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Development agreements
In what circumstances do they become subject to the EU procurement rules?
17 December 2009
For more than two years now, a state of uncertainty has existed
over the precise circumstances in which development agreements are
to be classified as ‘public works contracts’ for the purposes of EU
public procurement law, and consequently subject to a competitive
tendering requirement.
The uncertainty arose after the case of Auroux v Comune de
Roanne, heard in the European Court of Justice in early 2007.
A name now on the lips of many a developer and local authority,
Auroux disturbed a previously popular belief that
contracts involving the development of land (for example in the
context of urban regeneration) fell outside the scope of the EU
procurement rules. Questions were soon asked as to how, for
example, a project required by a local authority involving the
regeneration of land owned by a developer could possibly be subject
to the EU rules. After all, if the developer isn’t willing to let
anyone else develop their site, what is there to procure?
The level of doubt following Auroux was sufficient to
put a number of major planned development projects throughout the
country on hold. The position clearly needed to be clarified.
Lawyers began to analyse the issues and to try to come to a
consensus in the absence of further clarification from Europe
itself. The Office of Government Commerce (OGC) has issued guidance
on the subject in an effort to provide some clarification in light
of the uncertainty. Future European Court cases are sure to advance
the debate and will hopefully clarify the position. Meanwhile, the
following captures the current thinking in the briefest terms:
Having a say in the development
As a broad rule, situations where an authority in any way:
(i) specifies the development work to be done to a significant
degree, and
(ii) imposes legally enforceable obligations on another party
(such as a developer) to do the work, and
(iii) provides some form of pecuniary interest for the
developer/contractor in carrying out the work,
are likely to engage the procurement rules and require the
development agreement to be advertised – assuming, of course, that
the value to the developer of the construction work exceeds the
threshold for the rules to bite (currently just over £3.4m).
Whilst there is, as yet, no authoritative guidance as to exactly
how significant an input an authority needs to have into a
project’s design or function in order for that project to be
caught, the signs are that where the authority itself does not
specify the requirements of the project, the EU rules are unlikely
to apply.
This, it seems, is key. For example, a developer may wish to
undertake a project which it (the developer) has designed with
minimal or no input from the authority. If the authority then
decides to buy into the project (by acquiring the development or
taking a lease of space within it on its completion), doing so will
not engage the procurement rules (indeed it may, by then, amount to
a pure land transaction).
In the same situation, it is unlikely that the authority will
have imposed any contractual obligations on the developer to
actually deliver the project. If it had, then (thresholds
dictating) the contract containing the obligations would have been
likely to trigger the rules. The distinction is a subtle one.
The value of the work
Regardless of the extent to which the authority has a say in
specifying the project, the EU rules will not apply if the value of
the project is below threshold. An observation made by the Court in
Auroux is that, for the purposes of deciding whether the
work exceeds the threshold, it is the value of the work to the
developer/contractor which has to be taken into account and not the
value of the work to be purchased by the authority. So, in cases
(such as that in Auroux) where not all of the completed
development is necessarily destined to be owned by the authority
itself but, where parts of it may instead be sold to third parties,
the distinction is relevant.
Construction works ancillary to a broader main object of
the contract
Agreements which only involve the acquisition or disposal of
land (whether built on or not) do not engage the public procurement
rules. However, the disposal of a surplus site by an authority to a
developer may sometimes involve a degree of building work in order
to ‘make good’ retained premises as part of the separation process.
That work may exceed the £3.4m value threshold. Even so, there is a
belief that if the work is merely incidental to the main object of
the contract (for example where the value of the disposal is
significantly more than the value of the work), then the
procurement rules will not apply and the element of work will not
need to be advertised.
However, that view has not yet been tested. In addition, the
developer to whom the disposal takes place may be required to make
good the retained premises under the same contract – in which case
the procurement position regarding the development of the disposed
site and the making good of the retained premises will be the
same.
Exclusive rights in the form of land
ownership
It has long been the case that the requirement to advertise has
not applied where, for reasons connected with ‘exclusive rights’,
it is only possible for the work to be carried out by one provider.
In situations where the threshold is exceeded and the authority
specifies the project’s requirements but where the development land
is owned by a single developer desperate to do the development
itself, it would be good to think that this ‘exclusive rights’
exemption might provide an escape route. But this is debatable, and
may not prevent the procurement rules from requiring the authority
to advertise the project.
There is a belief that the practical risk attached to dealing
direct with a sole developer in these circumstances can effectively
be eliminated if the developer is made to tender out the
construction work - notwithstanding that the site itself belongs to
the developer. Even if this course helps fulfil the overriding
objective of the EU rules, namely to open up the construction
market to competition across Europe, there remains the question of
what happens if the developer is singularly uncooperative, refusing
to accept the raft of obligations required of it in order to
protect the authority adequately, and insisting on doing (or
arranging) the building work itself.
Public works concession contracts
Not all contracts involving public works are subject to the full
regulatory force of the EU rules. Public works concession contracts
involve projects where payment to the contractor consists of (or
includes) the right to exploit the project in question – for
example by taking toll revenues from it. If it is possible to
characterise a development agreement as a concession, then the less
stringent level of regulation affecting concessions will mean that
the authority can better structure the appointment of its
contractor to suit itself, much less constrained by EU-imposed
procedures. A case shortly to be heard in the European Court is
expected to clarify the way in which certain types of concessions
should be treated for the purposes of the EU rules.
This is a tricky maze, and we would like to help you navigate
it. We are here to give you pragmatic, value-adding advice on ways
to find solutions – if necessary novel ones – where it might be
thought that none exist.
talk to us
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Dominic Swift
0161 242 1303
Partner and Head of Public sector and Property
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general interest and information. It contains only brief summaries
of aspects of the subject matter and does not provide comprehensive
statements of the law. It does not constitute legal advice and does
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