UK: OCG Publish New Guidance On Land Development Agreements

Last Updated: 4 May 2010
Article by Jonathan Branton

The OGC has just published a long awaited commentary on the inter-play between the public procurement rules and land development agreements. This subject has been in the spotlight since the notorious Auroux v Roanne case of 2007, which highlighted that land transfers from public authorities which impose associated specified works obligations on developers are "public works contracts" and therefore subject to mandatory application of the public procurement rules if the relevant value thresholds are crossed. The OGC paper offers some further thoughts in relation to this. It seeks to clarify what are the "specified works obligations" necessary to place a land development agreement within the ambit of the public procurement rules, and in particular what sort of conditions in a land development will fall short of this test and thereby escape the rules.

The relevant law on public works contracts

Article 2(1) of the Public Contracts Regulations 2006 (PCR) defines a public works contract as "a contract in writing for consideration (in cash or in kind): (a) for the carrying out of a work or works on behalf of a contracting authority; or (b) under which a contracting authority engages a person to procure by any means the carrying out for the contracting authority of a work corresponding to particular specified requirements". In its paper the OGC has broken this down further into asking the following questions for the purposes of determining if a development agreement includes a public works contract, namely:

  • Is there a work or works required or specified by a contracting authority?
  • Is there an enforceable obligation (in writing) on a contractor to carry out that work or works?
  • Is there some pecuniary interest for carrying out this work (not necessarily a cash payment)?

If the above elements are all met then it is likely that the development agreement involves a public works contract subject to the procurement rules.

The Roanne case

This European Court of Justice (ECJ) case addressed these issues. It involved a French municipality (Roanne) engaging a third party developer (SEDL) to acquire land, build a leisure complex including a cinema and commercial premises (to be sold on to a third party) and a car park to be transferred back to the municipality together with various other outputs such as access roads and public spaces. The municipality of Roanne was the instigator and author of the project. The ECJ was asked to determine whether the agreement did in fact involve a public works contract subject to the procurement rules. The ECJ found that as the main purpose was to carry out works corresponding to specified requirements, it was a works contract that needed to be advertised and tendered under the OJEU rules. The construction of the leisure centre was to be regarded as corresponding to the requirements of the municipality because taken as a whole the project was intended to reposition and regenerate the local area. This was seen as a warning to local authorities everywhere that if a contract results in the provision of works to (public) order (in excess of the works value threshold of approximately £3.5m), then even if other aims are pursued through the project as well, there is a public works contract subject to the procurement rules which must be advertised accordingly. However, it is important to note (and the OGC stresses this) that the Roanne case did not change the law in any way, it merely brought it to wider attention.

Definition of "a work corresponding to specified requirements"

The OGC observes that the ECJ has yet to give explicit guidance on how exhaustively detailed a specification needs to be. The OGC offers a view that the specifications set by the contracting authority should be sufficiently detailed and be expressly referred to in the contract such that they may be legally enforceable. In a development agreement context there is a difference between that and a broad invitation to develop in accordance with applicable national or local land-use planning policies, and where the developer is free to put forward its own intentions, proposals and specifications within those parameters. Thus, the OGC has stated that in its view "where a contracting authority invites a developer or developers to submit their own proposals for the use or development of land or buildings, (competitively or otherwise) but without itself specifying the requirement, the public procurement rules may not apply, even if the contracting authority selects the winning proposal according to broad criteria pre-determined by the authority". This offers considerable flexibility set against the most conservative interpretations of the Roanne case and what is a public works contract, albeit it does not make crystal clear the point at which broad criteria for selection become sufficiently detailed specifications to be legally enforceable. This means that the correct interpretation of what is a public works contract in such cases will continue to warrant a very subjective assessment of fact and degree on a case by case basis.

Land deals and avoiding the procurement rules by expressing desirable outcomes rather than works obligations (Flensburg case)

The EU public procurement regime does not apply to straightforward land transfers with "no strings attached". A land transaction includes a transfer of a right or interest in land. The procurement regime applies to public works, and indeed services and supplies contracts. Roanne addressed how one characterises a "mixed contract", ie. a transaction that has elements of land acquisition and/or disposal, and elements of works and/or services. Such contracts are sometimes in the form of a joint venture between the contracting authority and an economic operator, and they often involve the contracting authority imposing requirements on what should be done with land contributed to the venture.

In particular the OGC notes a recent European Commission investigation concerning the German city of Flensburg. The Flensburg case involved the sale of land to a developer for the possible construction of a building that would correspond to certain urban development needs. However, apart from a simple statement of intent, that contract did not contain any legally binding obligation for the developer to construct the building envisaged. Rather, the contract only stipulated a right of buy back of the land in case the building was not constructed. The Commission has publicly stated in its press release noting the termination of the investigation that this was not a public works contract (nor a concession) because the contract in question did not contain a legally binding obligation to execute works on behalf of a contracting authority. The Commission further specifically confirmed that the buy-back right was not a sufficient sanction to create a positive and legally binding obligation to undertake the works.


The OGC states that the Flensburg case is a sound precedent to follow in land development situations and where a contracting authority only sets out general intentions that are not laid out in binding obligations, then the public procurement rules should not apply. The OGC adds that if a developer remained able to change the scope altogether without breaching the contract then again there would be a strong indication that the procurement rules did not apply.

