The application of procurement law to development agreements

EU and UK procurement law, in broad terms, requires public authorities to carry out a publicised tender process where, for example, they wish to procure certain types of works or services. However, in relation to land acquisitions/disposals, public authorities can generally benefit from a specific exclusion from the rules that applies to the acquisition of land "including existing buildings and other structures...and any estate, interest, easement, servitude or right in or over land."

20th May 2010

EU and UK procurement law, in broad terms, requires public authorities to carry out a publicised tender process where, for example, they wish to procure certain types of works or services. However, in relation to land acquisitions/disposals, public authorities can generally benefit from a specific exclusion from the rules that applies to the acquisition of land "including existing buildings and other structures...and any estate, interest, easement, servitude or right in or over land."

This exclusion meant that the UK courts traditionally considered that development contracts were, in broad terms, outwith the scope of the procurement regime. 

Notwithstanding this exclusion, the European Court, on the otherhand held that, where certain criteria are met, development agreements may fall within the procurement regime, where, in broad terms:

  • the public authority makes legally binding requirements/specifications about the content of developments;
  • the agreement is concluded for pecuniary interest (which in a contract refers to consideration paid to the contractor on account of the execution of works intended for the benefit of the public  authority). 

The European Court rejected the argument that the public procurement rules should not apply to development agreements, as a matter of principle, where they concerned what could be viewed as town planning policies.

The decisions of the European Court introduced a great deal of uncertainty around, for example, the extent to which public authorities could make directions surrounding work without triggering the procurement rules e.g. by way of restrictive covenants or by application of general planning policies.

Helmut Muller: The Salient Points

The recent case of Helmut Muller involved the sale of land by a German public authority and assessment of bidders' plans for the use of land by (another) local authority. The unsuccessful bidder (Muller) challenged the sale before the national court, claiming that it should have been carried out in accordance with public procurement law.

The Court's decision raises a number of interesting issues; however, of particular interest (and relief) to public authorities is the Court's view that, for the procurement rules to be in play:

  • the authority must have taken measures to define the type of work or, at the very least, have had a decisive influence on its design. The mere fact that a public authority, in the exercise of its urban-planning powers, examines certain building plans presented to it, or takes a decision applying its powers in that sphere, does not satisfy the obligation that there be requirements specified by the contracting authority;
  • the service provided must be of a direct economic benefit to the authority. The Court gave the following examples: (i) the authority becomes owner of the works or works; (ii) the authority holds a legal right over the use of the works which are the subject of the contract in order that they can be made available to the public; (iii) the authority may derive economic advantages from the future use or transfer of the work, due to the fact that it contributed financially to the realisation of the work, or in the assumption of the risks were the work to be an economic failure. 

In Muller the Court held that the mere exercise of urban planning powers, intended to give effect to the public interest, cannot be viewed as the obtaining of a contractual service of immediate economic benefit for the contracting authority.

Muller helps clarify the parameters within which the procurement regime will apply. However, there remain a number of grey scenarios where a detailed legal assessment will have to be carried out as to the applicability of the procurement rules.  Such an assessment has an added imperative in the light of the revamped remedies framework open to disgruntled third parties (across the UK) which - in particular - allows the courts, in certain circumstances, to strike down a contract award.

State aid refresher

Beyond procurement law, state aid remains an uneasy bedfellow to procurement issues and another consideration that public authorities need to bear in mind in the context of a land transaction.

State aid concerns will arise, in broad terms, where the land/property is sold by a public authority at less than market value (that is, in broad terms, the price at which the property could be sold under private contract between a willing seller and an arm's length buyer). In such a scenario the private purchaser would be viewed as obtaining an economic advantage. If there is state aid and this has not been pre-approved by the European Commission, the public authority will be required to recover the state aid from the recipient.

The European Commission has issued guidance on the application of the state aid rules to land transactions. The guidance indicates that there will not be state aid concerns where: (i) the sale has followed a sufficiently well-publicised, open and unconditional bidding procedure and the best (or only bid) has been accepted; or (ii) in the absence of such an auction process and prior to the sale negotiations, the public authority has obtained an independent expert evaluation which serves as the minimum purchase price that can be agreed without granting state aid.

The Commission's guidance should be considered carefully by any public authority involved in land transactions.