Legal Briefing

State aid risks involved in real estate transactions and public-private partnerships

The In-House Lawyer Logo

The Netherlands | 01 December 2009

Private undertakings that engage in commercial transactions with public authorities located in the EU should be more aware of the risk of unlawful state aid. This is especially true for construction or development companies, as well as real estate funds, when participating in projects with public authorities involving the sale and/or finance of buildings or land. In many of these transactions the risks of state aid are either ignored or overlooked. In general, state aid is forbidden and any unlawful state aid including interest is to be recovered from the recipient undertaking. The recipient undertaking therefore bears the risks of unlawful state aid. Hence the importance for undertakings to determine whether a risk of state aid exists in relation to commercial transactions with public authorities. If so, appropriate steps should be taken to seek compliance with rules on state aid or to notify such aid to the European Commission.

State aid

One of the main objectives of the EC Treaty is to attain a single market economy by removing trade barriers and to create a level-playing field for undertakings. State aid can distort this level playing field between the member states of the EU.

State aid can be defined as any transfer of public funds to certain undertakings that confers an advantage on the recipients, which distorts competition and affects intra-community trade. This applies to any aid whatsoever, either subsidies, loans, guarantees or fiscal measures, as long as a financial advantage is awarded that would not be available to the recipient(s) under normal market conditions. In relation to commercial matters with private parties, public authorities should therefore ensure that the price paid (or that they received) for a product or service is in accordance with its appropriate market value. This is known as the ‘market economy investor principle’. Thus, if a public authority makes an investment in a private undertaking on terms that would be unacceptable for a private investor, this in principle constitutes state aid.

State aid is subject to a system of state aid control under the Treaty and in general is not permitted. The ban on state aid is neither absolute nor unconditional as the Commission may declare certain aid measures compatible with the single market. Therefore, the member states are in principle obliged to notify aid measure to the Commission for its approval. Pending clearance, the state aid measure may not be implemented (standstill period).

There are several exceptions to the obligation of notification, including a separate European regulation in which – provided that several conditions are met – certain categories of support measures are exempted from the notification duty. If state aid does not fall under an exception it has to be notified with the Commission. The notification procedure does not necessarily need to be problematic. The Commission offers guidance in the form of various framework regulations and guidelines. The policy rules contained in these regulations and guidelines clarify the basis of what conditions a notified support measure is assessed. In principle, a public authority that draws up a measure in accordance with these policy rules will be given permission by the Commission to provide the aid in question.

Nevertheless, many public authorities usually consider that the procedure before the Commission is unnecessary or too complicated. The notification of a support measure is therefore often deliberately omitted. That may have consequences for the recipient because any support wrongly given will be reclaimed if discovered by the Commission. This means that unlawful aid must be repaid by the recipient without delay and includes interest calculated from the date the aid was granted to the date on which it is actually recovered. Indemnification by the public authority in question is null and void, as this would effectively neutralise the ban on state aid. Consequently, the recipient bears the full risk of unlawful state aid, even though it is primarily the public authority that has violated the Treaty.

Sale of land and buildings

Sales of land or buildings by public authorities are also subject to the notion of state aid control. For example, land sold by a public authority to a private undertaking below market value constitutes state aid in favour of this buyer. To avoid the risk of state aid, it is of vital importance to assess the market value of land or property in relation to transactions between public authorities and private undertakings. In 1997 the Commission introduced a communication on state aid elements in sales of lands and buildings by public authorities (p3-5, 97/C 209/03) that is to be used to establish whether there is such an element of state aid (the Communication).

The Communication sets out two procedures to prevent the existence of state aid that can be summarised as follows. Under the first procedure a sale of land or buildings by a public authority is preceded by an open and unconditional bidding procedure. If no unconditional sales procedure is instigated, an independent evaluation should be carried out by one or more licensed surveyors prior to the negotiations to establish the proper market value.

Any sale (or acquisition) of land or buildings by public authorities that does not adhere to the aforementioned principles of the Communication should – in principle – be notified with the Commission to assess the transaction on potential state aid. Applying the Communication in transactions involving land or buildings hence offers assurance that state aid is avoided. Case law has confirmed that the principles of the Communication are also used for the acquisition, as well as the lease of land or buildings by public authorities.

Compliance with state aid rules

Urban development projects often involve the co-operation of public and private parties. Such projects are often construed in the form of public-private partnerships in which the parties involved closely co-operate. Irrespective of the form of co-operation, development projects in general involve complex arrangements between public and private parties, with regard to the acquisition and sale of lands, the construction of (public) infrastructure, and the clearance of lands. For example, in 2006 the Commission held that the municipality of Haaksbergen in the Netherlands, in supporting a reconstruction project of its downtown area by covering the expected losses, had provided unlawful state aid in stipulating that individual parties did not have to return the ‘bridge financing’ if the loss incurred would turn out to be less than expected (decision of 4 April 2006, OJ L 307/207). Without pursuing this matter in further depth in this article, it is sufficient to state that even relatively simple arrangements between public and private parties can inhere serious risks regarding the provision of (unlawful) state aid.

In this regard it is important to take into account that third parties (that have a legitimate interest, although this notion is a rather extensive one) can challenge any aid that was granted before approval by the Commission in the national courts. Furthermore, third parties can file a complaint with the Commission if they perceive that state aid is awarded by a public authority. The Commission is obliged to investigate such complaints and take action if unlawful state aid is granted. It is worth noticing that competitors of the undertaking that is being granted financial aid will use these opportunities. Furthermore, the Commission is becoming increasingly vigilant in applying the state aid rules.

Considering these risks, private parties should be very alert in transactions with public authorities involving the sale, acquisition or lease of lands and buildings, as well as entering into public-private partnerships, to avoid any unlawful state aid. In that regard, private parties should either press for proper notification with the Commission if they are recipients of financial aid, or they should ensure themselves that the European rules on state aid are complied with. In both cases, it is recommended to seek legal assistance in these matters from specialists in state aid law.

By David van Dijk, partner and Jan Schreuder, associate, Boekel De Nerée.

E-mail: david.vandijk@boekeldeneree.com;jan.schreuder@boekeldeneree.com.

Boekel De Nerée is a leading independent Dutch law firm of advocaten and civil law notaries.