The EU Court of Justice has delivered a significant new judgment concerning the application of the EU procurement rules to urban regeneration projects. In Case C-306/06 Commission v Spain, the European Commission claimed that land development agreements provided for under a Spanish regional law constituted public works contracts and so had to be subjected to EU-wide tendering procedures. The EU Court, however, reached the opposite conclusion and dismissed the Commission's action.

This latest judgment (along with the Helmut Muller ruling last year) helps to allay concerns originally raised by the Court's 2007 judgment in Auroux v Roanne, which appeared to favour a much wider application of the EU procurement rules to land development agreements. Local authorities and property developers should nonetheless remain alert to the risks of non-compliance in this area, given the ongoing enforcement efforts of the Commission in other cases and the risk of an interested third party seeking an "ineffectiveness order" before the High Court.

The earlier Auroux and Helmut Muller cases

In case C-220/95 Auroux v Roanne, a French local authority entered into a public development agreement which provided for construction of a new leisure centre and various other works. The developer would acquire land, organise an architectural competition, manage construction and procure funding for the project. The EU Court ruled that the development agreement constituted a "public works contract" which had to be put out to tender under the EU procurement directives. It made no difference that the authority would not acquire ownership of the leisure centre, or that the developer would not execute the works itself but would have them carried out by subcontractors. It was also no defence that the developer itself would apply the directive's tendering procedures when awarding the sub-contracts for work.

By highlighting the wide reach of the EU procurement regime, the Auroux judgment raised serious concerns among local authorities and developers alike. It caused some authorities in the UK to put their urban regeneration projects on hold, so that competitive tendering procedures could be organised under the Public Contracts Regulations 2006.

Some of the concerns raised by the Auroux case were allayed by the EU Court's ruling in March last year in case C-451/08 Helmut Muller Click here. In that ruling, the EU Court made clear that the procurement rules apply only where works are to be carried out for the authority's "direct economic benefit" and where the authority has defined the works in a way that goes beyond the mere exercise of its planning powers.

The EU Court's new ruling in Case C-306/08 Commission v Spain

The Commission v Spain case concerned urban development regulations laid down by the Valencia Region of Spain. These regulations provided for the award of "integrated action programmes" ("IAPs") to developers wishing to develop land. The appointed developer became the public agent responsible for financing and managing the works, installations and compensation necessary for implementation of the programme. The owners of the land concerned by an IAP could cooperate by contributing their land plots to the developer or by paying to the developer a proportion of the development costs in cash. Where necessary, the local authority would exercise compulsory purchase powers, either on its own motion or at the developer's request.

Following complaints from third parties, the European Commission commenced infringement proceedings against Spain. The Commission alleged that each IAP amounted to the award of a public works contract under EU procurement Directive 2004/18 and that various aspects of the procedure for awarding and approving IAPs under the Valencian regulations infringed that Directive. The Commission claimed that the principal object of the IAPs was the execution of public infrastructure and urban development works. It also argued that it made no difference that the developer would entrust execution of the works to a building contractor, since it is the developer who manages those works.

In its recent ruling, the EU Court of Justice dismissed the action by the Commission. The Court ruled that the Commission had not established that works constituted the main object of the contract between the local authority and the developer. The Court noted that the execution of the IAP included activities which could not be classified as "works", including preparation of the development plan, management of the corresponding land consolidation project, appropriating land for public ownership and financing the costs of works and other investments necessary for execution of the IAP. The developer also had to organise the public competition for appointment of the building contractor who would execute the works in question. The Court concluded that the Commission had not proved that the contract between the local authority and the developer amounted to a public works contract.

Comments

On its face, this latest ruling by the EU Court of Justice provides reassurance to local authorities and developers alike, by limiting the extent to which land development arrangements are caught by the EU procurement rules. The arrangements foreseen by the Valencian regulations appeared to bear the hallmarks of development agreements that are typically entered into between local authorities and developers in the United Kingdom. Although the developer would not itself physically execute the works, it would take overall responsibility for assembling the land and instigating, financing and managing the overall regeneration scheme. The Court had implied in Auroux v Roanne in 2007 that this type of development agreement was caught by the EU procurement directives, whereas this latest ruling reaches the opposite conclusion.

Local authorities and developers still need to proceed with caution before drawing too much comfort from the EU Court's latest ruling. The judgment hinged on the complex facts surrounding the regional laws in question and the Court might have reached a different conclusion if the Commission had argued its case more convincingly or presented better evidence. Furthermore, it seems unlikely that this setback for the Commission will deter it from seeking to apply the procurement rules to land development projects in other contexts.

The Commission's continued efforts to apply the procurement rules to land development agreements were illustrated on 19 May, when the Commission announced that the Dutch government had agreed to apply EU procurement rules to certain local land development agreements. The Commission had raised objections when the Dutch municipality of Ede awarded several contracts related to a land development project to one developer, without carrying out a pan-European tender. The development included the provision of a sports hall, over 1,000 parking spaces and 650 houses, including 60 for social housing. Following the Commission's intervention, the Dutch authorities decided to annul the contractual provisions relating to the sports hall, parking spaces and housing, so that the revised contract solely concerned the sale of land and not the provision of works.

Last year, the Commission closed a similar case against the UK, after York City Council agreed to open to competition a residential development project. Another infringement case on land development in the Dutch city of Eindhoven is still pending before the EU Court.

It should also be recalled that, when a local authority enters into a development agreement which falls within the EU procurement rules, the consequences of failing to advertise the opportunity in the EU Official Journal ("OJEU") are potentially very serious. Under amending regulations introduced in late 2009, an interested third party may ask the High Court to declare the development agreement to be "ineffective" and to impose a fine on the authority Click here.

Both the public authority and the preferred developer therefore need to be very confident in their assessment that their agreement falls outside the procurement rules, before they proceed with an agreement which was not subject to a prior OJEU notice and competition. It may be prudent for the authority to publish a so-called "voluntary transparency notice" in the OJEU, explaining why no prior competition was held. Moreover, the parties would be well-advised to agree contractual provisions which spell out their respective rights and obligations in the event that a third party launches a successful procurement challenge.