The Court of Justice of the European Union ("EU Court") has clarified the distinction between a lease and a public works contract. When a public authority enters into a lease, this usually falls outside the rules on public procurement. However, a so-called lease may be caught by those rules (and thus subject to competitive tendering) if the landowner/developer agrees to execute works on the site in accordance with the public authority's specified requirements. In Commission v Austria (Case C-537/19), the EU Court recently rejected a claim by the European Commission that an authority in Austria had awarded a public works contract when it entered into a long lease for a new office building which had not yet been constructed.

1. Key Points

  • The acquisition or rental of land or buildings is usually excluded from the procurement rules
  • However, the procurement rules will apply if a public authority has a decisive influence on the design of a building which has not yet been constructed
  • This will be the case where the specifications requested by the authority exceed the usual requirements of a tenant taking a long lease of a building
  • The EU Court found that various stipulations by the Austrian authority did not give it a decisive influence over the building's design, suggesting that this is a high bar to satisfy.
  • Despite Brexit, UK courts are likely to take this judgment into account when considering similar real estate deals in future.

2. The facts

Wiener Wohnen ("WW") is a public body that manages municipal housing in Vienna. In May 2012, WW agreed to lease multiple floors of an office building that had not yet been constructed, with a view to occupying those floors as its new head office. The lease was for an indefinite period, but WW had the right to terminate it after 25 years and then every 10 years.

The property consisted of two wings (A and B). The contract provided that WW would lease the first five floors of both wings of the building. WW also took up an option to lease the sixth to eighth floors in the B wing.

Following a complaint from a third party, the Commission investigated the matter and took the view that the lease constituted the award of a public works contract by WW to the site owner. The Commission considered that WW had an influence on the planning of the works at those premises which went well beyond the usual requirements of the tenant of a new building. The Commission therefore brought infringement proceedings against Austria, claiming that WW had breached its obligations under the EU procurement directive then in force, by failing to advertise its requirement for works or to hold a competitive tendering procedure. The case ended up before the EU Court.

3. Judgment of the EU Court

In its judgment on 22 April, the EU Court noted that the acquisition or rental of land or existing buildings by a public authority is excluded from the scope of the EU procurement directives. However, this exclusion does not apply if the main object of the arrangement is the execution of works which correspond to requirements specified by the authority and where the authority has a decisive influence on the building's design.

Such a decisive influence would be shown if the authority's specifications exceed the usual requirements of a tenant and relate to the architectural structure of the building, such as its size, external walls and load-bearing walls. Stipulations concerning interior fittings would only demonstrate a decisive influence if they were exceptional in their specificity or scale.

The Court found that the characteristics of the planned building (including bridges linking the two wings) had already been determined when WW first identified the building and decided to enter into negotiations for a lease. This proved that WW had no influence on the architectural design or planning of the A and B wings of that building.

The Court also held that it made no difference that a building permit had not been granted at the time when the lease was concluded, since it was standard commercial practice for the site owner or developer of a largescale architectural project to apply for a building permit only when it has commitments from future tenants for a significant part of the planned building.

It was the case that WW had laid down various specifications for the new building. These included requirements that:

  • lifts would go from the basement car park to the top floor,
  • the building would meet the "gold level" of a certification system,
  • the floors would have a specified height and load-bearing force,
  • air conditioning systems would be built into the ceilings, and
  • the building would meet non-binding standards for improving energy performance and reducing impact on the environment.

The EU Court held that these specifications, although numerous and detailed, did not go beyond what a tenant of an office building might normally require and so did not imply that WW exercised a decisive influence on the building's design. It was normal for a prospective tenant of an office building to make its wishes clear as to the specifications which that site should meet, whether in respect of a new building or upgrade works on an existing building. The Court held that such steps do not mean that a lease has to be reclassified as a works contract.

For all these reasons, the EU Court dismissed the Commission's action against Austria, since the Commission had not established any infringement of the EU procurement rules.

4. Comments

Following Brexit, UK courts are not obliged to take into account rulings laid down by the EU Court after 1 January 2021, but they may have regard to them where relevant. It seems likely that UK judges would have regard to the ECJ ruling in Commission v Austria because it is relevant to the application of the Public Contracts Regulations 2015 ("PCR"), which implemented the main EU directive on public procurement (Directive 2014/24/EU) into UK law. Despite Brexit and unlike the Directive, the PCR remain in force in the UK.

The application of the PCR to land-related agreements involving public bodies, such as local authorities, is a tricky area that often raises uncertainty in practice. This recent EU Court ruling sheds helpful light on the dividing line between pure land transactions, such as leases, which fall outside the procurement rules, and contracts for the execution of public works, which in principle are caught by those rules and must therefore be advertised and subject to competitive tendering.

The EU Court concluded, on the facts, that the lease at issue fell outside the public procurement rules, even though the building had not yet been built and the public authority tenant had specified numerous, detailed requirements for the building. The case was clearly finely-balanced, because the Advocate General had reached the opposite conclusion in his advisory opinion. Nonetheless, the Court's judgement provides welcome reassurance for public authorities, land owners and developers alike by suggesting that many land deals fall outside the clutches of procurement law, even where they involve works for the benefit of a public body.