Development Agreement secured best consideration and was not subject to Public Contracts Regulations 2015 (High Court)

Practical Law UK Legal Update Case Report w-003-3227 (Approx. 7 pages)

Development Agreement secured best consideration and was not subject to Public Contracts Regulations 2015 (High Court)

by Practical Law Public Sector

Background

Section 123 of the Local Government Act 1972 governs the disposal of land by local authorities. It provides that a principal council may not dispose of land for a consideration less than the best that can be reasonably obtained in the market, except with the express consent of the Secretary of State. For more information, see Practice note, Local authority: disposal of land under section 123 of Local Government Act 1972.

By regulation 2(1) of the Public Contracts Regulations 2015:

“public contracts” are written contracts for pecuniary interest between economic operators and contracting authorities with the object of securing the execution of works, the supply of products or the provision of services.
“public service contracts” (regulation 2(1)) are public contracts for the provision of services.
"public works contracts” (regulation 2(1)) are public contracts which have as their object any of the following:
the execution, or both the design and execution, of a work or works;
the realisation of a work corresponding to the requirements specified and decisively influenced by the contracting authority (A “work” means “the outcome of building or civil engineering works taken as a whole which is sufficient in itself to fulfil an economic or technical function.”)

For more information, see Practice note, Light touch public procurement regime (PCR 2015).

Facts

The claimant, Faraday Development Limited, challenged the decision of West Berkshire District Council (council) on 4 September 2015 to enter into a development agreement with the interested party (St Modwen Developments Limited (SMDL)) to regenerate an area of industrial land (the development site) owned by the council.

The claimant company had been created as a special purpose vehicle in order to assemble land for redevelopment within the development site and held long leaseholds from the council in respect of some of the land. In October 2011, the company entered into a joint venture agreement with Wilson Bowden Developments Limited (WBD). The aim was to give WBD a right to acquire a 50% shareholding in the company and to participate in the redevelopment of the claimant's leasehold land. The agreement also required the parties to work together if other land within the development site should become available for redevelopment.

Planning permission had been secured by the claimant for a mixed-use redevelopment on its leasehold area, the Faraday Plaza Scheme. Following the grant of the planning permission for the Faraday Plaza Scheme, the claimant negotiated with the council for the grant of a new consolidated ground lease for a term of 250 years in respect of a number of plots. By April 2011, heads of terms had been agreed with the claimant and a lease had been drafted. In the meantime, the claimant had reached heads of terms or pre-let agreements with a number of occupiers for its scheme. However, from July 2011 onwards the council ceased to negotiate the grant of a new consolidated lease with the claimant.

At the beginning of 2011, the council commissioned a strategic feasibility study of the development site from consultants to secure the successful regeneration of the area and best consideration for the council, following a procurement process falling outside the scope of the EU Procurement Directive.

Subsequently, in 2013, WBD and David Wilson Homes made a bid in the council’s tender process for the regeneration of the development site. The bid was wholly funded and largely prepared by WBD and David Wilson Homes and included the claimant’s land at a substantially reduced value in return for a share of the profits.

On 27 March 2014, the council’s executive chose SMDL’s bid in preference to WBD’s. The report to the executive pointed out that there was relatively little to choose between the submissions from SMDL and Wilson Bowden although Wilson Bowden proposed a higher density solution that represented a slightly greater level of risk.

In concluding, the report advised the council to have particular regard to the fact that the development would be a long-term and unusual development/investment partnership, requiring a wide range of commercial and residential skills and that SMDL would be the better partner to deliver the scheme.

The development agreement

On 4 September 2015, the council and SMDL entered into the development agreement. The agreement imposed upon SMDL an initial obligation to prepare project plans for the Steering Group's (SG) approval (where the council and SMDL had an equal voice), which were a Business Plan and Master Plan covering the whole of the development site setting out development plots, sites to be retained, initial infrastructure works and a land appraisal. SMDL was required to assemble the necessary land interests.