Legal status of the OGC paper and the Flensburg case

The OGC paper does not have the formal legal value of the EU public procurement Directives, the (UK) Public Contracts Regulations 2006, or related Court judgements in the UK and the ECJ. Similarly, the Flensburg case – which follows as it does a European Commission press release rather than an ECJ judgement – does not have ultimate legal force. However, the OGC is the governmental body entrusted with the monitoring and application of procurement law in the UK, and the European Commission is the body similarly charged with ensuring and enforcing respect for the procurement rules on an EU-wide basis. Neither body expresses a view on such significant issues without thinking very carefully and consulting the leading legal experts available. It may therefore be reasonably assumed that this is the best guidance for interested parties available at present.

Other situations identified by the OGC

The OGC also identifies some other typical situations in which questions arise as to whether or not a development agreement includes a public works contract subject to the procurement rules, namely:

  • Development contracts ancillary to a lease: the OGC notes that a contracting authority leasing property to a developer and charging a rent, while allowing the developer to build to its own requirements, should not constitute a public works contract. The payment of rent is not a pecuniary interest corresponding to specified works requirements in such a case, and this is so even if the development agreement sets out certain limitations to what the developer may do in order to protect the authority's interest as lessor.
  • Building licences: the OGC observes that on some occasions rather than development agreements involving transfers of (public) land, contracting authorities grant building licences to build subject to various conditions, thus allowing the authority to retain control of the freehold pending satisfactory completion of relevant works. If that licence imposes specified works obligations on the developer it will normally be covered by the procurement rules, but if the licence only contains negative obligations on the developer not to go back on its own pre-determined plans then this should fall short of the specified works obligations necessary to place it within the procurement rules.
  • Mixed developments: where only a small part of a much wider development situation includes specified works obligations that a contracting authority wishes to impose (eg. a major development which includes the relocation of council offices as one discreet part) then an authority may wish to ring fence and procure the discreet part without the whole development (and associated land transfers) becoming subject to the procurement rules. On the other hand if the specific circumstances make it practically impossible to make such a separation then the safe approach would be to procure the whole development.

Planning obligations

Since the Roanne judgement there has been a debate as to whether additional planning obligations under UK law flowing from (for example) s.106 or s.278 (highways) agreements might also be covered by the procurement rules. While such obligations may sometimes appear in the same light as pure planning conditions (for example as terms limiting use or specifying mitigation to be carried out by the developer) in some cases they may go much further and stipulate the carrying out of works (eg. highways or schools) that might otherwise be carried out by the authority. The OGC has declined to express a view on this and promises to revert with further guidance in due course.

Impact of the new Remedies Directive

A series of very recently adopted amendments to the Public Contracts Regulations 2006 will take effect on 20 December 2009. These follow the 2007 EC Directive on procurement remedies otherwise known as the new "Remedies Directive". This will be the subject of another detailed briefing shortly but the immediately obvious implication for current purposes is that the new remedy of a Court declaration of ineffectiveness will be available for situations where no OJEU advert has been published when it should have been. This is precisely the judgement that is often made in Roanne-type situations, ie. a determination is made that a given development agreement situation falls outside the procurement rules altogether – perhaps because of a "Flensburg" assessment or similar – and so a development proceeds with no OJEU advert at all.

Of course, if that judgement that the procurement rules did not apply is upheld, then no declaration of ineffectiveness will be given. However, the possibility of such a remedy being granted post award of the contract (NB. the existing regime allows for damages only as a remedy post award) will escalate the risk assessment of the original decision as to how safe is the conclusion that the procurement rules did not apply and no advert was required. In such situations further strategic considerations are likely to come into play, such as the publication of voluntary "transparency" or "award" notices" which may publicise the fact that contracts have been awarded without full OJEU process, and briefly set out why. The object of such voluntary publications will be to flush out any potential challenges there and then to limit the availability of potential declarations of ineffectiveness in the future.

A declaration of ineffectiveness will only have prospective effect, meaning that works entered into already will remain legal, just that further works will be required to stop. If no voluntary transparency or award notices have been published then proceedings to obtain a declaration of ineffectiveness must be commenced no later than six months from the date of entry into force of the contract concerned. In addition, even if a declaration of ineffectiveness is warranted a Court may decline to give it if there are overriding reasons in the general interest.

Conclusions

The OGC sums up noting the following points as indicative of a development agreement situation not being subject to the procurement rules:

  • the development is undertaken at the autonomous initiative and instigation of the developer;
  • the development agreement is incidental to a transfer or lease of land and only contains protections to the public authority's retained interest in the land;
  • the development is based on proposals put forward by the developer rather than specifications set by the authority, even if the proposals were sought by the authority and a winner chosen;
  • there is no pecuniary interest (ie. payment in cash or kind) passing from the authority to the developer; and/ or
  • the development agreement does not contain specified and enforceable obligations, even if the parties may agree some general intentions.

The OGC is at pains to stress that every situation must be assessed in the round and taking into account all relevant facts and agreements, and artificial arrangements with no purpose other than circumvention of the rules are likely to be viewed with suspicion. Given the sensitivity of the area the OGC paper is never a substitute for expert legal opinion applied to all the specific facts of each case.

All in all the OGC commentary offers very useful guidance for what has loong been a vexed issue, even after Roanne. This will be helpful in guiding contracting authorities and developers alike in judging when and where the procurement rules bite in future development agreements, and taking balanced risk judgements accordingly. The new Remedies Directive – particularly when taken together with the recent higher incidence of procurement challenges generally – serves merely to highlight further still the importance of getting this right.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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