R (Midlands Co-Operative Society Ltd) v Birmingham City Council & Tesco Stores Ltd8
Proper planning can avoid procurement problems developing. The recent case of R (Midlands Co-Operative Society Ltd) v Birmingham City Council & Tesco supports the notion that a development agreement can be intentionally structured so as not to invoke the procurement rules.
Following the cases of Müller and Commission v Spain, this recent case considers the application of the Public Contracts Directive in the context of planning and development. It offers helpful reassurance for councils engaging their planning powers in order to develop land, that a section 106 agreement of itself (subject to the precise terms and conditions) will not constitute a public works contract.
In this case, the contracting authority, Birmingham City Council (the Council) wished to redevelop a site just outside Birmingham. The land was comprised of various parcels of land, with different owners, including a bowling and community centre owned by the Council. The Council accepted that, if the site were developed, the community facilities would need to be relocated.
Both Midlands Co-Operative Society (the Co-Op) and Tesco Stores Ltd (Tesco) were granted planning permission to develop the site, and both signed section 106 agreements that they would provide replacement community facilities as part of the planning permission.
The background to the decision involved a three stage process on the part of the Council.
Initially, the Council undertook a competitive tender process between the Co-Op and Tesco, in order to choose the development partner. The tender documentation included the obligation to provide replacement community facilities, and to develop the land within a specific timeframe. Tesco was chosen as the preferred developer, but as these obligations appeared to go beyond the exercise of mere planning requirements, the Co-Op challenged the decision (via judicial review) on the basis that the contract constituted a public works contract, such that a full procurement process (under the Public Contracts Regulations 2006) should have been applied. Having taken legal advice, the Council decided to terminate the tender process.
A second tender process was initiated. The Co-Op did not submit a bid, and Tesco’s tender was not compliant.
The third tender process was an open tender process, intended to sell the land (so a land transaction, divorced from the development obligations), and Tesco was successful. It was granted new planning permission. Although the new s106 agreement used different language to the original, it still continued to impose obligations on Tesco. However, such obligations only applied if Tesco chose to implement the planning permission and develop the site.
The judge considered the definition of a “public works contract”.
An essential characteristic of a public works contract is a binding and legally enforceable obligation on the contractor to execute relevant works as specified by the contracting authority. This is supported by case law and OGC Guidance. Following the Müller decision, the requirement for the contractor to assume a legally enforceable obligation was also found to be “an essential element”.
As the current s106 agreement would only be triggered if Tesco chose to implement the development (and there was no obligation on Tesco to do so), there was no such binding obligation in the present case.
What may be of specific interest to Councils considering similar transactions is that, as part of its argument, the Co-Op claimed that as the first tender process had potentially breached the procurement regulations, the Council had “sought to find a way around them”.
On this point, the judge found that “that was not a fair way of putting it”. In his view, the Council had a choice. It had the ability to impose specific development obligations on the contractor (which would necessitate compliance with the procurement rules) or it could accept the disadvantage of having to detach the sale of the land from any binding development obligations, in order to ensure that the transaction fell outside the scope of those rules. The Council should therefore not be criticised for formulating a strategy with regard to the development of the site that, whilst having other downsides (including an absence of development obligations it could enforce against the successful tenderer), avoided the onerous obligations of the 2006 Regulations.