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Procurement case headed for the Court of Appeal

A leading case on the application of public procurement to public sector real estate scheme is headed to the Court of Appeal, after that court granted permission for the case to be heard.

As you may recall, judgment was given in the back in August 2016 in favour of the defendant local authority, West Berkshire District Council and its chosen development partner St Modwen Development in what was an important case for those involved in local authority development schemes.  (At the time we commented on the judgment).

The case concerned a competition held by the Council to select a development partner to bring forward a valuable development site.  The competition was not conducted in accordance with the procurement regime set out in the Public Contracts Regulations.  The Council (successfully) argued in the High Court that because of the nature of the overall development agreement (in particular because it lacked clear development obligations for the initial phases of the work) there is no “public works contract”, and therefore no need to comply with the Regulations.  As we noted in the article, much of the High Court judgment is sensible and represents a re-statement of existing law, but there we also identified certain aspects of the judgment could be subject to criticism, particularly the process for the drawdown of ground leases (in the latter phases of the development process) which must (apparently) contain obligations to develop, which might be argued to bring those leases dangerously close to the definition of “public works contract”.

The August 2016 judgment was regarded as tremendously helpful by those advising on local authority development scheme, and it is to be hoped that the Court of Appeal leaves intact the key reasoning on which the earlier judgement was based.

The Court has indicated a “hear-by” date of 15 December, so we don’t have too much longer to wait.

The pendulum swings: case comment on David Wylde and Other v Waverley Borough Council (9 March 2017)

A new judicial review case concerning the interface of development agreements, judicial review and public procurement has recently been decided by the High Court.

The case concerned changes made to a historic development agreement (awarded in 2002) relating to the East Street area of Farnham.  Under the original agreement with Waverley Borough Council, the developer needed to pay at least £8.76m for the Council’s land.  The changes to the agreement appear to allow the developer to proceed with a far lower minimum land valuation of £3.19m (as well as other changes relating to the developer’s profit element).

The changes met with resistance in the form of five claimants, two of whom were parish councillors of Farnham, with the other claimants being members of local civic societies.

On its face, the case has some startling similarities with the Gottlieb v Winchester City Council case, where Cllr Gottlieb challenged his own Council’s proposals to unlawfully amend a historic development agreement (the changes also had the objective of making the scheme viable for the developer).  Cllr Gottlieb was successful and the development proposal came to a juddering halt after 12 years.

So in view of the similarities, was the same result reached here?  No.

Mr Justice Dove decided that the claimants did not have “legal standing” to bring judicial review proceedings, because they do not have a sufficient interest in the outcome of the competition (in contrast to the position of Cllr Gottlieb in his case).  So none of the arguments concerning public procurement were explored.  No doubt this is a bitter blow to those towns folk who are struggling to understand why a developer should be allowed to re-write the terms of a deal in their favour (resulting in the viability of a development scheme they vehemently oppose).

Standing in judicial review cases

There have been a number of cases on standing in judicial review, and Dove J’s reasoning is largely consistent with those rulings.  Some have resulted in permission being granted.  Others not.  This is a case where the pendulum has swung back in favour of the defendant public authority.

It cannot be disputed that the vagaries of the case law means that merely being a council tax payer is probably not enough (alone) to get standing to bring judicial review proceedings.

That said, Mr Justice Dove is critical of the Gottlieb decision.  We think that this criticism is misplaced.  Unlike a parish councillor complaining about a decision of the borough of which his/her parish forms part, Cllr Gottlieb was (and is) an elected member of the authority of who had taken the unlawful decision.  In our view this would have given him standing anyway, given his special ability to enforce the general public law obligations and fiduciary duties of the council – but this point was never properly addressed in the Gottlieb case.  The proper approach would have been for Dove J to distinguish the circumstances in Gottlieb from those of Wylde.

The judgment will no doubt be a relief to developers facing significant local opposition to their schemes, but, to make a broader point, we believe that it is in some ways regrettable that council tax payers are written out of the picture when it comes to judicial review in public procurement cases. The public procurement rules ensure fair play between bidders, encourage competition which is not only about price (or receipts for land disposal) but quality.  The inability to enforce those rules robs the public of an opportunity to influence place, something in which they certainly have a legitimate interest.

(Dentons acted for Cllr Gottlieb in his successful challenge against Winchester City Council.)

