RU caught by EU?
Procurement Workshop Tuesday 8 December 2009
BIGGART BAILLIE LLP APPLICATION OF PROCUREMENT RULES TO DEVELOPMENT AGREEMENTS MODEL ANSWERS TO SCENARIOS 1 AND 2 Until recently development agreements were often viewed as not being subject to the Public Contracts (Scotland) Regulations 2006 since agreements for the acquisition or disposal of land are expressly excluded from the scope of the regulations. The European Commission has raised concerns that a number of development agreements entered into in the UK between contracting authorities and developers have the characteristics of public works contracts and so may fall subject to the Regulations. In assessing whether the Regulations apply to development agreements between public bodies and developers, the OGC has produced guidance which sets out three questions that are relevant in ascertaining whether the development agreement comprises a public works contract: •
Is there a work or works required or specified by a contracting authority?
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Is there an enforceable obligation (in writing) on a contractor to carry out that work or works?
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Is there some pecuniary interest for carrying out this work (not necessarily a cash payment)?
If the answer to all three questions is “yes”, it is likely that the agreement will be subject to the public procurement rules. In determining whether there is a work or works specified by a contracting authority, it is necessary to look at the definition of a “public works contract”: •
public works contract means a contract in writing, for consideration (whatever the nature of the consideration):
(a)
for the carrying out of a work or works for a contracting authority;
(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 specified requirements;
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“work” means the outcome of any works which is sufficient of itself to fulfil an economic and technical function;
•
“works” means any of the activities specified in Schedule 2 of the Regulations (including site preparation and construction of buildings, roads and utilities including refurbishment).
A public works contracts will be subject to the public procurement rules where the value of the contract exceeds the threshold (circa £3.9m from 1 January 2010).
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Scenario 1 A local authority owns a large site, which comprises a library and a public car park. The site is located next to a shopping centre. The owner of the shopping centre (DevCo) is looking to redevelop the centre, doubling its size, by expanding onto the library site. If the development goes ahead the existing library will need to be demolished and a new facility provided elsewhere. The new shopping centre will include a multi-storey car park. In exchange for the current library site DevCo have offered to build a new library (to the Council’s specification) on an alternative site currently owned by DevCo. Title to the new library will be transferred to the Council before DevCo take ownership of the current library site. The Council’s current site is valued at £5,000,000. The new library will cost in the region of £3,000,000. The value of the new library site is £2,000,000. The title to the new library will be transferred to the Council when it is completed for nominal consideration. The Council are keen to take DevCo up on this offer. Are there any procurement issues for the Council?
Scenario 1 – Model Answers Are there any procurement issues for the Council? In deciding whether there may be a procurement issue for the Council, it is necessary to look at each of the three OGC questions in turn to determine whether the contract can be considered as a public works contract. 1. Is there a work or works required or specified by a contracting authority? •
Yes, the Council requires a replacement library facility to be built.
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If there are detailed and specified requirements imposed by the contracting authority on the developer, it is likely that the agreement would be subject to the Regulations. In this scenario, the Council requires the new library facility to be built to its specification.
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For the purposes of deciding whether the contract exceeds the threshold, the total value of the contract should be seen from the point of view of the supplier. Therefore whilst the value of the new library facility is less than the threshold at £3m, the aggregate value of the new development as a whole relates to the value of the land and the value of the new building, which together will exceed the threshold for works.
2. Is there an enforceable obligation (in writing) on a contractor to carry out that work or works? •
This is dependent on the wording in the contract. However -
•
In such a situation a well advised Council should seek to place an obligation on the developer to build the new library to the Council’s specification with a set time scale. A mere expectation that the library will be built is not sufficient to protect the Council’s interest.
3. Is there a pecuniary interest for carrying out this work? •
Although there is no money passing between the Council and the developer, it is likely that the transfer of the original site from the Council to the developer would be viewed as consideration.
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In the Roanne case, the court considered that there was a pecuniary interest because the carrying out of the works settled a debt that would otherwise have been due. The same view could be taken of the obligation to provide the replacement facility on the new site.
Given that the answer to all three questions in this scenario is likely to be yes, the contract would be regarded as a public works contract for the purposes of the regulations and so subject to competitive tendering. What action should the Council take – should they accept DevCo’s offer or should they launch a public procurement process?
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On the above analysis the contract should be publicly procured. This may lead to the perverse situation where only DevCo would be interested in pursuing the shopping centre development and DevCo would be the only party capable of delivering the library since they own the proposed site. On this basis some public bodies may however assess the risk of challenge to their decision as low, accept such an offer without putting the contract out to tender and simply bear the risk of a potential procurement challenge from other disgruntled developers. It should be noted however that non-compliance risks are likely to increase as a result of the new Remedies Directive which is to be implemented into national law by 20 December 2009. This directive gives bidders significantly improved remedies and in particular allows courts to set aside award decisions where the contract was not procured in accordance with the Regulations. Such an agreement would certainly be open to challenge if not publicly procured given that it almost certainly satisfies the criteria for being classified as a public works contract. Therefore the most prudent approach would be for the Council to publicly procure the contract for works, even though this would be a somewhat artificial process given that there is not likely to be any other interest in the contract other than DevCo. However, in doing so, the Council would demonstrate that the regulations have been complied with and avoid the risk of challenge.
