EU Procurement Regime and Development Agreements – A New Regime?
Thu 27 Nov 2014
With a new set of regulations on the horizon, we are about to see the most significant changes to the EU procurement regime in a decade. In the ten years since Housing Associations have been subject to the rigours of the EU procurement regime, Associations have slowly been realising the benefits of value-for-money gains through competitive tendering. But the procurement regulations are frequently viewed by Associations as an impediment to business rather than an opportunity, particularly when they crop up unexpectedly in development deals. Housing Associations and Local Authorities – and indeed private developers when they are dealing with those bodies - all need to be able to spot a potential procurement headache when structuring their development arrangements. Will the new regulations bring a change?
In 2004, under pressure from the European Commission, the UK Government conceded that Housing Associations were bound by the EU procurement regime, the law of which is currently governed by the Public Contracts Regulations 2006. Earlier this year, new EU directives were issued, with much fanfare as to the scale of the change in the regime. The new regulations which will bring the new regime into force in the UK will be implemented in 2015, so watch this space.
There is a growing voice within the social housing sector maintaining that the financing and regulatory position of Housing Associations has changed significantly enough since 2004 that Associations should no longer be considered to be bound by the regulations. However, it would take a test case from a Housing Association to test the theory, and that might prove too risky for many Associations. The industry watched with interest as the new regulations took form, but notwithstanding early whisperings to the contrary, there is nothing in the new regulations to suggest that the regime will not continue to bind Associations.
A frequent source of difficulty with the regulations has been how they might impact on Associations involved in development. A contract for the sale of land is exempt from the regulations. But a contract for the construction of dwellings is a works contract, and a procurement process should be followed if the value of the contract is above the threshold, which is currently £4,322,012.
What if a deal contains a mixture of land sale and works? For example, a developer introduces an opportunity to an Association to purchase land with planning consent, and in return the Association grants a build contract to that developer. Or, an Association buying section 106 affordable dwellings from a housebuilder purchases the land early (say, at golden brick) with the dwellings to be built out pursuant to a development agreement. Perhaps an Association might sell land into a JV or to a third party, with affordable dwellings to be delivered back to the Association at practical completion.
Where contracts contain a mixture of works elements and land sale, there has been a grey area as to whether the procurement regulations apply. The new regulations do not give any further guidance or clarification, but whilst the case law to date has not set out any firm tests, the general approach taken in those cases will still apply. Where contracts contain a mixture of land and works, the Courts will look to what the predominant purpose of the contract is. If it is predominantly a contract to purchase completed affordable dwellings, as is the case with a typical s.106 affordable purchase, then on balance it will most likely be viewed as a land contract and therefore not caught by the regulations, even if those dwellings have not yet been completed. On the other hand, an Association putting forward its land for the delivery of a scheme in which it takes the affordable housing back, would most likely be viewed as a works contract.
In each case, it depends very much on the structure of the individual deal, who holds the land, and where the obligations lie in relation to the delivery of dwellings. Sometimes, it may be unavoidable that a procurement exercise needs to be carried out. In other circumstances, it may be possible for a deal to be structured in a way that prevents a works contract being granted by a contracting authority.
The key message for Housing Associations and Local Authorities, and private developers when dealing with those parties, is to bear in mind whether there might be a procurement issue when negotiating contractual arrangements for the delivery of dwellings and other works. The earlier you spot the potential issue, the more time and opportunity you will have to deal with and mitigate any potential risk.