Timely delivery for regeneration projects

man building a brick wallThe Winchester Silver Hill scheme was based on a development agreement between Winchester City Council and a developer for a mixed-use retail and residential scheme in the city centre.  While the principle of regeneration for Silver Hill was widely agreed, this scheme was bitterly opposed by some residents (and local businesses and landowners), primarily on the grounds that the design and mass of the development was inappropriate for the historic setting of Winchester’s city centre.

Here we consider some of the legal issues and challenges that local authorities can face as they attempt to regenerate their localities, taking lessons from this well-documented scheme.

Read the full article

This article was first published in the Solicitor’s Journal Half Year Review (June 2016).

A return to local authority housebuilding?

Between the late 1940s and the early 1980s, over a 100,000 social housing units were built each year in England, with the vast majority being built by local authorities. In recent years, English local authorities have built around 1,500-2,000 dwellings per year.

Although this is not a like-for-like comparison (social housing vs all dwellings), the figures paint a clear picture of local authorities’ withdrawal from the business of house building.

A number of initiatives suggest that this might be about to change, and one model for local authority housing delivery may be particularly attractive to local authorities looking to get back into house building without the rigmarole of OJEU procurement.

man building a brick wallCouncils as housing developers

The Government’s One Public Estate programme (delivered in partnership with the Local Government Association) has the ambition of delivering collaborative property focussed projects involving local and central government.  The ambitions go beyond simply enabling house building, and extend to rationalising Council’s land holdings and improving local government efficiency and promoting jobs.  However it is one of the house building projects which will be of particular interest to local government (and perhaps of concern to the local house builders).

Croydon Council, as part of the One Public Estate programme, has created a wholly-owned development company, called Brick-by-Brick.  It will benefit from a pipeline of potential sites currently owned by either the NHS or the Council, and has the objective of delivering 1,200 homes by 2018.

Legal issues: OJEU Exit?

It has some innovative legal features too.

It has been reported that the Council considers that the local housing company will not be subject to the EU procurement rules – and thus will be able to engage suppliers without having to comply with the Public Contracts Regulations 2015 – a major advantage.

From a procurement law standpoint, this is completely correct, provided that the company has a commercial character, and is not predominantly a vehicle to deliver public policy objectives. To maintain this position it will also need to operate as an independent commercial undertaking (albeit one that is owned and control by the Council). However certain features, such as a Council guarantee for the liabilities of the company would fatally undermine this independence, and call into question its status as an entity outside of the reach of the public procurement rules.

Certainly the information that is currently available about Brick-by-Brick suggests that it will be a commercial entity – it is aiming to provide a return on the Council’s investment in order to fund wider council services (amongst other things).

Councils looking to establish similar companies will also have had to take advice on issues such as local government trading powers and the General Power of Competence under the Localism Act.

A further consideration is the price that such companies obtain land from the public sector. EU State aid rules mean that, if the entity is to be genuinely financially independent, it would need to pay a market price for the land it receives from the public sector.  Noting the premiums paid for residential sites in London, this could require considerable upfront capital within the company.

Conclusion

Despite the challenges (none of which are insurmountable) the Brick-by-Brick model will be of great interest to many Councils who are keen to deliver new housing (and to be seen to be doing all they can to achieve this objective) within their areas.

Local house builders may have concerns about perceived advantages enjoyed by development companies established, particularly around valuations for the purchase of public sector land – time will tell whether they are well founded.

Public procurement – ineffectiveness: paper tiger no more?

At the end of last month a Scottish court made UK legal history by becoming the first Court to grant a claimant the remedy of contractual ineffectiveness under the Scottish public procurement legislation (which is in most respects is the same as that which applies in the rest of the country). The remedy first became available in 2009.

Council services framework

The case concerned a contract award made by Inverclyde Council for street-lighting service, ostensibly made under a framework agreement. An economic operator challenged the award decision on the basis that the contract award had been made to a corporate entity, Amey Public Services LLP, which was not on the framework.  The Amey entity that was party to the framework agreement was Amey OW Limited.  The LLP was a joint venture owned by Amey (66.6%) and North Lanarkshire Council (33.3%).  The Court was not persuaded that this was a mere administrative error that could be rectified through a novation to the correct Amey entity.  Instead it considered that the appropriate response to the claim was to declare the contract award ineffective.

