On 16th October 2009, the Office of Government Commerce (OGC) released its guidance note on the application of the public procurement rules to development agreements. The guidance has been keenly anticipated and is welcomed after the decision of the European Court of Justice (ECJ) in Auroux & ors (law relating to undertakings) [2007] caused a great deal of concern in the regeneration sector.
impact of AUROUX
Auroux concerned an agreement between the Roanne local council and a semi-public regional development company, SEDL. Under the agreement SEDL would undertake certain town centre works, the minority of which would be for public use and the majority sold to third parties. The ECJ confirmed that the application of the public procurement rules is determined by the main purpose of the contract and that the contracting authority does not necessarily have to become the eventual owner of the works for the contract to fall within the procurement rules. It also found that the procurement of the actual works for the development by SEDL through the Official Journal of the EU (OJEU) (so-called ‘delegated compliance’) did not relieve Roanne of its responsibilities to advertise in the OJEU. According to the ECJ it is also necessary to look at the total value of the works to the developer, not the value of the works for public use, when assessing whether the financial threshold for the application of the procurement rules is triggered.
The ruling placed many development agreements squarely within the ambit of the public procurement rules as public works contracts or public works concessions (the difference being that the latter allows the developer the right to exploit the works). It has been responsible for several stalled schemes in the UK, as local authorities have become paralysed by the conflicting need to advertise as against the property rights of the in situ owner and developer who has come up with the desired proposals.
Key messages of the guidance
The OGC guidance will not be new for many procurement practitioners. The OGC cannot re-write the law or take away the uncertainty that Auroux has produced, which some may have been hoping for. However, the guidance does clearly and succinctly (and perhaps rather boldly) set out the type of contractual structures and conditions that it considers may not be caught by the rules, and this is greatly welcomed.
The guidance flags the following areas for consideration:
- Is there an enforceable obligation to build? The guidance focuses on the definition of a public works contract in the Public Contract Regulations 2006 and highlights relevant matters such as whether there is an enforceable obligation (in writing) on the contractor to carry out specified work or works and whether there is some pecuniary interest in carrying out this work (not necessarily cash payment). If the answer is yes, then public procurement rules are likely to apply but it highlights the recent Flensburg infraction case in which the European Commission stated that a simple right to have the land back if works are not built is not the same as contracting with someone to carry out those works. (For case details, please see the Commission’s press release: IP/08/867 of 5 June 2008.)
- Specified requirements: Does the contracting authority need to provide a detailed specification of the works? It is not clear how detailed specifications have to be before they are caught, but the OGC’s view is that the rules are not intended to catch agreements that simply set broad parameters for developments. This does not mean that a full technical specification is required for the procurement rules to apply, but obligations that would not themselves be detailed enough to enforce, because they are too vague and unspecific regarding a local authority’s requirements, are unlikely to be enough.
- Transfer or lease of land or property: This is explicitly excluded from the scope of the public procurement rules unless the transfer document is accompanied by or contains a requirement to undertake a work or works as defined in the rules. However, any works that are incidental to the transfer will not fall within the scope of the procurement rules. The OGC is not aware of any explicit definition of ‘incidental’ or ‘ancillary’, but suggests a conservative and purposive approach would be sensible. Works that are clearly not the main purpose of the project and are low in value may not render the entire project in need of advertisement. If there is a risk of this, the contracting authority should consider carving out those public works elements and advertising them separately.
- Development agreement ancillary to a lease: A lease is not considered to be a public contract, and a development agreement ancillary to a lease may not be subject to the public procurement rules if it sets out the intentions of the lessee and includes obligations that are intended to protect the rights of the contracting authority as lessor. Payment of rent is unlikely to constitute a pecuniary interest for the supply of goods, works or services.
- Building licences: Building licences, as an alternative to a development agreement, sometimes allow the authority to retain the freehold and ensure the purchaser’s construction activities comply with specific land obligations. Once this is shown the freehold is transferred. This would not be subject to the procurement rules provided that the purpose of the licence is to ensure the purchaser does not go back on its own intended activities.
- Mixed land ownership: Developments commonly comprise a mixture of land or property owned partly by the local authority and partly by the developer. Where the local authority simply wants to sell its part to the developer to be incorporated in the latter’s development, this is unlikely to fall within the ambit of public procurement rules unless this agreement includes works obligations on the developer. OGC suggests where part of the activity within the overall development is likely to be a public works contract, the authority may consider competitively tendering a separate contract or a series of contracts for those elements of the development.
What’s next?
In its new guidance the OGC makes clear that the application of the public procurement rules remains heavily dependent on the specific circumstances of each individual situation. The Commission and the ECJ will take a purposive view and look at the overall nature of all relevant agreements between the parties.
The OGC also rightly acknowledges that it cannot provide definitive or comprehensive guidance, and that the new guidance may change once the outcome of the recent infraction cases is known (potentially at the end of this month or during 2010). A more definitive position may be reached in 2010 with infraction cases against member states pending before the ECJ and the Commission. Greater certainty on what is and is not a public works contract is still very much needed. For UK developers and local authorities alike it is to be hoped that the resolution of UK infraction cases, in particular, will deliver just that.
By Chris Bryant, senior associate, and Clare Reeve, trainee solicitor, Berwin Leighton Paisner LLP.
E-mail: chris.bryant@blplaw.com;clare.reeve@blplaw.com.
Auroux & ors (law relating to undertakings) [2007] EUECJ C-220/05
