A recent High Court decision (R (Faraday Development Limited) v West Berkshire Council and another [2016] EWHC 2166 (Admin)) provides an interesting examination of the interrelation between procurement law and land development. The case concerns a judicial review of West Berkshire Council (“WBC”)’s decision to enter into an agreement to develop a site in Newbury. A rival bidder, Faraday Development Limited (“Faraday”) (who was not selected as a result of the non-regulated tender process), brought the claim on three grounds:

1.WBC failed to acquire the best consideration reasonably obtainable for the disposal of land, contrary to its obligation to do so under s.123 of the Local Government Act 1972 (“LGA 1972”).

2.The development agreement was a public contract (per the Public Contracts Regulations 2015 (“PCR 2015”)) and therefore WBC’s actions in not following a regulated procurement process were unlawful.

3.WBC’s deliberate circumvention of procurement law requirements by not imposing an enforceable obligation on the selected developer (St Modwen Developments Limited (“SMDL”)) was unlawful.

All grounds were dismissed by the High Court.

Ground 1 - Alleged breach of duty under s.123 LGA 1972

WBC had a duty to obtain the best consideration reasonably obtainable for the land. Faraday claimed that this duty was not met and that WBC failed to assess the financial estimations of the tenderers in adequate detail. It was also claimed that too much emphasis was placed on WBC’s objective of regeneration (in this case, boosting employment) and the ability of the tenderers to deliver their proposals.

The Court held that the s.123 duty was not breached. It was found to be perfectly acceptable that WBC’s aims were increasing employment and improving revenue streams from the site and that these objectives were not incompatible with the duty to obtain best consideration. WBC’s aim of maximising returns was evidenced by the professional advice it had obtained; references to s.123 were also made in this advice. It was sufficient, in this instance, for WBC to have considered the s.123 duty, and to have prioritised future revenues as a way of satisfying the requirement for best consideration.

Given the uncertainties and complexity surrounding the future of the development, the Court was unwilling to criticise WBC for not requesting more in-depth financial information on the tenderers’ estimates. Having regard to the expertise and relevant experience of the various tenderers (beyond simply the bottom line) was found to be justified.

Ground 2 - Alleged non-compliance with procurement regulations

It was argued by Faraday that the development agreement between WBC and SMDL (the successful bidder) amounted to a public works contract and that, as such, it was subject to the tendering procedure under the PCR 2015.

The Court turned to the three-part test in Helmut Muller to establish whether the agreement fell within the scope of public procurement legislation. The first two parts of the test were considered applicable:

1.The ‘main object’ of the agreement must correspond to the definition of a public works contract, a public goods contract or a public services contract.

-This limb failed as the ‘main object’ of the contract was not the provision of works or services; it was to maximise WBC’s financial receipts from the site.

2.The development agreement must contain an enforceable obligation on the developer to perform the works. 

-This limb also failed. SMDL remained free to “walk away” from the contract as the obligation to acquire and redevelop the land was optional. Faraday had no success with the argument that the commercial reality of the situation virtually guaranteed that SMDL would undertake the works.

It was therefore held that the development agreement was not a public contract subject to the procurement regulations.

Ground 3 - Deliberate avoidance of the procurement regulations

By avoiding the imposition of enforceable obligations on SMDL, WBC circumvented the public procurement regime and made the project more attractive to external parties. Faraday contended that this was unlawful and irrational. The Court acknowledged the onerous nature of the procurement regime and accepted that it was absolutely reasonable of WBC to improve the market appeal of the arrangement. The need to stimulate market interest in this way was, given the degree of uncertainty involved, deemed to be both rational and justified.

Deliberately structuring the agreement so that it fell outside the scope of procurement law was held to be a pragmatic and lawful course of action, as WBC had a rational basis for doing so.

Practical Points

  • The Court is prepared to take a pragmatic approach to the obligation to secure best consideration under s.123 LGA 1972.
  • It is important to be able to demonstrate that the s.123 LGA 1972 duty has been considered – in this instance by commissioning expert advice.
  • It is acceptable to deliberately structure development agreements to avoid them being classed as public contracts, thus sidestepping the procurement regime.
  • Drafting agreements so that there is no enforceable obligation on the developer to undertake works may also help to avoid procurement rules.
  • Development agreements should be carefully drafted to take account of councils’ key objectives.