids had received by the defendants had offered specific prices or values for all of the various components of the redevelopment but had instead presented estimates in the form of projections of future cash flow.
In light of those matters, the defendants’ approach under section 123 could not be criticised. There was no inadequacy in the financial information provided in the bids so as to require the defendants to probe them further. In view of the advice that the defendants had received from their expert, and in light of the future uncertainties of the project, the defendants were entitled to focus on their assessment of the experience and expertise of the developers bidding in order to form a view as to how those uncertainties could best be addressed.
Nor was it irrational for the defendants to place importance upon the expertise of the developer and the deliverability of the project without also imposing an obligation on the interested party in the DA to carry out the redevelopment. That decision was rational when viewed in light of the relevant context, which included the fact that the interested party was obliged under the DA to take on the considerable cost of preparing project plans and development strategies and to secure planning approvals, and therefore so that it had a commercial incentive to carry out the development to recover those costs.
(3) A contract would only fall within the scope of the public procurement legislation if it had as its main object one of the matters specified in regulation 2(1) of the 2015 Regulations, which covered the execution, or “both the design and execution”, of works or the “realisation by whatever means” of a work. If the execution or realisation of works was merely ancillary to the main purpose of the contract, that agreement could not be a “public works” type of “public contract”: Gestion Hotelera Internacional SA v Comunidad Autonoma de Canarias (Case C-331/92) [1994] ECR I–1329 and Commission v Italy (2008) (Case C-412/04) applied. Likewise, a contract for the transfer of land did not fall within the scope of Directive 2014/24/EU; accordingly, if the carrying out of works was merely incidental to such a contract, rather than its main purpose, then the public procurement legislation would not apply. The main purpose of the contract had to be determined by an objective examination of the entire transaction to which the contract related.
In order to qualify as a public works contract, the economic operator with which the contract was made had to be under a direct or indirect obligation to carry out the relevant works or provide the relevant services. Accordingly, a contract could not fall within the public procurement regime unless its main purpose corresponded to one of the definitions of a “public contract” and the contractor was under an enforceable obligation to carry out that main purpose. The concept of an “indirect obligation” should not be given an extended meaning so as to perform an anti-avoidance role. Consistently with that conclusion, a public authority could choose to enter into a contract that avoided the onerous requirements of the procurement legislation. So long as the agreement did not contain an artificial device for the avoidance of the procurement regime, the question was an objective one, namely: irrespective of whether the parties intended their agreement to fall inside or outside the public procurement regime, did the contract fall within the legal definitions of a “public contract”: Helmut Müller GmbH v Bundesanstalt für Immobilienaufgaben (Case C-451/08) [2010] ECR I-2673; [2010] PLSCS 100 and R (on the application of Midlands Co-operative Society Ltd) v Birmingham City Council [2012] EWHC 620 (Admin); [2012] LGR 393 applied.
(4) Applying those principles, the DA did not fall within the public procurement legislation. It did not impose any obligation on the interested party to carry out works. It could not be viewed as imposing a deferred obligation on the part of the interested party to carry out redevelopment works, once it acquired a lease of each plot, since that obligation might never come into existence. While the interested party would be expected to want to recoup its costs and earn a return by drawing down land so that development for profit could be carried out, the long timescales involved made it perfectly understandable, given the risks that the interested party alone bore, that it should have the option of not going ahead with the purchase/lease and redevelopment of a particular plot at the particular time envisaged by the DA, or in some circumstances at all. The option arrangement in the DA was not artificial or an improper device.
In the absence of an obligation to carry out works, the DA could not be regarded as having as its main purpose the execution of works. Nor could it be regarded as a contract for “design and execution”. To fall within that description, a contract had to have both design and execution as its single main purpose. Thus, it was essential that the contractor was obliged to execute works and not simply to design them. The DA did not meet that requirement since it imposed no legally enforceable obligation to execute works. An obligation simply to provide design services and not to execute the works as designed was insufficient for the contract to qualify as a contract for both the “design and execution” of works. For the same reasons, in the absence of an obligation to carry out works the DA could not be a contract for the “realisation by whatever means” of a work. The DA was not a public works contract and the defendants had not acted irrationally in concluding that the public procurement regime did not apply to it.
Charles Banner and Heather Sargent (instructed by DAC Beechcroft LLP) appeared for the claimant; David Elvin QC and Luke Wilcox (instructed by Bond Dickinson LLP) appeared for the defendants.
Sally Dobson, barrister
Click here to read a transcript of R (on the application of Faraday Development Ltd) v West Berkshire Council
