Development Agreements

November 20th, 2018

A development agreement is entered into by a local authority land owner with a private contractor (St Modwen). There has been a competitive process. That complies with the Council’s duty to obtain “best consideration” on a land disposal, pursuant to its duty under Section 123 of the Local Government Act 1972 (and its “best value” duty). A challenge to its compliance with the Section 123 duty fails, at first instance, and is not pursued on appeal. However, there had been no procurement process, as would be required, not for a land transaction, or transaction whose “main object” was a land transaction, but for a public works contract. A challenge in this respect also failed at first instance, but has been pursued on appeal.

The Court of Appeal has now given a Judgment which is important in a number of respects in Faraday Developments Ltd v West Berkshire Council (2018) EWCA Civ 2532, Judgment delivered on 14 November 2018, and concerned with a major regeneration site in Newbury. The first instance decision on the procurement issue has been overturned. Moreover, a VEAT notice was regarded as ineffective, and a declaration of ineffectiveness was made. However, the “dissuasive” financial penalty was £1.

The main issue was whether there was no public works contract within the procurement regime because there was no binding obligation upon the developer under the conditional development agreement, but rather an option for the developer to draw down parcels of land under long leases, before there would be any obligation to carry out any works/develop the land.

The decisions of the Court of Appeal included that:-

  1. The development agreement was not a public works contract at the time when it was concluded, because it contained no immediately enforceable obligations to carry out works. Contingent obligations did not suffice, at any rate where the relevant contingency lay within the contractor’s control
  2. Nor was it a public services contract, even though it included immediate services obligations, because the “main object” of the agreement was the carrying out of works;
  3. However, entry into the development agreement was still unlawful, because looking at the substance of the arrangements taken as a whole, they involved the Council in committing itself to the procurement of works from the developer: if the developer did draw down the land, a public works contract would come into being, and it would then be too late to carry out the required procurement, and this was both a breach of the Public Contracts Regulations (actual or anticipatory), and a breach of public law (because it involved the Council in effect agreeing to act unlawfully in the future).

The Court of Appeal distinguished the ECJ decision in Case C-451/08 Helmut Muller, the Commission decision in Flensburg, and High Court decisions in R (Midlands Co-Op v Birmingham City Council (2012) EWHC 620 (Admin), (2012) LGR 39, and AG Quidnet Hounslow LLP v Hounslow LBC (2012) EWHC 2639 (TCC). See Faraday at paragraphs 23 and 34-36, 44, and 52-53.

Lindblom LJ said:-

“44.      … we must keep in mind the underlying principles in the public procurement legislation, as they have been applied in the cases, and apply them with realism and common sense to the circumstances here.”

“46.      The case law … has developed the concept of relevant “obligations” in this context. It is clear from the jurisprudence that a transaction will not fall within the definition of a “public works contract” unless it involves the contractor assuming an obligation. But a question left unresolved by specific authority is the defining quality of a relevant obligation, and, in particular, whether or not it must be an obligation that is immediately enforceable.”

“49.      … a contingent obligation, or an obligation that is not immediately enforceable at law, is generally not a relevant obligation for the purposes of the definition of a “public works contract”, at least where the contingency or the enforceability of the contract rests in the control of the developer. …”

“53.      … In this case, … when it entered into the development agreement, the council was not exercising any of the functions of a local planning authority under the statutory planning scheme. It was entering into a contract whose essential object was the execution of the works for which it provided. It therefore fell within the scope of the public procurement regime.”

“57.      … If the development agreement was not a “public works contract” on the day it was entered into, because St Modwen was not then under an immediately enforceable obligation to carry out development, it will nevertheless become a “public works contract” once the option is exercised, the land is drawn down, and binding obligations, for consideration, are triggered.”

“60.      … the court must comprehend the whole content of the agreement at the date of its being entered into, and establish whether, at that date, it embodied defined obligations that will, once they take effect, compose a “public works contract”. … The touchstone, … is whether, in substance, the agreement in question, at the date it is concluded, provides for a relevant procurement.

“61. In this case, judged by that test, the development agreement clearly did provide, at the date it was entered into, for a procurement by the council of the development it was intended to deliver. At that date, no further act of procurement by the council remained to be done, for which a lawful public procurement procedure could later be conducted. The time for that had passed. When it entered into the development agreement, the council had nothing more to do to ensure that a “public works contract” would come into being. It had, in fact, done all that it needed to do to procure. It had committed itself contractually, without any further steps being required of it, to a transaction that will fully satisfy the requirements of a “public works contract”. It had committed itself to procuring the development from St Modwen. The development agreement constitutes a procurement in its result, and a procurement without a lawful procurement procedure … The procurement crystallizes when St Modwen draws down the land. The ground lease entered into by St Modwen will contain an unqualified obligation to carry out works, and a corresponding obligation will also be brought into effect in the development agreement itself. The development agreement made that commitment on the part of the council final and provided also for a reciprocal commitment on the part of St Modwen. It did so without a public procurement process, and without affording any opportunity for such a process to be gone through before the “public works contract” materializes. At that stage it would be too late. Thus a “public works contract” will have come into being without a lawful procurement process. The regulation of the council’s actions in procuring the development will have been frustrated.

“62. By entering into the development agreement, therefore, the council effectively agreed to act unlawfully in the future. In effect, it committed itself to acting in breach of the legislative regime for procurement. As Mr Giffin submitted, that is in itself unlawful, whether as an actual or anticipatory breach of the requirements for lawful procurement under the 2004 Directive and the 2006 regulations, or simply as public law illegality, or both. The only other possibility would be that a contracting authority is at liberty to construct a sequence of arrangements in a transaction such as this, whose combined effect is to constitute a “public works contract”, without ever having to follow a public procurement procedure. That would defeat the operation of the legislative regime.

“63. Those conclusions do not, in my view, offend any principle in the authorities. They sit well with the approach evident in the relevant decisions of the Court of Justice of the European Union, which requires the national court to look at the real substance of the transaction, and to view the several stages of a “multi-stage” process as a whole. In this case that entails not only a first stage, comprised in the development agreement itself, but also a second stage provided for in it, which is initiated when the option is exercised and land is drawn down by the developer. In that second stage the developer’s obligation to execute the works is effective, and the public works performed. Inherent in this two-stage process is a public procurement. The breach … occurs when the land is drawn down by St Modwen. At that point the council retains its contractual control over the content of the works, but has no further control over the award of the contract for their execution. Once the option is exercised, the council is obliged to enter into a long lease, and St Modwen is obliged, under both the lease and the development agreement, to bring the works to fruition.

“64. Doubtless there were good commercial reasons for the parties constructing the development agreement as they did, not least the flexibility it provided against the risk borne by St Modwen. But this cannot undo the conclusion that there was here a procurement of development that did not undergo the requisite procurement procedure.”

The issue therefore arose whether the remedy of a declaration of ineffectiveness was precluded by the Council’s VEAT Notice. The Court of Appeal held that it was not, applying Case C-19/13, Fastweb. The VEAT Notice, in referring to a land transaction and to binding obligations being absent, did not mention the detailed provisions for the design and execution of a large development, and so did not sufficiently indicate the nature of the transaction.

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