Ten questions contractual parties ask about UK PFI project hand backs

As the keys start being handed back on the earliest of the 500+ UK PFI projects, the parties are gearing up for the first of many hand back discussions up to 2050.

As ever, there are nuances between delivery structures (vanilla PFI and NHS LIFT), sectors and the project vintage (when it was signed and the standard form or version of guidance that applied).

We explore what the parties should be considering before beginning discussions.

Q: What should we do first?

A: Correct any lack of information, drawings, reports and/or documents and get together up-to-date documents.

Each party needs to be clear what the current contractual position is: it is difficult to form a definitive view without sight of the original project documents from Financial Close and subsequent variations (whether deeds of variation or completed variations/changes).

The next steps (and when you should undertake them) depend on the PFI party.

Public sector health checks at seven, five and three years before expiry are sensible, but re-procurement activities need to be factored in too given the time they take. Surveys one to two years before expiry may not provide a sufficient period of time to remedy any reported issues.

Q: The hand back obligations are unclear, what do we do?

A: This is common with the early projects, where the position on expiry may not be clearly or fully articulated in the contract. If this is the case, then the parties may need to agree what hand back means for that project. This may include what asset condition/residual asset life surveys will be undertaken (and their scope), by whom and for which parties and then what is to happen based on the surveys (for example, on a schools project, RICS condition rating C (not satisfactory, major change needed) and D (unacceptable in its present condition) need attention, but rating B (satisfactory) is acceptable).

More recent projects should have more clarity in the specification or specific hand back requirements. There will also be various questions as to the impact of changes in law on the required standards. Input is likely to be needed from technical and legal advisors in order to understand the position.

Q: Are we looking in the right place?

A: The primary hand back obligations should be in the project or concession documents (including the related technical schedules (be that Authority Requirements or output specification). However, there may be equivalent covenants in related leases which need to be checked too.

The lease position may be less obvious. Any lease dilapidation, "fair wear and tear" or full repairing and insurance positions could potentially conflict with, or enhance, other contractual obligations.

Q: Who has hand back risk?

A: This might not be clear either as between the project company and the FM contractor.

While any express hand back obligations might be flowed down to the FM contractor, they may be qualified by other risks/provisions in the FM contract. For example, who ultimately has lifecycle (expenditure) risk and whether there are discrepancies in the hand back retentions which can be imposed, given the significant difference between the unitary charge and FM fee.

Q: The surveys have found issues, what do we do?

A: This depends on the severity of the issues found (including the impact on the users), the project documents and allocation of risk and the relationship between the parties.

Remediation work (for less critical issues) needs to be planned with a degree of flexibility. Leaving it all to the last summer holiday of a schools contract is too late, but repeated denials of access need to be taken into account too.

The parties should consider the nature of the remediation works and how these are, or should be, treated under the contract (including the payment mechanism).

Q: Can we reach a settlement?

A: Yes, the parties can reach a settlement on hand back obligations and financial liabilities. However, the public sector party will need to consider whether or not there is any procurement risk in not upholding the original position in the contract.

Q: In the absence of a settlement agreement, do liabilities come to an end on the expiry date?

A: Not necessarily. Certain obligations may "survive" or continue after the expiry date (such as confidentiality) and thus the liabilities will continue too. Otherwise, depending on how the original project documents were structured and signed, after expiry of the contract the parties may still have a residual liability for any breach of obligation to be performed before the expiry date of up to six or twelve years.

Q: What happens to any staff working on the project?

A: Broadly speaking, any staff dedicated to the project are likely to transfer to the new service provider (whether the public sector counterparty or a third party) on or after expiry. Technically, this applies right through the supply chain: Project Co, the FM contractor and any sub-contractors. This may even apply to Project Co's management services provider.

Employers will need to be aware of their contractual obligations and duties under TUPE. Typically, this includes the provision of information.

Employers should also consider their pension liabilities in respect of such staff.

Q: Can we extend our PFI contract?

A: There are mixed views on this at present. We understand that the central view is that extensions (expressly set out under the contract or otherwise) are not permitted. However, this will be a decision for each public sector counterparty, taking into account the likely procurement risk of such extension. (Unless there is a change in government policy, parties should assume that any PFI credits will not automatically extend.)

Q: When should a decision be made whether or not to engage a new service provider?

A: Public sector counterparties (and long-term asset holders, such as academy trusts) should be deciding on the future requirements for the assets and FM service provision sufficiently far in advance to ensure the completion of any public procurement process.

The public sector will need to ensure there is no cliff edge in FM service delivery and sufficient mobilisation time for an immediate transition to third party service providers or competent in-house delivery teams on the expiry date.

Osborne Clarke comment

In addition to the above, all parties preparing for hand back should familiarise themselves with the various guidance from the Infrastructure and Projects Authority (IPA) and National Audit Office (NAO) and other guidance available, maintain a good relationship and collaborate where possible.

Keep a look out for our future Insights on specific issues for PFI parties to consider as our series continues.