Court of Appeal declares local authority Development Agreement ineffective

The case concerned the Council's decision to enter into a development agreement without running a competition under public procurement law. The Court of Appeal has overturned the High Court's decision and ruled that the development agreement should have been procured via a competition under the Public Contracts Regulations 2006 (replaced by the Public Contracts Regulations 2015 (PCR)).

In deciding the case, the Court looked at the relevant contractual arrangements as a whole to establish whether the Council procured, or contractually committed itself to procuring, works or services from the developer.

In summary, the Court held that:

• The development agreement was not a public works contract, because it contained no immediately enforceable obligations on the developer to carry out works.
• The development agreement was not a public services contract, because applying the main object test, the obligation to provide services was ancillary to the works that were the main object. The services were part of the indivisible whole of the agreement.
• However, applying the underlying principles of the procurement legislation, and applying them with "realism and common sense to the circumstances", the Council entered into a contract whose essential object was the execution of works. It had therefore committed itself contractually, without any further steps being required of it, to procuring works from the developer. By entering the development agreement the Council effectively agreed to act unlawfully in the future. The development agreement constitutes a procurement and should have been procured under the PCR.
• The voluntary ex ante transparency (VEAT) notice published by the Council was incorrect, or at best misleading, and could not be relied on. The Court therefore was able to make a declaration that the development agreement was ineffective.

The decision is highly significant for local authorities and developers looking to enter into development agreements for the regeneration of land without running a procurement under the PCR. The judgment also highlights the importance of the drafting used in VEAT notices, which are used by local authority's to try and protect contracts from legal challenges for the remedy of the contract being set aside under a declaration of ineffectiveness.

Any development agreement signed in the last few months where a VEAT notice was published that does not meet the test set out in this judgment, remains at risk of challenge.

Background to the development agreement

The express object of the development agreement was the comprehensive re-development of land, mainly owned by the Council, on an industrial estate near Newbury. The development agreement was structured around an option for the developer to acquire the land in question and carry out works for its, and the Councils', financial benefit. In advance of the option being exercised, the developer needed to provide services, including acting as a master, and plot, developer and estate manager, preparing development strategies and obtaining planning permission.

Once various development strategies had been prepared by the developer and approved by the Council, the developer could serve an acquisition notice / residential plot notice, triggering the automatic transfer of a lease (commercial plot) or freehold (residential plot). It was accepted by the Council that it would be highly unlikely that the developer would decide not to exercise the options under the development agreement. Under the development agreement, once the lease / freehold had been transferred, the developer was obliged to carry out works to deliver the implementation programme that had been agreed with the Council for that plot.

The Council had concluded that the development agreement was not a public works contract under the PCR. It published a VEAT notice in the Official Journal of the European Union (OJEU) that: referred to the main object of the agreement being an "exempt land transaction"; stated that there was no binding obligation on the developer to carry out any works; and stated that any services provided by the developer were merely incidental to the main object of the agreement. However, during the case, the Council did not pursue the argument that this was a land transaction, and instead positively asserted that the main object of the development agreement was the execution of works, albeit that those works were conditional upon the developer exercising an option.

The Court of Appeal's decision

The development agreement was not a public works contract

The substance of the development agreement demonstrates its object, which in this case was the execution of works to develop the land to which it relates, in accordance with the Council's aspirations. Because the obligations on the developer to carry out the works, although plainly directed to the object of the contract, were 'contingent obligations' (i.e. not immediately legally enforceable obligations to carry out the works), the development agreement was not a public works contracts. Contingent obligations did not suffice; not, at any rate, where the contingency lay within the developer's control as they did here – i.e. the decision whether or not to exercise an option.

The development agreement was not a public services contract

The main object of the development agreement was the delivery of works to meet the Council's aspirations as set out in the recitals to the agreement. The obligations on the developer to provide development / design and planning / estates management services, although essential to the project itself, could not be sensibly divorced from the undertaking of the physical works of development – they had no independent purpose. As the services to be carried out by the developer were preliminary to the performance of the works (i.e. were ancillary to them), the development agreement was not a public services contract.

The substance of the development agreement was to procure works from the developer, so should have been procured under the PCR

However, entering into the development agreement was still unlawful. The Court held that when considering whether the PCR apply to a development agreement, it is necessary to consider the transaction in its entirety by looking at the substance of the arrangements as a whole. The development agreement, when considered through this lens, involved the Council committing itself contractually, at the date it was entered into, to procuring works from the developer to deliver the development that the Council intended to be delivered. It had committed itself to procuring the work from that developer, but had not procured the contract under the PCR.

By entering into the development agreement, therefore, the Council effectively agreed to act in the future in breach of procurement law. This was both a breach of the PCR (actual or anticipatory) and a breach of public law (as the Council had agreed to act unlawfully in the future). The alternative possibility to this conclusion was that the Council was at liberty to construct a sequence of arrangements in a development agreement whose combined effect constituted a "public works contract", without ever having to follow a public procurement procedure. That cannot be right as it would defeat the purpose of the public procurement regime.

The VEAT notice was not valid:

Although the Council had published a VEAT notice in the OJEU, this did not save the development agreement from being set aside by the court declaring it 'ineffective'. The VEAT notice did not meet the requirements set down in the PCR or the standards in the applicable European case of Fastweb. A VEAT must:

• provide a clear and unequivocal explanation of the reasons that led to the view that a contract could be awarded without following the procedure for public procurement;
• be more than a formal justification; and
• leave any third party reading it with full knowledge of the relevant facts to decide whether they consider it appropriate to challenge the award of the contract without a procurement procedure having being followed.

The Council's VEAT was held to be incorrect, or at best misleading. By stressing in the VEAT the concept that the development agreement was "an exempt land transaction" and not mentioning the obligation to undertake works, it would have been easy for a third party to infer from the VEAT that no such obligations were included. Accordingly, the VEAT did not alert a third party to the real nature of the transaction.

The sum effect of the Council's failure to publish a valid VEAT notice meant that it was not effective in preventing the Court from making a "declaration of ineffectiveness". The parties agreed following the judgment that it was mandatory for the Court to grant a declaration of ineffectiveness and to order the payment by the Council of a 'Civil Financial Penalty'. The amount of that penalty was fixed at £1. Permission to appeal to the Supreme Court was refused.

Osborne Clarke comment

Since the European case of Helmut Muller in 2011 and the English case of Co-operative v Birmingham City Council, there has been a concerted focus in this sector of trying to keep contractual structures that are clearly development agreements, rather than mere disposals of land, out of the public procurement regime. This case is a sharp reminder of the risk in this approach. There is a need to regularly stand back as a transaction is being developed to decide whether the PCR applies.

Our experts would welcome the chance to discuss how this important case impacts you. Please get in touch with Catherine Wolfenden or your usual Osborne Clarke contact.