Are you a public body that owns land and buildings?

Are you involved in the sale or leasing of publicly-owned land and buildings?

Do you know how to ensure your property transactions do not involve State aid?

Many public bodies find themselves involved in the sale or leasing of land and buildings in their ownership - whether this is part of site arrangements for regeneration projects and development projects or simply to generate a capital receipt or income from an under-used asset in times of shrinking public budgets.

The matters involved in any sale or leasing of publicly owned land and buildings are likely to vary on a case-by-case basis.  However, State aid compliance is an area that public bodies must always consider and address before proceeding to complete on any property transaction.

Why are the State aid rules relevant?

If a public body has sold or leased land or buildings to an economic undertaking (e.g. property developers and non-residential tenants) at less than the full market value it will have provided an economic advantage to the purchaser/tenant which is highly likely to amount to the grant of unlawful State aid.   

So… what must public bodies do to ensure that they comply with the State aid rules when selling or leasing their land or buildings?

The European Commission has been clear for a number of years that for property transactions by public bodies to be State aid compliant the public body must ensure that it achieves full market value for the transaction.  This is often referred to as the public body acting in accordance with the Market Economy Investor Principle ("MEIP") - i.e. acting in a comparable way to that of a private investor selling or leasing land or buildings in the same circumstances.

  1. Market value determined by placing the sale or lease on the open market and holding an unconditional bidding process.

The public body must advertise the sale/lease in the national or international press for a period of two months or more, with the advertising sufficient to attract European or international interest.  The buyer must also be free to decide how to use the land or buildings;

OR

  1. Market value determined by one or more independent asset valuers.

Holding an open, advertised bidding process will always provide public bodies with the most comfort that they have secured full market value as the transaction will have been tested by the market.  There will of course be occasions, for example where a developer is already in place on a project, where putting the sale or lease on the open market to determine the market value will not be an attractive option.  In these circumstances the public body will need to rely on the second method described above and must seek an independent valuation before proceeding. 

Helpfully, in a recent State aid case the General Court has upheld a clarification provided by the European Commission on the five (5) criteria to be applied when opting to secure State aid compliance in public sector property transactions through an independent valuation[2]:

  1. The valuation must be made prior to negotiation of the sale/lease; AND
  2. The valuation must be commissioned by the initial owner of the land or building (i.e. the public body); AND
  3. The valuation must be conducted by an independent third party; AND
  4. The valuer must have extensive experience in the property sector; AND
  5. The method of valuation must be credible, based on reasonable assumptions and the value must be fully explained rather than asserted.

Of particular note in the above criteria is the requirement for the valuation to be independent - public bodies should therefore take caution and refrain from using in-house services for the purposes of valuations for the sale or leasing of its land and buildings.

Provided a public body can demonstrate that the valuation(s) used for non-advertised property transactions satisfy all of the five (5) criteria set out above, the public body can take comfort that it has taken the necessary steps to accurately determine the market value of its land or buildings and mitigated the risk of the transaction involving State aid.

Not a public body but involved in public sector property transactions? 

As a developer or business tenant you may feel that you have got a good deal by securing land or buildings at less than their market value - but it should always be remembered that when the property transaction is with a public body any below market transaction will expose you to the risk of receiving State aid.  As the recipient of State aid it is you that will be responsible for repayment of any under value (plus interest)! 

It is therefore essential that all organisations involved in the purchase or rental of land or buildings from public bodies, or otherwise involved in public sector property transactions, take proactive steps to ensure that they do not receive State aid under the transaction.  Simple steps include:

  • If the sale/lease has not been advertised and you believe the value agreed with the public body is below market value - request confirmation from the public body on why the transaction is State aid compliant;
  • If the value has been agreed based on valuation(s) - request details of the valuation and ensure it satisfies all of the five (5) criteria set out above.