25 January, 2019
Recent case law has shed light on the interlocking worlds of land development agreements and public procurement law. The Court of Appeal recently heard the case of Faraday Development Limited v West Berkshire Council, which has reaffirmed the need for caution and compliance when the two overlap.
On 14 November 2018, the Court of Appeal handed down judgment on the question on whether a future commitment in a development agreement entered into by West Berkshire Council constituted a public works contract for the purposes of the Public Contracts Regulations 2015. The Council was found to have breached procurement regulations by effectively committing to award an above-threshold works contract as part of a broader agreement involving land elements all intended to achieve regeneration of an industrial estate.
This result is not surprising given judgments from previous procurement cases. The European Court of Justice in the Helmet Mueller case held that a public works contract will exist if a contracting authority undertakes measures to specify the type of work or has a "decisive influence", on its design and there is a legal obligation to undertake the works. This decision is reflected in the drafting of the Public Contracts Regulations 2015 and the Concession Contracts Regulations 2016.
Additionally, the Faraday ruling is consistent with the EU Commission Notice given out in 2009 concerning the award of a public contract for the construction of a tax office building in Quedlinburg. The Commission held the view that the main purpose of the deal was not the land but instead the €6 million worth of building works within the €7.4 million package deal and therefore the works could not be construed as secondary to the land purchase itself.
In Faraday, the Council did not undertake any due form of procurement process in relation to a public works contract to which it would be committed upon the selected developer exercising on the option on the land. The Council, in fact, published a voluntary ex-ante transparency notice (VEAT Notice), on the basis that the contract was an exempt land contract, and that any works related to it were purely incidental.
In the words of the Court of Appeal: "by entering into the development agreement, therefore, the Council effectively agreed to act unlawfully in the future. In effect, it committed itself to acting in breach of the legislative regime for procurement". The Court also criticised the Council's use of a VEAT notice, stating that it "did not… say all it should. In short, it is not transparent enough".
Many public bodies have historically accepted some risk of procurement challenges in order not to miss out on opportunities or accepted legal advice from developers that there is no risk. Since the recent decision in Faraday, public bodies need to be fully aware of all risks in these circumstances. Even in circumstances where there is no suggestion of deliberate wrongdoing, the effect of circumventing the procurement regime is the same.
This decision confirms that build contracts that are to be entered into as a condition of a land contract with a contracting authority are still works contracts and that, therefore, if they are above the relevant threshold for public works contracts (currently £4,551,413), the contracting authority (be that a housing association, a local authority, or any other public or quasi-public body) has a duty to carry out a procurement process in line with the requirements of the Public Contracts Regulation 2015. Where the land and works elements are inseparable they should be valued as one contract.
Contracting authorities should be wary of contractors who approach them with land plus works packages that are above procurement thresholds to be contracted without procurement rules. Any contracting authority planning to use a VEAT notice to legitimatise a contract award deliberately outside of the Regulations should consider the detailed analysis and harsh assessment of the one in Faraday.
The key advice in these circumstances for public bodies is to get advice at the earliest possible stage. It is often difficult for an authority to extricate itself from an unlawful package and to implement any mitigating steps where it has already signed heads of terms or agreed to the package in principle.
Forbes Solicitors' Governance, Procurement and Information department regularly advises housing associations, schools, and other contracting authorities on the application of procurement law, including the Public Contracts Regulations 2015, in development and other contexts, including assisting in carrying out procurement processes and drafting contracts. Our Dispute Resolution department specialises in litigating procurement disputes and challenges for both contracting authorities and economic operators. Get in touch with Daniel Milnes on 01254 222313 for details.