On 26 August 2016, the High Court dismissed an application for judicial review of West Berkshire District Council’s (the Authority’s) decision to enter into a development agreement with St Modwen Developments Limited (SMDL). The Claimant, Faraday, sought to challenge the Authority’s decision on the grounds that the Authority had (inter alia) not complied with its duty to obtain best consideration under section 123 of the Local Government Act 1972 and that the agreement should have been procured in accordance with the Public Contracts Regulations 2015. Mr Justice Holgate dismissed Faraday’s application on all grounds and refused permission to appeal.
For contacting authorities and developers, this case provides helpful guidance on how development agreements can fall outside the public procurement rules as well as the factors that can be taken into account in considering whether best consideration has been obtained.
In relation to best consideration, the Court considered the entire process undertaken by the Authority and found that the Authority had plainly considered its statutory obligation to achieve the best consideration reasonably obtainable based on the evidence of the Authority’s desire to maximise its returns.
As regards the procurement aspects, the Court found that the agreement was a contract to facilitate regeneration by the carrying out of works of redevelopment and to maximise the Authority’s financial receipts. The provision of services did not represent the main purpose, but simply facilitated the Authority’s regeneration and financial objectives. Furthermore, as there was no legally enforceable obligation on SMDL to carry out any works, it was also not a “public works contract” for the purposes of the public procurement rules.
Faraday was created in 2014 as a special purpose vehicle to assemble land within an area for which the Authority was largely the freehold owner (the Regeneration Site) and held long leaseholds from the Authority for certain areas of the Regeneration Site.
Faraday entered a joint venture agreement for future redevelopment of the Regeneration Site with Wilson Bowden Developments Limited (WBD) and obtained planning permission for the mixed-use “Faraday Plaza Scheme”. By April 2011, Faraday and the Authority had drafted a long lease and agreed heads of terms with potential occupiers.
At the beginning of 2011, the Authority commissioned a Strategic Feasibility Study (SFS) of the Regeneration Site and issued a specification to enable consultants to bid for the task. In late May 2011, Strutt & Parker (S&P) was appointed by the Authority to prepare the SFS.
At its meeting in September 2012, the Authority’s Executive accepted S&P’s SFS including a recommendation that S&P be commissioned to produce an Opportunity Document to enable the Authority to test market interest in the redevelopment of the Regeneration Site and to find a suitable development partner. Following approval by the Authority’s Executive on 17 January 2013, the Opportunity Document was given to interested parties on 23 January 2013 and also advertised in Property Week and Estates Gazette. S&P received 10 responses in total. Given the level of market interest, the Authority proceeded to the next stage of shortlisting 6 candidates to become the development partner. Following interviews, S&P and the Authority identified a shortlist of three potential developers including St Modwen Developments Limited (SMDL) and WBD/Faraday.
In March 2014, the Authority chose SMDL’s bid, citing little to choose between the financial submissions, but a lower overall risk in SMDL’s proposal. On 14 August 2015, the Authority issued a VEAT Notice stating that it considered the agreement to fall outside the procurement regime. A review of the VEAT Notice cites the following reasons:
- the agreement places no binding obligation on SMDL to undertake any works;
- the Authority has not specified the requirements for any works; and
- the Authority does not exercise a decisive influence (nor indeed any influence) on the type or design of any works:
- the contract is not a ‘public services contract’;
- any services to be provided by SMDL are merely incidental to the main object of the agreement, namely an exempt land transaction; and
- in the event that any services had not been merely incidental to the main object of the agreement, the services would nevertheless have classified for the purposes of public procurement law, as a service concession in that SMDL would bear the risk of providing any such services and any consideration payable to it for the provision of the same would depend upon SMDL’s exploitation of the subject-matter of the project.
The Development Agreement
On 4 September 2015, the Authority and SMDL entered into the development agreement (the Agreement). The Agreement imposed an initial obligation on SMDL to prepare project plans for the Steering Group's approval including a business plan and a master plan covering the whole of the Regeneration Site, setting out development plots, sites to be retained, initial infrastructure works and a land appraisal. It was a matter for SMDL to propose the content of the plans and strategy documents and risks were borne by SMDL and not the Authority. In addition, the plans and development strategies were required to be consistent with the market, maximise returns to and secure best value for the Authority. The Agreement was structured to ascertain best value.