Step up to the big leaguenana

The facts of the case are relatively unremarkable, but the decision to grant the remedy of ineffectiveness is significant, particularly if it foreshadows more judgments where the remedy is granted. Contractual ineffectiveness is applied prospectively, so all future performance obligations fall away, theoretically (in the context of a services contract) all services rendered prior to the date of ineffectiveness would still need to be paid for.

Property risk

In the context of a property transaction, for example an agreement for lease, it would be very much more difficult to predict how a court would handle the consequences of a declaration of ineffectiveness – potentially leaving investments made on the basis of the agreement vulnerable to loss.

Prudent counter-parties entering into transactions with public sector bodies where procurement is an issue have been aware of the risk of ineffectiveness since the rules relating to remedies changed in 2009 (and the threat has always been considered real – no procurement lawyer would ever truly describe ineffectiveness as a “paper tiger”). However, various measures can be employed to protect parties to mitigate the risk of ineffectiveness and its consequences – but only if the issue has been thought about in advance.

A footnote to this case is the obligation in the rules to impose a fine on the public authority (Inverclyde Council in this case), which must be levied in all cases where the remedy has been granted.  It will be interesting to see at what level the fine is actually set at, having regard to the fact that a substantial fine could have an impact on the provision of public services in the locality.

Check your privilege – information rights and pre-planning advice

The High Court decision in Hallows v Wilson Barca LLP, concerning the disclosure of evidence in a damages claim, is a reminder that correspondence with a local planning authority (LPA) is vulnerable to requests under the Freedom of Information Act (FOIA) (or the Environmental Information Regulations (EIR)).

The facts in Hallows are unusual.  Hallows had brought a damages claim against his former solicitors, Wilson Barca, for failing to register rights of ways for a property he owned.  The Claimant’s litigation solicitor wrote to the LPA requesting pre-planning advice on the likelihood of obtaining planning permission for residential development of the site.  The Claimant intended to use the response as evidence to establish his losses in the damages claim, rather than to support a bona fide planning application.

Be careful what you ask forpriv

The Defendant got wind of the LPA’s response – which was unhelpful to the Claimant – and obtained it by FOIA request.  The Claimant asked the Court to restrict the use of the information, which would probably have meant that it could not be used as evidence.  It claimed that the information was subject to legal professional privilege and should never have been disclosed by the LPA to the defendant under the FOIA.

Privilege has limits

It is worth noting that the normal rule is that information created to support a claim attracts legal professional privilege and that means it cannot be used against the party that created the document, unless the privilege in the information is waived.

In this case, the court ruled that:

  • the pre-planning advice could attract legal professional privilege, and thus be exempt from release under FOIA (or use in any subsequent legal proceedings), but
  • this would only be the case if the LPA had been informed of the true purpose of the request for information.  In this case they had no idea that the claimant was only seeking pre-planning advice to assist with establishing his losses.

Lessons

Although there are a number of quirks relating to this judgment (not least that the case turned on FOIA when the EIR arguably applied), several points are worth keeping in mind when considering the application of the information rights regime in the planning context:

  • It is a timely reminder of the how FOIA/EIR requests can be used strategically to gain advantage in litigation;
  • It is a warning for those people and companies who regularly provide sensitive information to LPAs that the information produced by the public sector can only rarely be regarded a truly safe from disclosure;
  • In the rare circumstances where a person has asked an LPA to produce information, and the predominant purpose for the request is to support litigation, then in order to benefit from the protections offered by legal professional privilege, they must inform the LPA why they are asking for the information.  Although there are many circumstances where an LPA would be sufficiently “spooked” by the possibility of litigation arising from a request, there may be circumstance where it is happy to cooperate.

Flexibility for public sector development agreements?

Long term contracts including development agreements often require modification to deal with changing circumstances.  Despite this, the scope of contract variations is restricted when the agreement has been publicly procured. However, the recent Edenred case (Edenred (UK Group) Ltd v Her Majesty’s Treasury & Ors [2015] UKSC) provides useful guidance to those designing projects where change is anticipated and greater flexibility is required.

The Supreme Court in Edenred makes it clear that:

  • picAuthorities may, in certain circumstances, alter contracts to extend the scope of the goods, works, services to be provided.
  • Includes additional goods, works or services of the same nature and type as those originally procured.
  • The changes must have been included in the procurement documentation (and tenderers made aware that they may be required to deliver the services during the term).

