Procurement - a subject area for those due diligence enquiries?


06 February 2019

Developers and their funders now have even more reason to ensure that they carry out proper due diligence on the procurement aspects of developments commissioned or instigated by local authorities and other public bodies.

In the recent case of Faraday Development Ltd. v West Berkshire Council 2018 the Court of Appeal set aside a development agreement entered into by West Berkshire Council and a developer who it had selected as its development partner following a competition managed by the Council’s property consultants. The competition was designed to meet the Council’s obligations to obtain the best consideration that was reasonably obtainable for the land under section 123 of the Local Government Act 1972. However, it did not comply with the requirements of the Public Contracts Regulations 2015 (the PCRs).

The PCRs

The PCRs require public bodies and similar organisations to conduct competitions in the market when buying goods, services or commissioning works where the contract in each case exceeds a certain value. These competitions require the advertisement of the opportunity in the Official Journal and the selection of tenderers and evaluation of their bids in accordance with prescribed rules.

In general terms, contracts for the acquisition or rental of land or existing buildings are not covered by the PCRs, but where a public body wishes to commission or secure the delivery of works, a ‘public works contract’ can be created which must be competed in accordance with the PCRs where its value exceeds the relevant threshold for that type of contract (currently £4,551,413). A good deal of case law and debate has centred on when a contract has as its main object a land transaction (and so falls outside the scope of the PCRs) and when it fulfils the criteria for a public works contract under the PCRs. Both development agreements and planning agreements have been considered by the courts in this respect. Previous case law had found that a public works contract does not arise if a developer is under no enforceable legal obligation to carry out any works on the relevant land. This formed an important part of the points raised in the Faraday case.

The facts of the case

Having selected its development partner, West Berkshire Council entered into a development agreement for the mixed use regeneration of a ten-acre site it owned near Newbury Town Centre. The development agreement gave the appointed developer a degree of flexibility (to take account of future changes in market conditions as the site was to be developed over a period of years) and envisaged a partnership approach to the development. This included a joint steering group comprising representatives of both parties who would consider development proposals for each plot brought forward for development by the developer. Only if and when the developer served a draw down notice on the Council would the Council be bound to grant a ground lease of a commercial plot (or transfer the freehold of a residential plot) to the developer who would then be obliged to develop the plot in question. Essentially, the developer had an option whether to carry out all or any part of the development, but it could only acquire a plot subject to an obligation to carry out the relevant works on that plot.

One of the unsuccessful bidders for the development opportunity challenged the Council’s entry into the development agreement. This challenge included the ground that the Council had failed to comply with its statutory obligations under the PCRs. The Court of Appeal agreed that the Council had failed in this respect and set aside the development agreement by making a ‘declaration of ineffectiveness’ under the PCRs.

The Court of Appeal concluded that the main object of the development agreement was the carrying out of ‘works’ and not that of a land transaction. Importantly, the Court also held that, although the development agreement did not fall within the definition of a ‘public works contract’ at the time that it was entered into (as there were no immediate obligations on the development partner to carry out works), its terms committed the Council to grant a lease of or transfer the land at the sole election of the developer, triggering the obligations on the developer to carry out the relevant works upon that grant or transfer. The Council would be unable to carry out a competition under the PCRs for the award of the ‘public works contract’ that arose when the developer gave notice to draw down the land as the Council
was bound to proceed with the grant of the lease (or the transfer of the freehold) on exercise of the option.

The Court held that for a public works contract to exist the obligations to carry out the works need not be immediately enforceable. In this case the Court was prepared to consider the contents of the development agreement (and each of the stages within it) as a whole. Accordingly, the Council’s entry into the development agreement committed it to breach the PCRs and act unlawfully at a future date.

Conclusion

The Faraday case emphasises the importance of checking the correct categorisation of a proposed development project under the PCRs at the outset to avoid wasted time and costs. In Faraday the Council engaged a firm of property consultants to support the project and had also taken legal advice (details not revealed). It still got it wrong, both on the substantive point of the nature of the development agreement as well in its attempted mitigation of the risks of challenge by its publication of an inadequate ‘VEAT notice’ under the PCRs.

While the PCRs certainly provide that a project cannot be designed with the intention of excluding it from the ambit of the PCRs (an anti-avoidance provision), that does not mean that it cannot be structured for entirely justifiable reasons in a way that has the consequence that no ‘public works contract’ arises for the purposes of the PCRs.

In Faraday the Council was not found to have acted in bad faith or with any motive to create a mistaken understanding of its objectives in entering into the development agreement. Rather, it was the terms of the development agreement when considered as a whole that led the Court to decide that the Council had acted in breach of the PCRs.

Birketts LLP has a number of specialist procurement lawyers who are familiar with the obligations placed on public bodies by the PCRs and who regularly support developers, contractors, suppliers and service providers in their bidding for a range of public contracts and in challenging the outcome of procurement procedures.

For further information please contact Erika Clarke. Law covered as at February 2019.