Adapting to a new normal is likely to mean a rethink for many regeneration schemes. How can authorities and developers vary existing schemes without falling foul of the public procurement rules?
Most regeneration schemes will have been concluded in a way that envisages at least some element of variation, including variations in the event of changes to market conditions. However, any material variation that has not been provided for “in the initial procurement documents in clear, precise and unequivocal review clauses” is likely to expose the parties – and in particular the local authority or other public sector partner – to the risk of acting in breach of the procurement rules, including the risk of damages and fines.
The dangers
While the public procurement rules do contain provisions under which existing contracts can be modified without being considered to constitute the award of a “new contract”, those provisions need to be applied and relied on with care.
The issue was highlighted in R (on the application of Gottlieb) v Winchester City Council [2015] EWHC 231 (Admin); [2015] PLSCS 53, where the council was forced to halt its redevelopment plans for Winchester city centre after the High Court held that a proposed variation to a £165m scheme amounted to the renegotiation of a new contract in breach of the public procurement rules.
The council had entered into a development agreement with a developer in 2004 but the scheme had subsequently run into viability issues. The developer had sought to abandon a requirement of 35% affordable housing and to replace a requirement for a bus station and various civic uses with additional retail space, including a new department store. The council agreed to the revised scheme but was subsequently judicially reviewed by one of its own councillors, Kim Gottlieb.
Accepting Gottlieb’s arguments, the High Court ruled that the variations to the development agreement largely removed the unprofitable elements of the development, affording the developer a greater opportunity to increase its profits from third parties. The court held that the variation altered the economic balance in favour of the developer such that it amounted to a fundamental change to the essential terms of the original agreement and was unlawful.
Attacks from rivals
Perhaps the more common scenario under the public procurement rules is for variations to existing schemes to be challenged by competing developers. In that scenario though, the remedies available to competing developers are limited to either damages and/or seeking to have the varied agreement declared “ineffective” (assuming the challenge is not made before the variation has been agreed). As a general rule, it will be very difficult for a competing developer to establish a claim of damages in respect of a contract that it has not tendered for. It may also be difficult to pursue a declaration of ineffectiveness seeking to have the varied agreement invalidated.
This latter point was highlighted in AEW Europe LLP v Basingstoke and Deane Borough Council [2019] EWHC 2050 (TCC). The council had run an OJEU tender process for the appointment of a development partner to implement a long-term strategy plan for the development of leisure park in Basingstoke. The council ultimately only received one final tender and negotiations with that developer continued, resulting in an agreement to a revised scheme that substantially increased the retail element of the new leisure park development. A competing developer that was in the process of developing its own retail development in Basingstoke challenged the revised scheme. Its argument was that the revised scheme was materially different to the one advertised in the original OJEU and should only have permitted retail development that was minor or ancillary to the leisure facility.
In its defence, the council successfully argued that even if that were the case, the remedy of ineffectiveness invalidating the agreement was only available to the challenger if the agreement “bore no relation” to the contract opportunity as originally advertised in the OJEU.
That might be the case, the court held, if the council had awarded a contract for 1,000 affordable homes when advertising a redevelopment opportunity for a leisure park, but not where the development is still essentially the redevelopment of a leisure park, albeit now involving a significant retail element. The test to be applied was a “broad brush” one, looking at the opportunity as described in the OJEU and how this could reasonably have been expected to have been interpreted by the market.
While AEW involved amendments to a scheme at tender stage (pre-contract) and not a variation to a concluded agreement, it highlights the difficulties any third party may have if it seeks to challenge the redesign of existing schemes.
Careful scrutiny required
The redesign of schemes, whether still in procurement or already under contract, will have implications under the public procurement rules whenever a public sector body is involved. There are provisions in the rules that establish a set of grounds under which variations (modifications) can lawfully be made to concluded contracts. There are also ways to mitigate risks for both the public sector bodies and for developers, but these issues will all have to be thought through carefully to avoid the risk of falling foul of the public procurement rules.
Graeme Young is a partner at CMS LLP