When preparing project documentation Authorities must think carefully about future requirements or potential change to requirements and policies and should not assume that the specification is a living document that can be changed at will and will evolve during the contract term.  Where flexibility is required the Authority should build this into the original specification and other procurement documentation.  A procurement exercise can cover ‘optional’ services and the Authority is not required to actually purchase such services from the provider. The Authority can chose whether to take up the optional services at a later date during the contract term.

Built to Last

Where greater flexibility is required the Authority should consider building this into the original specification and other procurement documentation.

  • A procurement exercise can cover ‘optional’ services and the Authority is not required to actually purchase such services from the provider. The Authority can choose whether to take up the optional services at a later date during the contract term without risk that the change will be deemed material.
  • The Edenred case also confirms that Authorities should consider the total value of goods works, and services that may be required under the contract during the term and include this in the estimated contract value at the outset of any procurement. If an Authority sets an estimated contract value range, with an upper limit covering both core and additional services, this will provide useful evidence that the additional works, goods and services were envisaged by the original contract.
  • However, the contract value alone is unlikely to be enough to demonstrate that the additional services, goods or works of a different type or nature were encompassed by the original contract.

The exact wording of the published procurement documentation, including the specification, is key to defending a procurement challenge to contract variations and it is vital that the requirements published during the procurement are complete and are drafted so as to cover all potential works, goods and services which the provider may be called upon to provide during term.  In practice, this will mean that the more the tender documentation can do to anticipate changes which may be made to a scheme, the less risk there will be where those anticipated changes are made.  Even so the scope must be clear and have limits – Edenred is not authority for an open ended tender exercise and open ended future changes.

Click here to read our detailed note of the case.

State aid risks

gavel-with-e_20131112140210365A recent case in the EU General Court serves as a reminder that all parties involved in the development of public sector land need to be aware of the risks associated with State aid.

The case the Netherlands v the European Commission (30 June 2015) involved an appeal against a Commission Decision that the renegotiation of a PPP agreement involved unlawful State aid by reason of the price of the land value being reduced considerably (as compared to the contractual agreed position) and certain agreed fees being waived.

The Court found that the Commission’s analysis of the land valuation was deficient insofar that it had failed to take account of the actual value of the land at the point at which the renegotiation occurred (the actual land value had declined considerably).  The Court also decided that the Commission had not adequately assessed the legal position of the municipality involved in the transaction correctly.  In assessing whether there was aid the Commission applied the usual approach of considering how a hypothetical private market investor would have conducted itself in the same circumstances.  The Court ruled that a private market investor would have had regard to issues such as the complexity of the scheme, the strong contractual position enjoyed by the PPP partner, the risk associated with litigation, and the potential return from delivering the scheme sooner (albeit with some waived fees).  It was also significant that if the opportunity was to be retendered, the lower land value may have meant that no better commercial offer was available in the market place anyway.  As a consequence the Court found that there was no unlawful State aid.

How to ensure that a transaction is compliant with the State aid rules

The first point of reference should always be the Commission’s “Communication on State aid elements in sales of land and buildings by public authorities”.  This document provides general guidance about how public authorities can ensure that their disposals of land comply with the State aid rules.  In general the communication provides two mechanisms to ensure compliance.  Firstly, through holding a well publicised and unconditional bidding procedure.  Secondly, market value can be established by means of an independent expert’s report.  In practice most local authorities will obtain a valuation prior to any disposal in order to be certain that they have obtained “best consideration” in accordance with their Section 123 duty (under the Local Government Act 1972).

Where the parties are contemplating a renegotiation, an important lesson from the case is that (A) the State aid rules should be carefully considered before proceeding with any change and (B) that the actual valuation in the market of the land concerned, at the point in time that the change is made is likely to be a highly relevant factor when considering the risk associated with the change.

A further consideration, where the arrangement in question has been procured in accordance with the Public Contracts Regulations 2015, is whether the change is “material” for the purposes of procurement law (see the recent Winchester case).

What are the risks?

If a transaction is found to be unlawful as a result of State aid there is the possibility that it could be challenged in the UK Courts by way of judicial review.  A low-cost option for parties aggrieved by the transaction is to alert the Commission to the possibility of there being unlawful aid and request that they investigate.  If the Commission determines that there has been unlawful aid, then it can require the Member State to recover any unlawful aid from the recipient.  In the context of a land transaction at a below market price, this could mean that a local authority seeks to recover a sum equal to the amount by which the disposal was undervalue.