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Development agreements and the "OJEU" rules - a new case and a pause for breath

10 June 2008

Last Thursday, the European Commission closed an investigation into a development in the German city of Flensburg. This gives us a chance, a year or so on, to look again at how the OJEU rules apply to development agreements.

Some background

The EU Rules force public bodies to advertise in the EU Official Journal, and run detailed competitive tenders when they are procuring works, services or goods over a certain value.

The Rules do not apply to “straight” sale of land (because the authority is not procuring anything), or to “straight” purchase of land or existing buildings (because a clear exception applies).

It was always debatable whether the Rules do apply (on the basis the authority was procuring “works”) in circumstances where it disposed of land subject to a development agreement specifying what had to be built on the land. Where the Rules apply, the authority has to procure the developer through an open, competitive tender process advertised in OJEU, or risk being sued.

The UK High Court looked at the issue in the mid-90s when Brent Borough Council was challenged for not following the Rules when it redeveloped a number of its housing estates through mixed use schemes. The Court said that the Rules did not typically apply to development agreements because their main purpose was “redevelopment” rather than procurement of works. Most procurement lawyers scratched their heads at this, but the market accepted it.

The La Scala and Jean Auroux cases

The European Court largely over-ruled the Brent decision in two relatively recent cases.

In the La Scala case (which we reported on a few years ago), the Court said that the Rules do apply to a development agreement where the public authority specifies works which are “secured for public benefit”. This was taken to mean that, if a mixed use development included a strong “public” flavour, by way of social housing, public spaces etc., the Rules would apply, particularly where the “public” element outweighed the “private” element, or was itself worth more than the GBP 5 m works threshold.

Last spring, the Court went one step further in the Jean Auroux case. You may have seen our briefing on this last year. A French local authority disposed of surplus land, subject to a development agreement providing for construction of a leisure complex, commercial premises and shops. It awarded the development direct, without advertising in OJEU, and a rival developer challenged. The Court said that the agreement was caught by the Rules, even though it contained very little “public” element. It applied the definition of “works” very literally, and said an authority procured public works where it specified what had to be done on the site, to meet its regeneration objectives. It did not matter whether the works specified were to belong or be used by the public or private sector. And, when assessing the value of the project for advertising purposes, the Court said that the entire scheme (public and private) had to be included. So the test of assessing whether the development predominantly had a public or private sector feel no longer applied.

The recent German case

A German council had sold a piece of land to a private developer for construction of a building which would help regenerate the area. The Commission objected to the fact that the council had not advertised and tendered the development agreement. In the end, the Commission closed the file, because the development agreement did not contain a binding obligation on the developer to complete the works, but only a right for the authority to buy the land back if the building was not completed.

On its facts, this was clearly not a “public works contract” under the Rules, and the Commission was right to close the file. If it wanted to take on a further test case on this issue, it looks like it picked the wrong one.

So where does this leave us?

From advising clients and speaking to the market over the past year or so, it is clear that the Auroux case has led to a great deal of discussion, and a divergence of approach. Some public authorities are applying it very prudently, and are following the Rules on most development arrangements. Others are taking a more robust approach on the basis that there may be little risk of challenge in their individual circumstances.

There are clear indications, however, that awareness of the point is growing on both sides, and our (anecdotal) evidence is that developers are becoming more willing to raise the issue if they feel their rights under the Rules have been breached. This will only increase next year when the Court will gain the right to “tear up” contracts awarded in breach of the Rules. Our experience is that market practice is more and more moving towards advertising, except in clear cut cases where there are no works specified, or the specifications are very loose, or advertising thresholds are clearly not met. There will always be circumstances on the margin where the authority wants to get the job done quickly, and is prepared to take a commercial approach on the basis of a “good old fashioned” risk assessment. There is nothing wrong with that, but each project needs to be assessed carefully on its own merits.

As ever, we would be happy to discuss this with you, or to hear your views.

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Peter Andrews

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T: 08700 86 5035
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E: peter.andrews@shoosmiths.co.uk