The case of R (Faraday Development Ltd) v West Berkshire Council and another [2016] EWHC 2166 (Admin) will be of interest to local authorities and developers alike as it provides detailed guidance on how a land development agreement can be structured so that the resulting contract is outside the scope of public procurement law.

Background

The case concerned a judicial review of West Berkshire Council's (WBC) decision to enter into a development agreement with St Modwen Developments Limited (SMDL) in relation to the redevelopment of a site in Newbury.

The development agreement was entered into following a non-regulated bidding process. It required SMDL to produce project plans for the site and negotiate outstanding land interests, but only included an option for SMDL to acquire an interest in the land and undertake works.

Faraday Development Limited (FDL), a member of the joint venture company that had been unsuccessful in the bidding process, challenged the decision on the following grounds:

  1. WBC had breached its obligation under section 123(2) of the Local Government Act 1972 not to dispose of land for consideration less than the best that could reasonably be obtained.
  2. WBC’s decision not to follow a regulated procurement process was unlawful because the development agreement was a public contract under the Public Contracts Regulations 2006.
  3. WBC acted unlawfully by deliberately deciding not to impose an enforceable obligation on SMDL to carry out works on the site in order to avoid the application of procurement law.

The High Court dismissed all three grounds of claim.

Ground 1

In dismissing FDL’s argument that WBC had breached its duty under section 123(2), the Court found that WBC’s intention to maximise its returns from the site was evidenced through the professional advice it sought as well as within the tender documentation, which included references to its duty under section 123. This clearly showed that WBC had its duty under section 123 in mind.

FDL also argued that WBC acted irrationally in not probing SMDL’s and FDL’s financial proposals further when it was advised there was insufficient financial information to choose between the two bids. It was held that given the complexity and future uncertainties of the project, it was entirely rational for WBC not request further details. In the circumstances, WBC was entitled to focus on the experience and expertise of SMDL and FDL in order to form a view as which of the bidders would be likely to address those uncertainties best. Assessing the experience and expertise of the bidders was directly relevant and critical to WBC meeting its obligation under section 132(2).

Ground 2

Following the test in Helmut Muller, the Court provided that the development agreement would only constitute a public contract and therefore fall within the scope of public procurement legislation if:

  1. the “main object” of the development agreement corresponded to the definition of a public works contract, a public goods contract or a public services contract. This is to be determined by an objective examination, of the entire transaction, having regard to the essential obligations which predominate and characterise the transaction
  2. the development agreement included an enforceable obligation on the developer to carry out that main object (eg works)
  3. the other requirements of the procurement legislation were met (eg thresholds).

Main object

It was held that the main object of the development agreement was to facilitate the regeneration of the site to maximise WBC’s financial receipts.

The Court rejected FDL’s claim that the agreement was a public works contract as obligations and the option in the agreement amounted to an indirect obligation on SMDL to undertake works.

Neither was the agreement a public services contract as the provision of the project planning and negotiation services was not an end in itself. The services were intended to facilitate the main object of the agreement (see above).

The development agreement did not therefore meet “main object” limb of the test.

Enforceable obligation

In relation to the second limb, the Court held that there was no enforceable obligation on SMDL to undertake works as SMDL could choose not to carry out works on the site by not acquiring an interest in the land.

The Court appeared to take little notice of FDL’s claims that the commercial realities of the arrangement meant that SMDL was highly likely to acquire an interest and undertake the works. This is in line with the High Court judgment in Midlands Co-operative case, which found no enforceable obligation to undertake works, even though the developer would lose its right to acquire the land and the price it had already paid for the acquisition (50% of the purchase price), if it did not proceed with the works.

The Court therefore held that the development agreement was not a public contract subject to public procurement law.

Ground 3

FDL claimed that WBC’s decision to deliberately avoid having to comply with public procurement legislation was irrational as it was based on advice that it would receive a more positive response from the market by running a non-regulated tender process. This, in FDL's view, was a fundamental misconception of the public procurement regime.

The Court rejected this argument. It acknowledged that public procurement processes are onerous for participants and, given the uncertainty involved in the arrangement, it was not irrational for WBC to deliberately structure the agreement so that it fell outside of the scope of procurement law.

Conclusion

The case reinforces the view that the scope of the public procurement rules will not extend to development agreements provided that they are structured so that they are not classed as public contracts and/or do not include an enforceable obligation on the developer to undertake works.

However it will be important to structure the agreement carefully because the risks of getting it wrong and a contract being held to be a public works contract are severe.

The case also highlights the importance being clear in agreements, tender documents and internal communications on the key objectives of the local authority in entering into development agreement and the value of experts in helping the authority show it has met its duty under section 123.