Procurement law and development agreement – A binding obligation? – Case Update
Tue 08 Nov 2016
Public procurement legislation is one of those unfortunate areas of law which has led to a number of ‘grey areas’. If you were to pick one area of procurement law which has posed the most problems, the treatment of development agreements would be at the top of most procurement lawyers’ lists.
Do they constitute public contracts for the carrying out of works? A public works contract will (if above threshold) need a formal procurement process which complies with the Public Contracts Regulations 2015 (“the procurement regulations”). Development agreements typically consist of a mixture of contractual obligations to carry out services and works. They also usually involve land transactions which are themselves exempt from the procurement regulations.
The recent High Court case of Faraday Developments Limited v West Berkshire Council  EWHC 2166 has helped further clarify the shades of grey and a clear line of reasoning has emerged through recent similar cases. The judgment gives direction to public bodies and other organisations caught by the procurement regulations (such as Housing Associations) as to when the grant of development agreements will not need to go through a strict ‘OJEU’ tender process. It will also give a large degree of comfort to the developers bidding for such opportunities because they will want to know that the agreements they enter are safe from successful challenge from disappointed bidders.
The case also brought clarity to the interpretation of a local authority’s obligation to secure best consideration in accordance with section 123 of the Local Government Act 1972 (“section 123”). Challenges under the procurement regulations and section 123 often go hand in hand.
The case involves the proposed regeneration of an industrial estate in Newbury, Berkshire. West Berkshire Council has significant land holdings on the estate, which has been neglected of investment over a long period of time. The Council sought bids from developers to satisfy its twin objectives of (a) promoting the regeneration of the industrial estate and (b) enhancing the Council’s future income. However, whilst the Council did follow a competitive bidding process, it chose not to follow a formal ‘OJEU’ process and indeed took deliberate steps to structure the opportunity so as to avoid the procurement regulations.
The Council entered into a development agreement with the successful bidder, St Modwen Developments Limited. It contained obligations on the developer to carry out a variety of initial planning services with the ultimate aim of securing planning consents. It was then within the developer’s discretion as to whether they exercised an option to purchase the land. If the option was exercised, the developer would then be subject to a variety of obligations to carry out works.
The grant of the development agreement was challenged by an unsuccessful bidder, Faraday Development Limited, on the grounds that (1) the Council had failed to comply with its obligations under section 123 to obtain the best consideration reasonably obtainable and (2) the agreement was a public works contract within the meaning of the procurement regulations and therefore the lack of a formal ‘OJEU’ tender process was in breach of those regulations.
The High Court found in favour of the Council on both counts.
The High Court decision reinforces what has now become a well-established principle in deciding whether a development agreement is subject to the procurement regulations.
So, what is the ‘main object’ of the development agreement? If a development agreement is at its heart a land transaction, then the existence of works obligations will not bring it within the remit of the procurement regulations. The judgement then confirms a secondary question which has emerged in a more recent line of cases. If the ‘main object’ of the agreement is for the delivery of works, is the developer under an enforceable legal obligation to deliver them?
In this case, the developer had discretion as to whether to carry out works. They were under no contractual obligation to exercise their option and build out a phase. The fact that – commercially speaking – the developer was extremely likely to exercise their option following significant investment in securing planning was not enough. Without the binding legal obligation to carry out works, it was not a public works contract and so fell outside of the procurement regulations.
This does not mean that all development agreements will fall outside the scope of the procurement regulations. The structure of an opportunity will have to be examined on a case by case basis and careful drafting is required to ensure that the documentation as a whole does not trigger the procurement regulations.
The Court found that the Council had complied with its duties under section 123 to secure best consideration. Of particular note was the Court’s finding that the objective of securing the regeneration of the estate was not inconsistent with securing best consideration and in fact was directly relevant to securing it.