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Development agreements - in what circumstances do they become subject to the EU procurement rules?

16 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 isnt 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 projects 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 projects 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.

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The content on this page is provided for the purposes of 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 not provide a substitute for it.

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