The UK's Office of Government Commerce recently published a guidance note on the application of public procurement rules to Land Development Agreements awarded by public bodies or utilities such as ports.
Background – Legal uncertainty over Land Development Agreements
Public authorities and utilities such as ports must consider the potential application of the EU public procurement rules for any property development agreement, even if the deal is not for their benefit. Developers must also consider the rules, as contracts awarded in breach of the rules may be ineffective.
Land development agreements ("Development Agreements") have recently received particular attention having generally been regarded as falling outside the public procurement rules in the past and not being subject to competitive tendering requirements. However, following the decision of the European Court of Justice ("ECJ") in the case of Jean Auroux v Commune de Roanne (C-220/05) the European Commission ("Commission") has expressed concerns that Development Agreements entered into between public bodies and developers may often have the characteristics of public works or public concession contracts which should come within the ambit of the public procurement rules. The issue is whether the agreement aims to achieve a development fulfilling an economic or technical function or to fulfil an objective of the authority or utility. If so, the rules may apply.
General Principles of applying the public procurement rules to a Development Agreement
The general principles for the application of public procurement rules to Development Agreements are whether there is a work or works required or specified by a contracting authority or utility, whether there is an enforceable obligation (in writing) on a contractor to carry out that work or works and whether there is a pecuniary interest for carrying out this work (this may not necessarily be a cash payment).
The Office of Government Commerce ("OGC") advocates that for specifications a work should be sufficiently specific and detailed and expressly provided for in the contract so as to ensure legal enforceability. There are five more specific scenarios that are addressed by the OGC:
1) Transfer of land or property and the public procurement rules
The public procurement rules specifically exclude acquisition of land or existing buildings or rights in or over land by a public body or utility as well as the sale or leases of land by public bodies or utilities. A works contract should only arise if there is a contractual obligation to carry out the work. As a result, the OGC stipulated that the public procurement rules will not apply unless the developer is contractually required to carry out a specific part of the development. Contractual agreements nonetheless will be considered purposively.
2) Development Agreements ancillary to leases
If a Development Agreement is ancillary to a lease, it may avoid being subject to the public procurement rules as a lease is not a relevant contract and the payment of rent to an authority or utility by a developer is unlikely to be classed as a 'pecuniary interest' for the purpose of the rules. If the Development Agreement merely sets out how the developer will perform its obligations as a lessee, the agreement should not become subject to the rules.
3) Building Licences
If the purpose of a building licence (granted to a purchaser/ developer for the duration of the construction period, usually to ensure compliance with specific land obligations) is to ensure that the purchaser does not go back on its own intended activities, a licence will probably not give rise to a contract caught by the public procurement rules.
4) Mixed Land Ownership
The public procurement rules become potentially relevant for the purposes of mixed land ownership where some land is owned by a public authority or utility and some is owned by a developer or third party. A simple sale of land should not be caught by the rules unless the sale or lease imposes works obligations.
5) Other developments that might include a contract subject to the rules
If a public body or utility chooses to enter into a Development Agreement, which would not normally come within the ambit of the public procurement rules but may have associated requirements that could subject it to the rules, a part of the activity within a development could amount to a contract subject to the rules. In this case, the authority or utility might consider a separate procurement.
6) Development agreements less likely to be caught by the rules
The OGC concludes that a development agreement may be less likely to be caught by the EU rules where:
- The proposed development (or a significant part of it) is to be undertaken at the initiative and autonomous intention of the developer, particularly if the developer already owns or has control of the land;
- The development agreement is ancillary to a transfer or lease of land from the public authority or utility and is intended to protect the interests of an authority/utility which is the lessor or otherwise has an interest in the land;
- The development agreement is based on proposals submitted by the developer, rather than requirements specified by the contracting authority/utility (even if the proposals may be sought and selected by the authority/ utility);
- There is no pecuniary interest passing from the contracting authority/utility to the developer and consideration for undertaking the development, either through direct payment, or indirectly, for example, by the assumption of obligations such as contributions towards project finance or guarantees against possible losses by the developer;
- The development agreement does not include specific contractually enforceable obligations on the developer to realise a work or works, even if that work or works is recognised as being the general intent of the parties.
Since Auroux some authorities have advertised development agreements, others have not, and some have compromised, for example the developer is required to advertise the building contract. To advertise, the relatively light regime for works concessions can often be used if the commercial risk passes to the developer, and the developer's remuneration consists at least in part of sales to third parties. Public bodies, utilities and developers are strongly advised to seek their own legal advice on their Development Agreements before proceeding.
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.