Scenario 2 A developer has been negotiating the purchase of a brown field site from a local authority. The initial intention was that the developer would purchase the site from the Council at full market value to build private housing and some office accommodation. As negotiations have progressed the Council has indicated that it wishes to take a lease of one of the office units. The lease will be on the developer’s standard terms and conditions and the Council will pay market rent. Finally, as part of the missives the Council have offered the developer an option on a second site. The option may be exercised once the initial development has been finished. If the option is exercised the second phase of the development must contain 50% social housing which once complete will be transferred to the local housing authority (the Council). The consideration for the second site will be discounted by 50% to reflect the obligation to provide the social housing. The developer’s property director is becoming concerned that the transaction has changed from one of sale to a development agreement that the Council should have put out to tender. Is the developer right to be concerned? Would it make a difference if the design and make up of the social housing were left to the discretion of the developer? Can the deal be changed to address any concerns over procurement?
Scenario 2- Answers Is the developer right to be concerned? In answering this question, the scenario is best approached by looking at it in three stages: A. Initial intention of the developer to purchase the site from the Council •
At this stage of the proposed agreement, the primary purpose of the transaction would appear to be the disposal of land by the Council rather than to secure delivery of the works, since it is the intention of the developer to build private housing and office accommodation according to its own proposals rather than the desire of the Council.
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The regulations expressly do not apply to transactions concerning the acquisition or disposal of land.
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Therefore, at this stage of the scenario, the agreement would not be considered as a contract for public works.
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B. Lease of the office accommodation by the Council •
If the Council are simply leasing part of a property back from a developer at market rent and on standard terms and conditions, it would not to be viewed as a public works contract since again, the developer is developing the land according to its intentions rather than the offices being built to the Council’s specification.
C. Option to purchase and develop a second site •
It is at this stage that the developers concerns may well be founded since the nature of the original transaction appears to have changed from a straightforward sale of land to the contemplation of works. Therefore the three questions posed by the OGC now must be contemplated.
1.
Is there a work or works required or specified by a contracting authority?
2.
3.
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The inclusion of an option to develop a second site brings the works within the scope of the agreement since the purpose of the second option is the development of further housing.
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The works are also intended to meet economic or technical needs of the Council – namely that 50% of the second phase of the development must be social housing for use by the local authority – so arguably this is a specific requirement for work imposed by the Council.
Is there an enforceable obligation (in writing) on a contractor to carry out that work or works? •
There is an obligation contained within the missives for the first site that, on exercising the option, the developer must develop the second site in accordance with the Council’s requirement (that 50% of the site must be social housing).
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As the court in the Roanne case said, the contracting authority does not necessarily need to be the ultimate owner of a work for it to be a public works contract and so the fact that the housing will be transferred to the local authority on completion is irrelevant for these purposes.
Is there a pecuniary interest for carrying out this work? •
Again, while there is no money being exchanged between the parties, the land at the second site will be transferred to the developer at a 50% reduction in price to reflect the obligation to provide the social housing.
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This reduction in price may be viewed as a consideration for providing the social housing.
The inclusion of an option for the developer to purchase and develop a second site in accordance with the Council’s specification therefore arguably transforms this contract into a public works contract to which the public procurement regulations apply. Would it make a difference if the design and make up of the social housing were left to the discretion of the developer? It is unlikely that the developer having the discretion as to the design and make up of the social housing would make a difference to the classification of the contract as a public works contract since the requirement of the Council is sufficiently specific to be a public works contract. Provided the Council’s requirement clearly sets out what it wants then the particular make up of the solution does not matter. (Note that “social housing” is more specific than, say, ”affordable housing”.) If the development and use of the whole site were entirely at the discretion of developer without any requirement or specification from the Council regarding the works to be carried out, it is very unlikely that the contract would be considered a public works contract. Can the deal be changed to address any concerns over procurement?
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To avoid any procurement concerns, it would be advisable in such a situation for the deal to be split into two as follows: 1.
Sale of the first site This would not be considered a public works contract and so would be out with the scope of the regulations, given that it is simply a disposal of land by the Council to a developer. At the same time, the Council could take a lease of part of the completed units, which again would not trigger the procurement rules on the basis that the lease will be taken on standard terms and conditions and at market rent.
2.
Development of the second site The Council would enter into a second development agreement with the developer concerning development of the second site. Given that this contract would involve the carrying out of works to the specified requirements of the Council, it would be likely be regarded as a public works contract and so would require to be put out to tender.
Taking this approach, the two phases of the development can be kept separate, so allowing the second phase to be tendered competitively.
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