A recent case in the EU General Court serves as a reminder that all parties involved in the development of public sector land need to be aware of the risks associated with State aid.

The case the Netherlands v the European Commission (30 June 2015) involved an appeal against a Commission Decision that the renegotiation of a PPP agreement involved unlawful State aid by reason of the price of the land value being reduced considerably (as compared to the contractual agreed position) and certain agreed fees being waived.

The Court found that the Commission’s analysis of the land valuation was deficient insofar that it had failed to take account of the actual value of the land at the point at which the renegotiation occurred (the actual land value had declined considerably).  The Court also decided that the Commission had not adequately assessed the legal position of the municipality involved in the transaction correctly.  In assessing whether there was aid the Commission applied the usual approach of considering how a hypothetical private market investor would have conducted itself in the same circumstances.  The Court ruled that a private market investor would have had regard to issues such as the complexity of the scheme, the strong contractual position enjoyed by the PPP partner, the risk associated with litigation, and the potential return from delivering the scheme sooner (albeit with some waived fees).  It was also significant that if the opportunity was to be retendered, the lower land value may have meant that no better commercial offer was available in the market place anyway.  As a consequence the Court found that there was no unlawful State aid.

How to ensure that a transaction is compliant with the State aid rules

The first point of reference should always be the Commission’s “Communication on State aid elements in sales of land and buildings by public authorities”.  This document provides general guidance about how public authorities can ensure that their disposals of land comply with the State aid rules.  In general the communication provides two mechanisms to ensure compliance.  Firstly, through holding a well publicised and unconditional bidding procedure.  Secondly, market value can be established by means of an independent expert’s report.  In practice most local authorities will obtain a valuation prior to any disposal in order to be certain that they have obtained “best consideration” in accordance with their Section 123 duty (under the Local Government Act 1972).

Where the parties are contemplating a renegotiation, an important lesson from the case is that (A) the State aid rules should be carefully considered before proceeding with any change and (B) that the actual valuation in the market of the land concerned, at the point in time that the change is made is likely to be a highly relevant factor when considering the risk associated with the change.

A further consideration, where the arrangement in question has been procured in accordance with the Public Contracts Regulations 2015, is whether the change is “material” for the purposes of procurement law (see the recent Winchester case).

What are the risks?

If a transaction is found to be unlawful as a result of State aid there is the possibility that it could be challenged in the UK Courts by way of judicial review.  A low-cost option for parties aggrieved by the transaction is to alert the Commission to the possibility of there being unlawful aid and request that they investigate.  If the Commission determines that there has been unlawful aid, then it can require the Member State to recover any unlawful aid from the recipient.  In the context of a land transaction at a below market price, this could mean that a local authority seeks to recover a sum equal to the amount by which the disposal was undervalue.