Grounds of Challenge
Faraday applied for judicial review of the Authority’s decision to enter into the Agreement on the following grounds:
- the Authority failed to comply with its duty under section 123 of the Local Government Act 1972 to obtain the best consideration reasonably obtainable for the disposal of interests in its land;
- the Authority failed to comply with the Public Contracts Regulations 2015 (the 2015 Regulations); and
- the Authority deliberately sought to avoid imposing obligations on SMDL to carry out or procure works on the Regeneration Site, so as to avoid the 2015 Regulations, on the basis that this would increase market interest in the Agreement. That was irrational because it was founded on (i) a misunderstanding of the advice given to the Authority by its experts; and/or (ii) a fundamental misconception of the procurement regime.
Ground 1: Failure to obtain best consideration
Mr Justice Holgate concluded that, in light of the contemporaneous material, it was self-evident that the Authority did have in mind its obligation under section 123(2) to achieve the best price reasonably obtainable for the following reasons:
- First, there were explicit references to the statutory provision or to the substance of that provision.
- Second, the Authority’s consideration of the opportunities for redevelopment and the bids it received was the maximisation of the receipts it would obtain from its landholding.
- Third, the Authority did not treat employment generation as part of the consideration it would receive on a disposal of an interest in its land or as in some way offsetting the obligation to obtain best consideration. The Authority was seeking to maximise its income in the future from an estate that needed to be redeveloped taking into account the lack of investment for 40 years, the age of the existing buildings, their limited life and unsuitability to satisfy modern business requirements. The Authority as landowner had to proceed on the basis that redevelopment proposals would fall to be assessed against the planning policies for the Regeneration Site which promote its regeneration.
- Fourth, the evidence plainly showed that the Authority’s twin objectives (of securing increased employment and improving revenue stream from the Regeneration Site) were entirely compatible with compliance with its duty under section 123(2).
- Fifth, the Authority had received proper professional advice throughout on how to protect and maximise their income from the Regeneration Site.
Ground 2: Failure to comply with the 2015 Regulations
Mr Justice Holgate considered whether the Agreement was a “public contract” to which the 2015 Regulations applied and observed that a contract with a contracting authority only falls within the 2015 Regulations if its main object corresponds to one of the three defined types of “public contracts” in Reg. 2(1), namely “the execution of works, the supply of products or the provision of services”. If the execution or realisation of “works” is ancillary to the main purpose of the contract, that agreement cannot be a “public works” type of public contract. Citing Commission v Italy, Mr Justice Holgate agreed that the “main purpose” of a contract must be determined by “an objective examination of the entire transaction to which the contract relates.”
In determining whether the Agreement was a “public contract” to which the 2015 Regulations applied, Mr Justice Holgate set out a helpful step-by-step approach to resolving the issue:
- What is the main object of the contract having regard to (a) the transaction as a whole and (b) any obligations which are essential to the transaction?
- Does that main object correspond to the definition of one of the three types of public contract?
- If the answer to (ii) is no, then the contract falls outside the scope of public procurement legislation;
- If the answer to (ii) is yes, is the contractor under an enforceable legal obligation to carry out that main object (e.g. works) which is legally enforceable by the contracting authority?;
- If the answer to (iv) is no, then the contract falls outside the scope of public procurement legislation. If the answer to (iv) is yes, then the contract may fall within the scope of that legislation subject to applying other criteria (e.g. the definition of public contracts, the threshold values and the exclusions from the procurement regime).
The Claimants submitted that the Agreement imposed a number of direct obligations upon SMDL dealing with (inter alia) master planning and obtaining planning approvals, and which led to an option for SMDL to draw down land. If such an option were exercised, it would result in SMDL becoming under an enforceable obligation to carry out works. This, the Claimants submitted, was sufficient to qualify as an indirect obligation on SMDL to carry out public works and engage the procurement regime. Mr Justice Holgate was unprepared to accept that such an approach was justified on an anti-avoidance principle. He held that the procurement legislation did not contain any general anti-avoidance principle. Instead the question was an objective one: irrespective of whether the parties intended their agreement to fall inside or outside the public procurement regime, did the contract fall within the legal definitions of a “public contract”?