Following approval of the project plans, SMDL was to prepare:

A budget for infrastructure costs (for approval by the SG) and an application for outline planning permission.
After obtaining outline permission, for the SG’s approval a Development Strategy and Plot Appraisal for each of the Development Plots.

Following such approval, SMDL was to use all reasonable endeavours to obtain detailed planning approval for the work covered by each Development Strategy. Once a plot appraisal had been approved, SMDL could elect to enter into obligations to acquire and redevelop the land but it was under no legal obligation to do so.

The plans and development strategies were required to be consistent with the market, maximise returns to and secure best value for the council.

Grounds of challenge and decision of the court

The claimant challenged the decision to choose SMDL's bid on the basis that the:

Council failed to comply with its duty under section 123 of the Local Government Act 1972 to obtain the best consideration reasonably obtainable for the disposal of interests in its land and for the same reason made an unlawful grant of state aid in breach of Article 107 TFEU (ground one).
Development agreement was a “public works contract” and/or a “public service contract” within the meaning of Directive 2014/24/EU and the Public Contracts Regulations 2015 (PCR 2015) and that the council’s decision not to comply with the public procurement regime in that legislation was unlawful (ground two).
Council acted unlawfully by deliberately seeking to avoid imposing any enforceable obligation on SMDL to carry out or procure works on the site, in order to avoid the public procurement regime (ground three).

Ground one: failure to comply with the section 123 duty

The claimant's challenge on this ground related to an alleged failure by the council to seek further information from bidders given that the council had been advised that there was insufficient financial evidence to choose between the bids. In addition, the claimant raised the following arguments:

The council had been obliged to probe the bids further in order to satisfy its duty under section 123(2) of the LGA 1972 and had failed to do so.
Qualitative issues such as deliverability could not obviate a requirement to assess which bid offered the highest quantum.
WBDC had improperly treated the generation of increased income as sufficient to dispose of the best quantum issue.
It was irrational for the council to treat the deliverability of SMDL’s bid as determinative and yet enter into an agreement that did not contain any obligation requiring SMDL to carry out the redevelopment.
The council failed to test whether another bidder would have increased its offer and, if facing such increased competition, whether SMDL would have increased its bid, given that the council abandoned its requirement for a 250-year lease to be taken of the entire site.

The court held that there was no substance in any of these criticisms.

It was self-evident that the council had its obligation under section 123(2) of the Local Government Act 1972 to achieve the best price reasonably obtainable well in mind. The council did not set out merely to obtain an “increase” in its return from the development site since:

There were explicit references to the statutory provision or to the substance of that provision.
The context for the council’s consideration of the opportunities for redevelopment and the bids it received was the maximisation of the receipts it would obtain from its landholding.
The council did not treat employment generation as part of the consideration it would receive on a disposal of an interest in its land or as in some way offsetting the obligation to obtain best consideration. The council was seeking to maximise its income in the future from an estate that needed to be redeveloped taking into account the lack of investment for 40 years, the age of the existing buildings, their limited life and unsuitability to satisfy modern business requirements. The council as landowner had to proceed on the basis that redevelopment proposals would fall to be assessed against the planning policies for the site which promote its regeneration.
The evidence plainly showed that the council’s twin objectives (securing increased employment and improving the revenue stream from the site) were entirely compatible with compliance with its duty under section 123(2) of the LGA 1972.
The council had received proper professional advice throughout on how to protect and maximise their income from the site. The thrust of the advice was that the information provided by the two bidders was at the level to be expected for the long-term project proposed for the site.

In the court's view, the council’s response to the information it received could not be criticised as irrational and was entirely sensible. Given the future uncertainties of the project, it could not be criticised for not seeking further information on the financial estimates. The council was entitled to focus on its assessment of the experience and expertise of the developers bidding in order to form a view as to how those uncertainties could best be addressed. In this case that approach was directly relevant, indeed critical, to the satisfaction of the obligation under section 123(2) of the LGA 1972. There was, therefore, nothing irrational or unlawful in the council proceeding to evaluate other aspects such as experience, expertise and deliverability.

