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Competitive tendering – OGC guidance

This guide was last updated in September 2011.

The Office of Government Commerce (OGC) has published guidance on whether public procurement rules should apply to development agreements. This guidance was considered necessary after the European Court held that the French town of Roanne had breached the rules by not advertising a development contract in the Official Journal of the European Union (OJEU).

This guide covers what the guidance says and considers its relevance.

Why do public procurement rules exist?

One of the main objectives of the European Union is the creation of a single marketplace. Member states are expected to support this principle by ensuring that certain public contracts are brought to the attention of interested parties throughout the EU by publishing contract opportunities in the OJEU.

The rules apply to contracts where the total value meets or exceeds the relevant financial threshold, as follows:

  • for public works contracts: £3,497,313;
  • for public service contracts: £90,319 (for contracting authorities listed in the Public Contracts Regulations) or £139,893 (for other contracting authorities).

Background to the guidance

In 2007 the town of Roanne, in central France, arranged for a semi-public urban development company SEDL to build a leisure centre. The development included other works that were to be sold to third parties. Roanne agreed to pay for the construction of the leisure centre and to fund other parts of the scheme. It also gave SEDL certain guarantees. It did not advertise the contract in the OJEU and the court held that it had therefore breaches the rules.

The UK property industry speculated as to whether public procurement rules extended to UK development agreements. There was concern that some transactions would be affected and the public and private sectors wanted to know how the rules would apply. The public sector wanted to avoid the risk of a procurement challenge. The private sector's concerns were twofold: developers were worried that transactions would be set aside if the OJEU process should have been followed; but they also wanted to avoid incurring unnecessary tender costs where a direct award could have been made or a less complicated process followed.

The procurement rules do not apply to the straightforward sale of land or grant of a lease where building obligations do not arise, since nothing is being 'procured'. However, a land disposal will be caught if it forms part of a larger transaction where a public body needs something built to its specification. For example a local authority may, in the case of a town centre development, want to impose controls on what is being built and when to the extent that this is not available through the planning regime. As the authority is directing what work must be done and when it brings the contract within the rules.

What the guidance says

The OGC does not believe that the Roanne case has changed the way in which public procurement rules apply to development agreements. However, it does believe that the case has raised awareness of their applicability.

The guidance states that the rules are likely to apply if:

  • the work is required or specified by a contracting authority;
  • the developer enters into an enforceable written obligation (under a development agreement) to carry out the work; and
  • there is some pecuniary interest – which need not necessarily be a cash payment – in carrying out the work.

This will capture the majority of development agreements, even those that do not involve public work.

It may be difficult to identify exactly when a public body will be regarded as having specified its requirements with sufficient clarity, precision and detail to give rise to a public works contract. The OGC's view is that the rules would not catch a requirement to develop in accordance with national or local land use policies where the developer submits its own proposals and the contracting authority does not specify the function of the building and any work to be carried out. This was endorsed in the Müller case.

The guidance also suggests that a land disposal will not be caught if work is incidental to the disposal – for example where the extent or value of the work is small compared to the value of the sale, the work would not have been pursed if the land was not being sold and the sale is the primary reason that the transaction is taking place. However this is unlikely to help where the land disposal is conditional on, among other things, the completion of certain works.

Alternatives to development agreements

Building leases: these cannot be used in the place of development agreements. The guidance indicates that artificial arrangements – for example, separating land sales from work contracts – will not prevent the rules from applying.

Inserting an obligation or covenant into the lease which requires the tenant to undertake work in accordance with the specifications of a public body will not override the rules. However long leases that work alongside a development agreement that is intended for the landlord's benefit, and where the landowner builds according to its own intentions rather than the landlord's requirements will not be caught out. This will not help a public body landlord that wants a specific scheme to be built.

Buy-back options if the developer defaults: a land disposal under which both parties intend the developer to undertake particular work in accordance with a contracting authority's needs is not of itself sufficient to engage the public procurement rules. This is the case even if the contracting authority has a contractual right to reacquire the land if the work is left unfinished.

Consequently, it appears that a contracting authority is not obliged to follow the public procurement rules if it disposes of land to a developer under an agreement that:

  • sets out the parties' intentions that work will be carried out in accordance with the authority's needs; and
  • does not go so far as to oblige the developer to undertake the work, but allows the authority to call for the return of the land if the work is not completed within a specified time.

This is likely to cause disputes. Will the exception apply if the buy-back provisions are triggered by delays, or if the developer does not produce a project in accordance with a predetermined benchmark or specification?

Mixed land ownership and phased development: the application of the rules will depend on the specific facts if the proposed development includes land in public and private ownership. The guidance suggests that the contracting authority may invite tenders for those aspects of the development that have the characteristics of a public works contract and use a development agreement for the remainder.

On the other hand, if the specific circumstances of the contract make it impractical or impossible to separate the two elements there may be a question as to whether the transaction as a whole falls outside the rules.

Is the guidance useful?

The OGC admits that its guidance is not definitive. It fails to address several issues that will continue to be debated, since most contracting authorities will seek to dictate the nature of their projects and will also want to ensure the developer delivers them. Nonetheless, it is a step in the right direction.

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