Furthermore, Mr Justice Holgate noted that the Agreement did not contain a deferred obligation on the part of SMDL to carry out redevelopment works. Rather the Agreement was plainly analogous to option arrangements which fell outside the scope of the procurement regime. The option to draw down land following completion of the preparatory steps were perfectly understandable; given the risks that SMDL bore, it should have the option of not going ahead with the purchase/lease and redevelopment of a particular lot. Likewise, the obligation to carry out development contained in any ground lease or freehold transfer which SMDL elected to take could not be described as artificial or as forming part of a device to avoid the procurement legislation.
Main object of the agreement
The Claimant’s primary case was that the main object of the contract was “both the design and execution of works.” Mr Justice Holgate held that where an agreement concerns the “design and execution” of works, it was not sufficient if the developer had an obligation to design the works. The “execution” of the works was an “essential ingredient”. In the present case, SMDL was not subject to a legally enforceable obligation to “execute” the works, whether direct or indirect. This was sufficient for the Court to decide that the Agreement did not fall within the “design and execution of works” definition of a “public works contract”.
Mr Justice Holgate also rejected the Claimant’s arguments that the Agreement was for the “realisation, by whatever means” of a work (part (c) of the definition of “public works” contracts in Regulation 2(1) of the 2015 Regulations). Mr Justice Holgate was unprepared to accept this argument as the “enforceable legal obligation” requirement laid down in Helmut Müller was not satisfied. Furthermore, whilst it was common that this requirement could be met by the public authority exercising “decisive influence” over either the “type of the work” or “design of the work”, the Agreement did not require the works being provided to correspond to requirements specified by the Authority exercising a decisive influence over either the type or the design of the works.
The suggestion that the single main object of the Agreement was the “provision of services” was also held to be wholly untenable. That would depend upon the provision of those services being an end in itself, which was plainly not in this case. The services that SMDL had to provide under the Agreement were “intended to facilitate the regeneration or redevelopment of the [Regeneration Site] so as to maximise the Authority’s financial receipts... The achievement of that regeneration or redevelopment is undoubtedly a main object of the [Agreement], notwithstanding that the [Authority] decided to achieve it by reliance upon the non-binding assurance provided by SMDL’s proven experience, expertise and commercial commitment to bring it about, rather than a legal obligation.”
Referring to the Information Note 12/10 issued on 30 June 2010 by the Office of Government Commerce in the UK – Public Procurement Rules, Development Agreements and s106 Planning Agreements Guidance (the Note), Mr Justice Holgate observed that the Note identified a spectrum of circumstances which may need to be considered on a case by case basis. The present case focused on two prerequisites for the 2015 Regulations to apply, namely, the "main object" of the contract and the "enforceable legal obligation" principle. Applying those two principles alone led to the conclusion that the Agreement fell outside the scope of the public procurement regime.
Ground 3: Decision to enter into agreement outside procurement regime was irrational
The Claimant further submitted that the Authority’s reason for entering into an agreement outside the public procurement regime was irrational on two grounds. First, the Authority misunderstood the advice it received from S&P in so far as it thought that it was being advised that the market appetite for the Regeneration Site would be enhanced by avoiding the OJEU process. Mr Justice Holgate held that this criticism was wholly untenable. The second complaint was that, even if the advice from S&P was correctly understood by the Authority, it was nevertheless irrational for the Authority to follow it. Mr Justice Holgate concluded that, having taken into account the long term uncertainties and risks of the project, it was perfectly rational for the Authority to accept the advice it had been given by S&P in order to stimulate market interest in the Regeneration Site and also to rely upon a commercial assurance that the redevelopment would be completed over time in accordance with the Agreement, based upon the expertise and past performance of SMDL and the credibility and deliverability of its bid. That was entirely a matter for the judgment of the Authority, with which the Court was not entitled to interfere.
This case provides helpful guidance on the meaning of a “public contract” and a useful approach to follow when determining whether a development agreement falls within the scope of the procurement regime. It also serves as useful reminder to contracting authorities on the importance of careful drafting of development agreements to mitigate the risk of potential procurement challenges.