It was not unlawful for a local authority to sell land for development purposes without a legally enforceable obligation by the purchaser to carry out the development in order to avoid the onerous provisions of the Procurement Directive.

For these reasons, the court held that it was not irrational for the council to rely upon SMDL's expertise and experience to give sufficient assurance on the deliverability of its bid, without requiring SMDL to enter into a legal obligation to carry out the redevelopment that was enforceable from the outset.

Ground two: the development agreement was a public works contract

Under this ground, the claimant argued that the development agreement was a “public works contract” and/or a “public service contract” within the meaning of the Directive 2014/24/EU (which is transposed into English law by the Public Contracts Regulations 2015 (PCR 2015). Therefore, it was submitted that the council’s decision not to comply with the public procurement regime was unlawful.

For the purpose of the proceedings, the parties agreed that:

There was no material difference between the PCR 2006 and the PCR 2015 that replaced them.
It would be convenient for the reasoning in the judgment to be expressed by reference to the current legislation.

The critical issue in relation to ground two was whether the development agreement was a public contract to which public procurement legislation applied. It was common ground that the council did not comply with any of the requirements in the PCR 2015 because it believed that the contract fell outside the scope of public procurement legislation.

The court began by addressing the well-established principle that a contract with a contracting authority only falls within the scope of the procurement regulations if its main object corresponds to the definition of one of the three types of public contract:

The main purpose of the contract must be determined by an objective examination of the entire transaction to which the contract relates;
That assessment must be made in the light of, or having regard to, the essential obligations which predominate and characterise the transaction.

The court rejected the claimant's arguments that the development agreement was a public contract within the scope of the PCR 2015. It held that the development agreement was a contract to facilitate regeneration by the carrying out of works of redevelopment and to maximise the council’s financial receipts from the site. The provision of services under the agreement and land assembly did not represent a main purpose in themselves, but simply facilitated the council’s regeneration and financial objectives.

The court considered that the council had lawfully decided that the development agreement should not impose upon the developer an enforceable obligation to carry out the redevelopment. SMDL was free under the agreement to “walk away”, in the sense that it could choose not to come under an obligation to acquire and carry out works on any of the redevelopment land.

Therefore, the court held that the development agreement was not a “public works contract" and certainly was not a services contract because the provision of services was not an end in itself for the development agreement.

Ground three: failure to impose an enforceable obligation to carry out works

In relation to this ground, the claimant alleged that the council, in entering into the development agreement, deliberately sought to avoid imposing any enforceable obligation on SMDL to carry out or procure works on the site, in order avoid the public procurement regime and to increase market interest. The claimant argued that this was irrational as it was founded on a misunderstanding of the advice the council had received and/or a fundamental misconception of the public procurement regime.

The court held this criticism to be wholly untenable. It was clear that by the time the council tested market interest in redeveloping the site, it had decided to do so through a process outside the public procurement regime. Given the level of uncertainty involved, the council was concerned to stimulate market interest as much as possible. Its advisers had confirmed that the council had received a more positive response from the market because the exercise was being undertaken outside the scope of the PCR 2015.

The claimant's second complaint was that, given that one of the objectives of the procurement legislation is to promote competition, there was no rational basis for the council to conclude that the application of the procedures laid down by the procurement regime would reduce market interest in the opportunity at the site.

This complaint was also rejected. The court held that, having taken into account the long-term uncertainties and risks of the project, it was perfectly rational for the council to accept the advice that it had been given in order to stimulate market interest in the opportunity and also to rely upon a commercial assurance that the redevelopment would be completed over time in accordance with the development agreement, based upon the expertise and past performance of SMDL and the credibility and deliverability of its bid. In the court's view, that was entirely a matter for the judgement of the council, with which the court was not entitled to interfere.

Comment

Case

R (Faraday Development Ltd v West Berkshire Council and another [2016] EWHC 2166 (Admin) (26 August 2016).

End of Document

Also Found In

Resource ID w-003-3227

Published on 07-Sep-2016

Resource Type Legal update: case report

Jurisdictions

England
United Kingdom